Real Estate Investing Basics

Negotiating 101: Yes, You SHOULD Make the First Offer. Here’s Why.

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It is almost taken as a fundamental truth of negotiating that he who speaks first loses. It is axiomatic among many in business that you should try to get the other party to state their price first, no matter how awkward it becomes. The reason for this is because it acts effectively as the first concession and perhaps tilts the deck in the other party’s favor.

For example, the first offer could be way lower than the other would pay and thereby provide a huge boon. One business professional gives the example of a garage sale to illustrate this kind of thinking in an article titled “Negotiating Tips: The person who makes the first offer always loses:”

“OK, now we’ve met the seller. There’s no pricetag on the table, so here’s how negotiations could go.

Scenario one:

You: I’ll offer you $20 for this table.

Them: I’d like to get $35 for it.

You: Would you take $25?

Them: $30 and you’ve got a deal.

You: OK, deal.

Scenario two:

You: How much are you asking for this table?

Them: I’d like to get $35 for it.

You: I can’t pay more than $20.

Them: Well, I could come down to $25.

You: Great, I’ll take it.”

Now, there’s certainly a time and place for this. Sometimes you don’t want to make the first offer, but it’s not true that you never want to make the first offer. In fact, I would argue that when the seller is motivated, you usually do.

The reason for this boils down to two things: 1) Many sellers, even those who are motivated, have a completely unrealistic view of what their house is worth. When they throw out a number, it almost kills the deal before it even starts, as you are so far below them that for them to come down to your price would not only be a huge financial hit, but it would also be a huge hit to the ego. And 2) The funny way the human brain works.


Nobel prize laureate Daniel Kahneman in his absolutely fascinating book Thinking Fast and Slow tells us about a very interesting test he conducted that provides great insights to negotiating:

“…we told participants in the Exploratorium study about environmental damage caused by oil tankers in the Pacific Ocean and asked about their willingness to make an annual contribution ‘to save 50,000 offshore Pacific Coast seabirds from small offshore oil spills, until ways are found to prevent spills or require tanker owners to pay for the operation.’ This question requires intensity matching: the respondents are asked, in effect, to find the dollar amount of a contribution that matches the intensity of their feelings about the plight of the seabirds. Some of the visitors were first asked an anchoring question, such as “Would you be willing to pay $5…” before the point-blank question of how much they would contribute.

“When no anchor was mentioned, the visitors at the Exploratoriumgenerally an environmentally sensitive crowdsaid they were willing to pay $64, on average. When the anchoring amount was only $5, contributions averaged $20. When the anchor was a rather extravagant $400, the willingness to pay rose to an average of $143.” (Pg. 124-125)

This is the power of what psychologists call anchoring. Think about this example for a moment. The same types of people, randomly selected, reduced the amount they were willing to pay by 75 percent when given a low anchor and more than doubled it when given a high anchor.

Indeed, some examples of the power of anchoring are almost surreal and rather disturbing. Kahneman again:

“German judges with an average of more than fifteen years of experience on the bench first read a description of a woman who had been caught shoplifting, then rolled a pair of dice that were loaded so every roll resulted in either a 3 or a 9. As soon as the dice came to a stop, the judges were asked whether they would sentence the woman to a term in prison greater or lesser, in months, than the number showing on the dice. Finally the judges were instructed to specify the exact prison sentence they would give the shoplifter. On average those who had rolled a 9 said they would sentence her to 8 months; those who rolled a 3 said they would sentence her to 5 months.” (pg. 125-126)

Kahneman provides an in depth explanation for this psychological phenomenon, but in brief, anchors trigger our more automatic thinking processes (System 1), such as recognizing familiar symbols or faces. System 1 then sets the plate for the more deliberate thinking processes (System 2), which operates when trying to do more difficult tasks such as arithmetic or abstract thought.

As we all know, System 2 is lazy and likes its job made easy. So System 1 obliges. Anchoring feeds System 1 something to hang onto, which proliferates up to System 2 and influences the rational mind when it comes time to buckle down and do some serious thinking.

In other words, making the first offer sets the ballpark for the negotiation.

