Negotiating pt 1

Everyone says they hate negotiating, yet when the chance arises they do everything in their power to make sure that a negotiation occurs.

Rule number one in negotiating: don't take it personally! The person on the other side of the table has the same job as you - they want to hold on to as much of their money as possible, can you really blame them?

When people think of negotiation they think in terms of winning and losing. If you lose the house you want, or the only buyer out there that wants your house, who won? Not you, not the person on the other side. In reality, negotiation is an adversarial engagement which resolves itself as a collaboration towards a mutual goal.

WHAT???

"Negotiation is an adversarial engagement..."

In most negotiations we have two sides, a seller and a buyer, and a great majority of the time they have a differing idea on the price of a home. And, as stated above, both want to hold on to as much of their money as possible.

To be an effective negotiator, first you absolutely cannot have a horse in the race. Whether you are a seller or a buyer, your best plan is to have someone working between you and the other side. If you don't, you are likely to get swept up and either give up more than you should or miss an important condition in the contracts. A good agent works for you without getting swept up in any type of emotion in the negotiation.

You must also be aware of your playing field. In the case of real estate especially, you should know your market. Important things to know would be how many homes are on the market that roughly match yours, you should know their asking prices and how they compare to yours. Knowing how many buyers are out in the market is also important. I don't mention "buyers' side" or "sellers' side" here because both sides need this information. Since price is generally a function of supply vs. demand it is important to know if the home you are negotiating over is one of a kind or a dime a dozen. Could a buyer find pretty much the same house in the same area for a similar - or better - price? It works for buyers, too. Are there only two or three buyers out there or is the market swarming with them? If you are on the selling side, remember, in a slow market you are essentially "buying the buyer".

The first "salvo" in a negotiation is often called "putting them in the river". You need your price, or offer, to be such that the negotiations wind up in your favor. Here, I need to separate the buyers from the sellers.

On the seller side, you need to have an asking price that both has your buyers "in the river" enough that you walk away with the maximum amount of money in your pocket, yet you cannot have a price so high that a buyer won't even consider your home in their search. Remember, there are most likely other homes out there that they liked as much as yours.

Advice for the buyer is similar, your offer needs to be low enough that you keep the maximum amount of cash in your pocket but not so low as to telegraph to the seller that you are "not serious about buying a home". Yes, even though you went through the contracts and signed your name a few times you could still be regarded as being not serious. Your offer should be commensurate with the market conditions, though 90% of sellers would probably counter even a $1 offer rather than out and out rejecting it. Also, a rediculously low offer could elicit a similarly riduculously high counter offer. An initial offer should be a little lower than reasonable. This is where the "putting them in the river" analogy comes in. In a slower market like the one we have today the buyers are downstream with the sellers trying to pull them upstream from their initial offer.

After the offer is made is when the adversarial engagement ends.

"...which resolves itself as a collaboration towards a mutual goal."

What do you mean? We're still negotiating - we're still adversaries!

Are you? Think about this - buyers, you chose to write an offer on one house out of the many you toured. I am sure you have a second, third or even fourth choice, but none of those were your first pick. Sellers, face it, there aren't a whole bunch of buyers out there. You need them to move on to the next chapter in your life. At this point you MUST collaborate in order to move forward. Both sides have the same goal: to change the name on the title of the house.

To say at this point that negotiating the deal is like landing a fish would over simplify things - neither the buyer nor the seller have hooks in their mouths. Either one can walk away at any time during the negotiation phase. But, each side must work to ease the other to an acceptable landing point or risk the whole thing blowing up.

Do you have to move in price when you counter? That depends. For sellers, if you have your house priced aggrssively (i.e. lowest price and/or nicest house out of all the comparables) then you really don't. The buyers have most likely seen the competition and know that your house is a value. If you are working from this strong position I would counter back at full price or at least close to it.

