“Let us never negotiate out of fear. But let us never fear to negotiate.”
-John F. Kennedy
I love negotiating. Some people HATE it, some people SUCK at it, and some people LOVE it. I’m in the latter camp.
People say things like “they are so irrational” though, in reality, people are very rational – but they position themselves to protect themselves. In this positioning, the opposing party believes this is irrational. Did I just jump into the deep-end too quick?
A Negotiation Case Study
Here’s a true story to show you what I’m talking about.
An acquaintance of mine owned some nice rental properties in a very nice area of town. Every year, I would call this guy, who we will call “Jim” and offer to buy a particular quadplex. Nothing high pressure, but I would always just ask for the sale. Every year, he politely turned me down, saying it is a cash-cow and he has no interest in selling. This went on for five years but on the sixth year, before I got my call in, I notice the property pop-up on one of my screens. It’s the property I’ve been trying to buy for five years AND the price is only about half what I would have paid. After further research, I discover it was empty and in foreclosure!
I’m sure you are asking yourself a million questions as to why “Jim” didn’t simply sell me the property. The truth is: I don’t know why – but this is what I think happened: he was protecting (see above) his ego and pride. Rather than sell me something at a discount, or sell it all. Jim would rather just lose it. Some would say this is irrational. However, if you approach it from a different angle you can learn how to deal with this.
Develop A System
Most people reading this blog are BiggerPockets members, which means you guys and gals are smarter than around 80% of real estate investors out there. It also means that you guys are looking for great deals, not just the good deals that are on the MLS everyday.
Most of you have made an infinite amount of low-ball offers only to waste your time and the time of everyone involved. Please, do not misunderstand me – I am all about making low-ball offers and getting a great deal. However, as you probably have already experienced – blindly making a ton of low-ball offers doesn’t get you far.
Instead, why don’t you design a process that is repeatable, scalable, and works within the parameters you define and what works with whatever negotiation style you prefer.
My Real Estate System
Let me give you a real case-study of a process that I have defined for myself.
It was early December and we were currently renting, but my wife was VERY tired of living in a 1 bedroom place. Additionally, we were having our second child in February so she couldn’t help move and pack if we waited any longer. My wife found three houses that were the size we wanted and in the location we wanted. When we walked into the final house we knew this was the one; everything was already remodeled and we loved everything. At this point we knew it was obviously empty and on the market for awhile. I also saw where it had never been lived in at it’s current state, as it was previously a duplex.
Additionally, the price was way out of our budget.
After going through a number of failed low-ball bids, my wife and I tried a different strategy this time. We made the low-ball bid, but also included a letter explaining the offer.
This is the letter we sent:
November 30, 2010
I’m writing to let you know that I would like to make a bid on your property. I love your house and would love to raise my family in this wonderful house.
But given that my offer is well below your asking price, I also feel I owe you an explanation.
I am a credit analyst at a bank and my wife is a photographer. We were pre-approved for a $225,000 purchase price and my parents agreed to help us with another $15,000. This is how we came to our proposed purchase price. Even though this offer is below the asking price I feel there are several positive items in our offer that I would like to highlight:
- This offer is not contingent on us selling a house.
- We are getting conventional financing, not FHA.
- We can close within 30 days
- Although we do plan on getting a home inspection, we do not plan on asking for any type of credit after the inspection.
- We can change the purchase price terms to minimize your capital gains tax.
Thank you for considering our offer. We look forward to hearing from you.
Jimmy & Brittany Moncrief (Ada 2 years old & # 2 due to arrive in Feb 2011)
Breakdown of the letter
- It began with a positive note – establishing the tone
- The offer’s justification did not use quantitative data (repair costs, fair value estimates as well as qualitative factors (conditions))
- It listed all positive aspects of your offer – references, fast closing, etc..
- It listed more positives and benefits for them – (really think about the sellers condition and what they want – everybody says money, but that’s not even close to the full story.)
- Thank you – established the tone at the end
I want to emphasize one major point – DO NOT SOUND LIKE A PROFESSIONAL REAL ESTATE INVESTOR! They will immediately shut-you off if you take an impersonal, business-tone. Try to keep the tone as friendly as possible.
Below is the Process I use for my own Personal Residence
- My Wife likes it (I don’t need to waste time with anything else if this doesn’t work)
- Empty House (passive sign of distress)
- Bonus points for it being on the market over 6 months
- Another bonus point if it’s an investor or out-of-town owner (less emotion)
- Write a letter explaining the offer
Obviously, this approach takes some time on the front-end and you can’t just take a “spray-and-pray” approach to your offers. However, I have found that when you take a methodical approach to your offers and invest some time on the front-end and work within the confines of your own parameters, your success rate will dramatically improve.
I want to emphasize that this process took years of refinement and I had to really think about the positives aspects I have as a buyer. This will probably be very different from your positive aspects, because we are all different with different positive aspects.
On the BiggerPockets Podcast, Episode 23 – I LOVED two things James Vermillion said that compliment this article:
“Don’t pick a strategy and build your life around it. Look at your life – and build a strategy that fits your needs.”
Another key point that James pointed out was how he differentiates himself as a buyer in Lexington, KY. I’m going to paraphrase, but it was something to the effect of:
There are thousands of homes for sale her, thousands of buyers, but there is only 1 buyer who buys homes with mold and foundation problems, and that’s me.
Think about that!
In a town, with over 301K residents, his is the only buyer for a particular type of home.
Now that is a powerful negotiation tool!
In summary, I want to challenge you this week to be a hunter instead of a farmer. Think about your individual positives and negatives, put them down on paper. Write a letter to a seller and let me know the results in the comments.
“In business, you don’t get what you deserve, you get what you negotiate.” Charles L. Karrass
Photos: Tristan Martin