Real Estate Negotiations

An effective tool I’ve found when negotiating with sellers (particularly those who have an inflated view of their home’s worth) is to make my case first before either of us has had a chance to throw out an offer. So, let’s say I just recently bought a similar house nearby, or better yet, more than one. Then I describe those purchases to the seller to explain where I’m deriving my valuation from. I could also discuss the defects of the house that will require rehab and an estimate for that. Or if I know of nearby comps or anything else that supports my offer, I can bring that forth as well.

Related: 5 Crucial Steps for Successful Real Estate Negotiations

I’m not a flipper, but I do explain that we only buy deals we could flip. Therefore, you can just lay out the whole process. If it needs repair, explain that it’s most likely investors will be the only ones interested. Describe to them the 70 percent Rule, or better yet, break out the expenses individually and show them what it will take to make the deal work for you. Then make the offer.

All of this will dissolve the delusions of grandeur many sellers are afflicted with, while simultaneously anchoring a realistic and profitable price for yourself in their mind.

But please note, while negotiating is an important skill to learn, it’s important to not use these tactics unethically or to become some sort of used car salesman-type. The goal is to dissuade overly optimistic sellers and provide a service by being able to purchase a motivated seller’s house quickly and easily at a price that will be profitable. It shouldn’t be to try and trick someone. If that’s the goal, you will gain a bad reputation, and deals may very well blow up in escrow as the seller starts to believe they are getting screwed and desperately tries to get out of it.

If You Are on the Receiving End

So let’s say you get beaten to the punch, and the other party makes the first offer. Kanheman describes the approach of psychologists Adam Galinsky and Thomas Mussweiler when someone makes an opening offer that is too high: “They instructed negotiators to focus their attention and search their memory for arguments against the anchor” (Pg. 126-127). If you are conscious of the anchoring effect, you can counteract its influence and bring yourself back to a neutral state. System 2 needs to actively fight off the unsolicited influence of System 1. The worst thing to do is get so caught up in the negotiation (and the anchor) that you buy or sell something at a price you shouldn’t have.

Related: Are You Leaving Money on the Table? 7 Tips for Better Negotiations

As for Kanheman… well, I will end with his rather colorful advice:

“My advice to students when I taught negotiations was that if you think the other side has made an outrageous proposal, you should not come back with an equally outrageous counteroffer, creating a gap that will be difficult to bridge in further negotiations. Instead you should make a scene, storm out or threaten to do so, and make it clearto yourself as well as the other side—that you will not continue the negotiation with that number on the table.” (Pg, 126)

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In other words, use the patented “Toddler Tantrum” method of negotiating.

Weigh in: In your experience, do you like making the first offer, or would you rather counter? What’s your best advice when it comes to negotiating?

Leave a comment below!

