How to Negotiate: 7 Real Estate Negotiation Tips
I love to negotiate! Whether it’s buying furniture off Craigslist or being part of a multi-billion dollar corporate merger team (I’ve done both), I love the challenge of trying to get a great deal for myself while at the same time making the other person feel like they got a great deal, too.
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And while you may think that the skills required to negotiate small purchases are much different than the skills required to negotiate the purchase of big-ticket items (like cars, real estate, and companies), in reality, the basics are the same.
While you can spend your entire lifetime trying to perfect the art of negotiation, learning a few key negotiation strategies can put you far ahead of most of your competition and can help navigate those times when you're up against an unmotivated seller, a savvy buyer, or a head-strong contractor.
This article will offer seven powerful negotiating tips that you will likely find very useful while pursuing future real estate deals (or any other deals, for that matter).
7 Essential Real Estate Negotiation Tips
Tip #1: Let the Other Party Speak First
You’ll often hear people say, “Never make the first offer…let the other party do it.” This is great advice, but do you know why that will help your negotiating position?
There are two reasons:
1. First, it allows you to define a midpoint. Many inexperienced negotiators will find themselves “splitting the difference” in their negotiations; for example, if one inexperienced negotiator starts by asking $200 in the negotiation and another inexperienced negotiator starts by offering $100 in the negotiation, the negotiation result generally will end up somewhere around $150 (the midpoint). This is human nature not to want to give more or less than you’re getting, so people tend to increase or decrease their offers by the same amount as the other party.
But when the other party states their position first, you have the ability to define the midpoint of the negotiation!
In the example above, if the seller had stated the $200 ask first, the buyer could easily have offered $60, thereby reducing the mid-point of the negotiation (where they expect to end up) down to $130. On the other hand, had the buyer offered $100 to open the negotiation, the seller could have increased his ask to, say, $260, thereby increasing the midpoint to $180. As you can see, the person who states the first position is at a disadvantage to the person who waits, as the person who waits can define the midpoint.
2. Second, it’s quite possible that the other party’s first offer will be better than the first offer you would make. For example, let’s say you want to hire a plumber, and your budget is $500 for a particular project. While you could state upfront that you have $500 to spend on the plumbing work (in the hopes that the plumber doesn’t ask for more than that), what if the plumber was only planning to charge $300? You’ve now told him that you’re willing to pay $500, so he has little reason to quote you anything less than that. By stating your position first, you’ve given away valuable information to the other party (your maximum price), and he will use that information to extract the most money possible from you.
Tip #2: Stop Talking and Start Listening
One of the strongest maneuvers when negotiating is to keep your mouth shut. Unfortunately, it’s also one of the most difficult. People are naturally uncomfortable during a negotiating silence, but this is exactly why you should work to ensure those silent periods occur. If you’re uncomfortable, you can be sure that the person you’re negotiating with is uncomfortable, as well. And the common result of this uncomfortable situation is that one party will make a concession to break the awkward silence.
Next time you are negotiating and the person on the other side of the table throws out an offer, make a point to say nothing. Whether it be 10 seconds or 10 minutes, make the other person break the silence. You’ll be surprised to find that he or she will often interpret your silence as anger or disappointment and will break the silence by revising their offer or offering a concession. Master negotiators will use this tactic to get less experienced negotiators to make successively lower offers without ever having to throw out a counteroffer themselves.
This may be the most basic—but most useful—negotiating tactic you’ll ever employ.
Tip #3: Information is Power
I’d estimate that in 95 percent of all negotiations between experienced negotiators, the one with the most information (pertaining to the negotiation) will walk away with the better outcome. When negotiating, it’s important to know as much as possible, not just about the object of the negotiation but also about the party you’re negotiating with and their motives.
Most people tend to assume that negotiation is always about money, but often it is not. Smart negotiators realize that in many cases, it’s more important to solve a problem than to offer the most money.
For example, let’s say two buyers show up at an open house and both want the house. The first buyer assumes that the seller wants the most money possible and offers full asking price, but they also need two months to close in order to get financing in order, get inspections, etc. The second buyer asks the seller why he or she is selling, and the seller says that they received a job offer in another state and need to move in the next two weeks. The second buyer makes an offer for $10,000 less than asking but agrees to close in two weeks; plus, he or she requires no financing or inspection contingencies.
While the first buyer offered more money, the second buyer likely solved a problem that was more important than the difference in the offers—all because he gathered some information from the seller before making an offer.
Tip #4: Always Get the Last Concession
Part of being a good negotiator is “training” the other party to do what you want, without them even realizing it. Here is one way to do that with someone you will be negotiating with multiple times: Always make sure you ask for and get the last concession in the negotiation.
