We’ve been going over some pretty philosophical material in the Real Estate Investing 101 series, so I thought we’d take a break for a quick negotiation tip.

I can’t tell you how many negotiations come down to a few percent difference between what the seller wants and the most a buyer will pay. You come across a great deal, ripe with opportunity, but the seller won’t budge on the price.

So, what do you do? Walk away?

Sometimes, yes, but the good news is there’s a way you can shave 3% off just about any purchase price. It’s a little secret that real estate agents don’t want you to know because it technically takes the money out of their pocket.

Let’s go through it, step-by-step.

1. Understand the Commission Split

In a typical real estate transaction, the buyer and seller are represented by different agents. Each side wants their own counsel, and neither want to talk directly with each other, so the agents go back and forth between themselves. If you’re the buyer, then your buyer’s agent negotiates on your behalf, and the seller’s agent negotiates on behalf of the seller.

Each agent is also employed with a brokerage company, such as a Re/Max or Century 21 franchise. When the negotiations are finished, both brokerage companies split the commission — usually 6% of the sales price — and then the agent receives a piece of the brokerage’s portion. Then the seller collects the rest, minus any encumbrances (such as a mortgage), taxes, and closing costs.

OK, it’s a little confusing, so let’s do an example.

If you’re buying a house for $100,000, then the brokerage firm for your buyer’s agent would receive $3,000 (3%). Then your agent would receive a portion of the $3,000, depending on their employment agreement. Typically, it’s 50-80%, or $1,500-$2400. The seller’s agent would also receive a portion of their company’s $3,000, once again depending on their employment agreement. Out of the remaining $94,000, any mortgages or liens would be paid off, and the seller would receive the balance.

But here’s the wrinkle. What if you don’t have a buyer’s agent?

No one is forcing you to have one. Depending on your state, you can agree to dual agency, where the seller’s agent represents you as well. In this case, you’d think that the brokerage company would only receive 3%, since they are only paying one person, instead of two. Except that’s not the case.

In most listing agreements, the seller is still required to pay the full 6%. Normally, the agent is ecstatic because you’ve doubled their profit. They quietly walk away with both sides of the commission, and usually, neither the buyer or seller raises an eyebrow. As real estate investors, however, we make a lot of money by raising our eyebrows.

2. Agree to Dual Agency

Disclaimer: I only invest in North Carolina, South Carolina, and Mississippi, so some things here may not be accurate for your state. For example, in some states, dual agency is illegal. Check with the seller’s agent for the laws in your state.

In dual agency, you and the seller are represented by the same agent. Usually, both of you have to agree. In other words, if you want the seller’s agent to represent you, then the seller has to agree. The technical reason is the agent won’t be able to (legally) help the seller to get the upper hand in the negotiations. They’ll have to abstain from giving a lot of advice to either of you.

Then there’s the real world.

If the agent thinks they’re going to make twice as much money off of you as any other buyer, then they’ll secretly become your biggest fan. They’ll work harder to convince the seller to accept your offers, and they might even turn away other buyers that can offer more money. Technically, it’s illegal for them to give you that kind of favoritism, but it also happens everyday, and you might as well take advantage of it.

A few sellers know this, so they’ll refuse to sign a dual agency agreement. If that happens, you’re sunk — this strategy won’t work. Still, it’s pretty rare (I’ve never been denied), and most sellers will happily agree. Once you have the dual agency agreement signed, you can move onto the next step.

3. Negotiate the Seller down to Their Bottom Dollar

The next step is make an offer. An extremely low one. You have to push the seller as far as they’ll go and still have a difference in what you’re willing to pay.

You can do this several ways:

• Ask the seller for their rock-bottom price and then offer less
• Ask the seller how much they owe on their property and then offer less
• Just offer less than anyone would reasonably accept

For believability, you should also justify your offer. Tell them that you know the house is worth more, but you’re an investor and you have to make money. If you’re buying a house to live in, you can also tell them you can’t get financed for any more, and you’re just trying to make the deal work.

Eventually, you’ll come to a point where you’re not going to go up and they’re not willing to go down. This is where you move in for your extra 3%.

4. Ask for a Reduction in the Commission

By this point, you’ve probably negotiated several percentage points off of the purchase price, but it’s probably all you’re going to get from the seller. So, you move to the next person: your agent.

Tell them that you want to make the deal work, but there’s just not enough room for the full 6% commission and you need them to go down to 3%. Remind them that they would’ve only gotten 3% if someone with a buyer’s agent bought the house, so they’re actually not losing any money.

Plus, if they don’t reduce their commission, then you’ll have to walk away from the deal. This puts them in an interesting position. They can reduce their profit or get nothing at all. Obviously, they’ll take the 3%, even if they’re not happy about it.

Their employer, the brokerage company, may also have to authorize the reduction in commission, but it’s rarely a problem. I’ve used this strategy several times, and it works like a charm with everyone.

An Example of Buying a Primary Residence

Let’s say you’re shopping for a new home to live in, and you come across a beautiful little house selling for $200,000. You call the real estate agent and find out they’ve had it on the market for several months and they have an appraisal for the full amount, but no offers are currently on the table. So, you decide to purchase it.

The first thing you do is tell the agent that you’re not represented and you’d like them to represent you as a dual agent. Seeing dollar signs, they should happily agree, but they’ll have to run by the seller for approval. A day later, they call you to say it’s OK with the seller and they’re faxing a dual agency agreement. Look it over, sign it, and send it back.

Next, call your mortgage broker and ask them to prequalify you for up to $200,000. They’ll check your credit, gather some other financial information, and call you back within a day or two. If everything is OK, ask them to send you a prequalification letter for $160,000 — 20% below the purchase price.

Then call the agent. Tell them that you got prequalified, but the mortgage broker isn’t absolutely certain you can do more than $160,000. They’ll be disappointed and they might tell you that it’ll never work, but have them prepare an offer anyway. Say you’ll try to make the deal work for the seller, but you can only do what you can do.

A day or two later, the agent should call you with a response. If you’re lucky, the seller has gone down some. In this case, let’s say they went down to $190,000. Tell them you don’t know if you can prequalify for that much, but you’ll take it to your mortgage broker to see. Then call and ask for another prequalification letter, this time stating you can do $180,000.

Send it to the agent, and tell them that it’s the absolute most you can prequalify for. Have them prepare an additional offer and give it to the seller. You (and the agent) might get lucky, and they’ll come down an additional $10,000 to your price. But it’s unlikely. They’ll probably come back and say $190,000 is the best they can do and wish you good luck.

At this point, the agent is having a nervous breakdown because they see the deal falling through. This is where you move in for your extra 3%. Say the following:

Gosh, I really want this house, and I’ll do anything to make it work, but I doubt I can get more than a few thousand dollars more. If I could come up another $5,000, would you reduce your commission to make it work for the seller? You would probably have to reduce it to 3%, which is what you would’ve gotten if I had a buyer’s agent. In the interest of putting this all behind us, is that something you would be willing to do?

They’ll probably stutter or sit silent for a few minutes, but just wait for them to say yes. Put it all in writing, deposit your earnest money into escrow, and buy your next house with a whopping $15,000 of equity.