This is the second article in this series on negotiating. Real Estate Negotiation Strategies - Part 1
Negotiation- It is all a big game to some degree. How do you obtain the most out of a transaction and still make the other side feel good about it? In the first article in this series we reviewed win-win negotiating, communicating in person, body language, personality types, and personal power plays. In this second article, we will discuss specific beginning negotiation tactics and strategies from both the seller and the buyer points of view.
In negotiations the preference is always for the other side to be more motivated to get the deal done than you are. You have heard the phrase “motivated seller.” This is who you want to be dealing with when you are in the house buying business. If the seller does not have a compelling reason to sell (foreclosure, probate, relocation, divorce), they can take their time and advertise the property or call all your competition and get everyone in a bidding war – exactly what you do not want as a buyer but love as a seller. All too often I see brand new investors that are hungry for a deal and they become “motivated buyers.” They get emotional about the transaction instead of using their head and focusing on the numbers and their exit strategy. You also see this when a buyer is being transferred with their job and needs to buy a house this weekend because they start work here in Orlando in three weeks. Knowing that the other side has additional motivation gives you power over them. On the other hand, you as an investor need to take the position as being the reluctant buyer or seller. You are in no need to buy this particular property because you are looking at four more this week. And you are in no emergency to sell this particular property because you can always rent it out or sell it to someone else.
Price and terms – the meat and potatoes of the deal. You have probably heard the saying before. “Make the other person provide the first number.” The idea behind this strategy is that if you are buying, the seller might offer a much lower price and better terms than you otherwise would have expected. If you are selling they might offer you a higher price and cleaner deal than you would have expected. While this is certainly ideal, as a seller it is often difficult to successfully advertise an item without a price on it. Exceptions might be at a garage sale, an auction, or a souvenir shop on a Caribbean island. As a seller if you can imply that an item has high value, you can sometimes get buyers to start with higher offers. So the beginning part of the actual negotiations is to get the other side to give out their price and terms before you do. This gives you the advantage of knowing just how far apart you actually are before you even start negotiating with them.
Always ask for more than you expect to get from the other person. This does two things. First you might actually get more from them. Remember the Bible says “Ask and ye shall receive.” Secondly by asking for more, you have items that you can negotiate away later if you have to. As a buyer, you might ask the seller to pay for some closing costs or a home warranty. As a seller, you might advertise that you are taking all the stainless steel appliances with you to your new house. But as the negotiations get tighter, you could give up some of those extra things in return for them meeting your price. The most important thing is to not make the whole negotiation about price. Shift some of the focus on the other items of the offer – the closing date, the financing terms, or the extra items like that home warranty. Getting them to agree to some of the other terms in the beginning makes it much easier to talk about price later on. If the negotiation boils down to only the price, then there is clearly going to be a winner and a loser or even a stalemate.
Never say “Yes” to their first offer even if it is a fantastic one. This does not mean to go into paralysis of analysis mode and sit on the offer for a week. But you can at least say let me step outside and call my partner. If you do jump on the very first offer they give you, the other side will typically think one of two things. One - They could have done better. Two - There must be a problem that they are not aware of. For example, a house is listed for $100,000. You offer $50,000 and they agree to it without any hesitation. The first thing you should think is “Wow what an awesome deal.” But instead you will probably be thinking you could have gotten it for $40,000 or worse that you better spend a ton of money on every inspection known to man because there has to be a problem that they are not disclosing. Certainly due diligence is important but like I said in the beginning negotiation is a big game. If you can, always do a little bit of back and forth even if it is something minor. This helps give that impression that you let them “win” a little in the negotiating.
Another example: The seller is asking $80,000 for her house. You calculate that the most you are willing to pay for it on a cash offer is $65,000. How do you beat down the seller’s price? If you offer her $65,000, surely she will try to get you to go higher. The key here is bracketing. If you have gotten to know the seller a little and are on friendly terms, you can delicately offer her $50,000 (while implying some flexibility) and add in a few “throw away” items (like leaving behind her washer/dryer and paying to pump out the septic tank). You have now set up your price range brackets. Seller is at $80,000 and you are at $50,000. Now if you can just get them down another $15,000 you will have your target price. People are often willing to compromise. Push for them to “split the difference” with you. In return they can keep their washer/dryer and you will deal with that septic tank yourself.
When you do negotiate it is not a bad idea to simply write down for yourself on a sheet of notebook paper the basic terms of your offer as you go back in forth. As you and the other side slowly move together on price and terms, take notes. I have seen inexperienced negotiators make blatant errors in how they counter-offer. A seller will first give $5,000 off their price, but in the next counter-offer drop it $10,000, and the next $15,000. The buyer starts thinking to themself, this seller must be more motivated than I thought. Every time he comes back with a counter-offer, he drops the price even more. Instead the opposite should be happening. Give your biggest price concession on the first counter-offer. Drop it $15,000, on the next $10,000, and then $5,000. That way the buyer sees that you are shrinking it smaller and smaller each time and that you are about done negotiating with them.
To wrap up this article I will leave you with a few key negotiating phrases. The first one is not really a phrase but rather body language and voice inflection – which pretty much require you to be negotiating in person. When someone gives you their price and terms, act shocked. Jump back and say “Wow, that’s a lot more than I expected” or something along those lines. Sometimes just that snap reaction will get someone to immediately start reducing their own price. It sounds corny but it often works. A second phrase to use is “You will have to do better than that.” Again it causes them to renegotiate their own price without you even counter-offering them. Thirdly is a phrase I heard years ago from Ron Legrand, “If I can pay you all cash and close on the date of your choice, what is the least amount you would take for your property.” That gets them to their bottom dollar and often you can still get them to come down a little more.
In the next article, I will get into some more advanced negotiation tactics and strategies. If I can help you in your negotiations or property analysis, please do not hesitate to contact me.