Buyers - suppose you get a counter back at full price or close to it, what do you do? Again, that depends! Are you bidding on the nicest and/or lowest priced house in the market? If so, you actually may need to move up towards the seller at this point to reach your goal of owning the house. But suppose that the house you bid on is pretty darn nice but over priced and your number two choice is very similar and that your initial offer was in line with the market. Counter back at or close to your original offer.

This could go on and on and on. Someone is either going to give in or give up. This is where most people let it get personal and dig in their heels and do something dumb in the name of saving face:

"Heh - he wanted to pay $250,000 and I told him I wouldn't go under $260,000! Take it or leave it!"

"Really? Did the guy buy it?"

"Nope! I showed him!!!"

Yes, I have heard that very conversation (different numbers) more than once.

At this point, provided the buyer really wants the house and the seller really wants to sell, it is up to each side to ease the other in for a landing - hopefully on their side of half way. Just like with a fish, this is a give-and-take proposition (gee, some would call that "negotiation").

The give and take could include moving in baby steps on the price as opposed to vast swings as that usually indicated the other side is getting down to their "drop-dead" price. You don't drop the price $500 then $5000 the try to go back to $500 drops. If the other side sees there is no logic to your negotiation then they may be less likely to move on their price. Also part of a give and take could be things like the closing date, amount of earnest money, right to cure, home warranty or testing contingencies. In a slightly more robust market, removing a home sale contingency is another concession - or at least taking a 72-hour bump down to 48, for example. The more you let the other side know you want to work with them to reach mutually agreeable positions, the easier the negotiations should go. They are also more likely to end up on the side of the person being the most reasonable.

Make 'em sweat.

One of the hardest techniques in negotiating is the takeaway. It is hard because it is basically a game of chicken - get them to blink before you do. Suppose that negotiations are at an impasse. You can quantitatively show you are at a fair number yet the other side won't budge. You have the counter-offer from the other side in your hands and the deadline to respond is in an hour. What do you do?

Sit on it. Let that time pass. Depending on the market and how well your proposed price is compared to it, just wait. How often does the other sides' agent call yours? If it is often, you may have the upper hand. Now, here is gut-check time. You can either delay your response a day or two or just let it die. There is no right or wrong answer, you have to do what you feel comfortable doing. Remember, too, if the other side is being very unreasonable and you truly think you are being fair, then the transaction not coming together may be the best thing to happen.

If all goes well, you may get the other side to counter their own counter (the one you sat on). They are now no longer in the driver seat. They WANT this transaction to close. If their counter is in line with what you wanted, then accept it. If not, then it is back to the negotiation - or you walk away. It might take a couple of times for the other side to realize that you are offering a fair price. If you are in heavy competiton, this may not be the tactic to use.

If they don't counter their counter, you can still counter the one you sat on. I'd suggest this be your absolute drop dead number. The one that if they even counter back a mere $100 less you would walk away. (Buyers' side, this is your "Highest and Best", Sellers, it's your "Lowest and Best"). You won't be in the driver's seat, but at least you will be closer to a closing. Again, do what you think is best for you.

In the end, provided all goes well, both sides reach an agreement. It is important for both sides to remember that they agreed to the given price and that the thought of complaining that they got ripped off should never enter their minds. If you felt that you were, then you should have never agreed to the numbers!

Unless you absolutely have to, NEVER verbally negotiate anything. There is absolutely no commitment and by doing so you may be tricked into showing your hand. Sure, the buyer "said" they'd go up to $260,000 but what is going to keep them from countering your $260,000 offer with $250,000? Nothing.

Negotiating is an art. You need to be aware not only of your playing field (market), but also what may be in the minds of the people on the other side of the table. The best negotiator is like a chess master - always planning the next move. He or she makes their move knowing all of the possible counter moves and has planned what to do should any of them arise. Furthermore, the best negotiator knows that the negotiations do not begin with the offer to purchase, they begin even before they buyers walk through your door. Today, the negotiations begin online.

Stay tuned...I will complete that thought in another post!