There are many aspects of the art of negotiation that increase the odds that a person will make a better deal. One of these is called “The Power of Credentials”. It is derived from a level of confidence and trust that one party has in another. As a buyer, you'll be listening for inconsistencies in the seller's “story”. The seller will certainly be trying to judge just how much he can trust what you're saying to him; particularly when you're explaining how the market has changed and just why his house isn't worth as much as he was led to believe.
The key to establishing this climate of mutual trust between yourself and the other party is to be scrupulous in admitting when you're not certain of something while being adamant about facts that can be verified. The first fact that is going to have to be supported will have to do with the current fair market value of the house. This can be a very sensitive issue, involving the seller's ego, his initial investment, his perception of what comparable houses are selling for, and family issues posed by a spouse who “told him not to buy” to kids or tenants who don't want to move. You don't want to win the battle, but lose the war.
One way I've established current fair market value without ruffling too many feathers is to let the seller do his own appraisal. I used to provide the seller with a “comparative sales book” which listed recent sales. I'd explain its format and invited him to pick any five houses in his area that were the equivalent of his in size and amenities. I'd get his prior agreement that the average selling price of the five houses he chose would approximate the value of his house. Use caution here: When prices are rising, this is a safe way to start, but when prices are dropping, the average of prior sales might be above true fair market value.
Once fair market value is agreed to, the next step is to begin deducting the costs of sale and settlement. Take a look at a HUD-1 statement sometime and note how many beaks dip into a seller's trough before he receives the net sale proceeds. Brokers, title agents, abstractors, attorneys, mortgage brokers, lenders, appraisers, surveyors, insurance companies, tax collectors, messengers, administrators are all represented together with origination fees, warehousing fees, notary services, preparation of documents, etc.
It's important that you explain all these costs and deduct them from fair market value to arrive at net sale proceeds. Next, you have to explain that if you paid this much, you'd be lucky to break even because of the expenses for lawn maintenance, insurance, taxes, and mortgage payments; plus any required repairs need to be completed. You've got to deduct these plus estimated “holding” costs from the net sale proceeds. Last of all, you've got to deduct the profit you expect to net.