A concession is something the other party gives in a negotiation—a price drop, better terms, etc). By always asking for—and getting—the final concession, the other party will, over time, learn to stop asking for things once they essentially have what they want/need from the negotiation.
If the other party realizes that every time he or she asks for something, he or she will need to give something, they will naturally shy away from asking for more than what they need, fearing he or she will be asked to give up something important in return for additional (non-essential) demands on their part.
For example, when negotiating with a contractor, let's say that he throws out a final price that you both agree on. Instead of saying, "I agree with that price. We have a deal," try saying, "I agree with that price, if you can start first thing tomorrow morning."
Maybe they’ll come back with, “I can’t start tomorrow. How about the following day?” Your response could be, “That works, but I’ll need you to finish in three days instead of four.”
As long as he counters your request, continue to ask for additional concessions. Eventually, you will train the other party that by “resisting,” they are encouraging you to ask for more and more. They also learn that by just giving in, they end up giving up less in the end. It should be obvious how this will help in future negotiations with this person.
Tip #5: Implement a Penalty for Asking for Concessions
Have you ever been on the phone with a customer service representative from some company negotiating some point (for example, you’re on the phone with your cable company trying to get your monthly fee reduced by $20) and find that every time you ask for something, the rep puts you on hold for 10 minutes while they “check to see if they can do that.”
You can bet that it doesn’t really take them 10 minutes to determine whether they can give you $20 off your bill. But they realize that when you ask for $20 off, then wait for 10 minutes, and then they come back and counteroffer you $5 off your bill, you’re going to be less likely to go another negotiating round (“How about $15 off?”) if it means you’ll have to wait another 10 minutes to get the response.
What they’ve done is implemented a “penalty” for each time you ask for a concession. While you’re sitting on hold, you’re powerless—you have the option to wait for some unknown amount of time or hang up and get nothing.
If you want to discourage others from asking for concessions in your negotiations, do the same thing—implement a penalty each time they ask (though don’t let them know you’re doing it on purpose). And the penalty doesn’t need to be the same for each “offense.”
Making them wait (like the example above) is a great example of a penalty. Perhaps you say, “I’ll have to think about that. I’ll give you a call tomorrow and we can discuss further.” Or perhaps the penalty is that they have to fill out a bunch of forms to get their desired concession. Or perhaps they’ll have to drive somewhere to pick up that extra thing that they want.
If you make the penalty for asking more cumbersome than what they asked for, it’s quite possible they’ll decide it’s not worth the effort—like having to wait 10 minutes to find out if you can save $10 extra.
Tip #6: Friction is Your Friend
On the surface, a negotiation that ends quickly and smoothly without too much back and forth appears to be a good one. But this isn’t necessarily the case.
Can you remember the last time you went into a negotiation and the other person quickly accepted your offer without too much protest or countering? How did it make you feel? If you’re like most people, you probably felt like you didn’t get as good a deal as you could have. You probably felt that, because the other party didn’t put up too much resistance, they were likely very happy with the deal, and therefore, you got the worse end.
Oftentimes, though, the other party feels the same way! There wasn’t enough friction in the negotiation to make both parties feel like they earned a great deal. And because of this, what you will often find in negotiations that go quickly and smoothly is that one or both parties will want to back out of the deal. So, if you really want to ensure that the other side doesn’t back out after the negotiation is finished, make them work hard to get to a common agreement; this hard work will often translate into feelings of a successful outcome for the other side.
This is especially important in real estate investing, when the other party often has several days (if not weeks) to back out of an agreed-upon deal.
Tip #7: Check Your Ego at the Door
Oftentimes, we assume that the other side is looking for something tangible in the outcome of a negotiation: more money, better terms, etc. But a lot of people who pride themselves on their negotiating skills are more interested in having their ego stroked than they are in any real tangible outcome. While some people are going to be all about getting every extra penny in the deal, there are those who will happily give a discounted price (assuming they are still above their minimum threshold) in return for some solid ego stroking.
In real estate negotiation, this might mean telling a contractor how highly recommended he or she comes. Or it might mean reminding a potential investor/buyer how good he or she is at rehabbing on a shoestring budget. Or it might mean “confessing” to your wholesaler how much you hate buying from him or her because they are such a good negotiator.
You’d be very surprised how far some sincere flattery will go in getting you a better negotiating outcome. Not only will it encourage the other party to put their defenses down, but they will also feel an obligation to “return the favor” in some way. So make sure you give them a way to return it right then in terms of a lower price (or whatever else you might want).
Remember the last time you negotiated with someone who was really nice? How about the last time you negotiated with a complete a**hole? In which case did you feel better about “sticking it to them”? Which were you happy to give a break to?
Leave your comments below!