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip ...
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    Joseph Ball Residential Real Estate Agent from Groveland, Florida
    Replied almost 6 years ago
    I respectfully disagree. In at least two very recent transactions, the Seller actually stated lesser number than mine. In one case, 50% lower! And I don’t see it does any harm. I respect your opinion.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied almost 6 years ago
    I did say there’s something to waiting for the other person to offer, but I’m convinced there’s also a lot of value in setting the ballpark and anchoring. As I think about it more, I think it comes down to trying to gauge where the seller is at during your conversations before either makes an offer. If they sound like they’re willing to give it away for a song, yeah let them offer first. If not, I would think it’s best to put in the first offer. But I can definitely understand why you would disagree (especially after getting one for 50%).
    Mike Palmer from Utah
    Replied almost 6 years ago
    Some good points in the article. I think it depends on the situation. If you are making offers on the MLS, then I think this strategy makes sense. If you are dealing with off market deals and negotiating in person I want them to throw out the first number. The problem I see with anchoring first is you are still throwing out the first number. If you set the anchor at $50k, thinking in your mind you would be willing to go up to $60k, but the seller was willing to take $30k, you just lost out big time. I think that is Joseph’s point, and I agree. I always want to hear the other party give a number first. If it is totally out of whack, you can then still set a realistic anchor. If they come out with $75k out of the gate, you can still set your anchor at $50k. I think you win more often with this strategy, but it depends on the situation.
    David Rupp Rental Property Investor from Columbus, OH
    Replied almost 6 years ago
    Hey Andrew, great article. My business has pretty much morphed into doing this. It is seeming to work well. I am wondering what this looks like for you in your business? How does a typical phone call play out? Thanks again for a great article. David
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied almost 6 years ago
    Most of what we do is make lots of offers on MLS listings, but I still deal with a fair number of sellers and I certainly believe this has helped. Before, especially when I was flipping in Oregon and dealt almost exclusively with sellers, I would always try to get them to make the first offer. There were a few really good ones for sure, but by far the most were all but dead on arrival.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied almost 6 years ago
    I found this article fascinating. Thank you for the insights. I certainly learned a few things that I will use in my future negotiations.
    Ryan Ball Rental Property Investor from Chicago, IL
    Replied almost 6 years ago
    I think both approaches work in certain situations. I have personally had more success throwing out the first offer. The majority of the time I have had a seller throw out the first number it is so unrealistic that you really can’t have a conversation because usually their number has no basis in reality. I have had the most success by starting with a number that I think is the lowest offer that the seller will actually consider and explaining how I arrived at that figure.
    Graham Lawlor from New York, NY
    Replied almost 6 years ago
    Why is the lowest number the seller will consider relevant? If his lowest number is 50k and you can only make money on the project if you buy it for 40k then surely you don’t offer him 50, right?
    Ryan Ball Rental Property Investor from Chicago, IL
    Replied almost 6 years ago
    No I would not ever make an offer on a property that was above what I projected would meet our target returns. We are not buying fixer upper or distressed properties, so throwing out unrealistic numbers generally does not work. Using your numbers, if someone is asking $50k and we offer $5k, it is not going anywhere. If it makes sense to us at $40k, we might offer $30k-$35k. We are not dealing with owner occupied properties, so it is rare that someone has to sell. A different approach might be appropriate for single family or distressed properties.
    Jeffrey Hare
    Replied almost 6 years ago
    The focus I emphasize for my negotiating students is “situational awareness.” There are no magic formulas or hard rules in negotiating – everything is driven by the respective interests of the parties, the emotional, economic and environmental circumstances, and the relationships. Anchoring is definitely a powerful psychological influence, but the key to using or responding to anchoring — is preparation. It can backfire if not used in the proper context, especially when it is overtly used to seek some unilateral advantage at the risk of losing the deal altogether, and possibly destroying trust any future opportunity with the same parties. Used in the extreme, anchoring is simply inefficient and ineffective. A much better approach is to use a number based on sound data that is part of a comprehensive proposal keyed to the other party’s interests.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied almost 6 years ago
    I actually agree with this, as I mentioned in the article, I build my case first and then make the offer. And while it’s not always best to make the offer first, given the advantages of anchoring, I think it usually is.
    Uyenchi Ho Investor from San Jose, California
    Replied almost 6 years ago
    This is a very timely article for me. I’ve just sent out my firs batch of letters to home owners declaring that I will buy their house as-is, for all cash. I’ve received multiple calls and emails a day, and 100% of the time, they challenge me with: “Make an offer.” If I respond with, “What do you want for your house,” They say, “You want to buy my house. Make an offer.” Often time I’m able to pull certain information from them such as how much they currently owe on the house (so I know how low I can go), how much they think their property is worth, etc., but I always find myself in the position of having to make the first offer. So far no seller has accepted my first offer yet, so I’m not worried about my initial offer being too high. It’s good to see a situation in difference perspectives, because now I know I don’t have to force a first offer out of the seller every time.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied almost 6 years ago
    The one thing I would note is that you don’t want to waste too much time with people who aren’t motivated. So make sure to vet their level of motivation before spending too much time comping the property or going out to visit it.
    Karl James Land Investor from Fulshear, Texas
    Replied almost 6 years ago
    Good thoughtful article and follow up. thanks!
    Karl James Land Investor from Fulshear, Texas
    Replied almost 6 years ago
    Good thoughtful article and follow up. thanks!
    paul doane
    Replied almost 6 years ago
    Very good article, must agree with some of the others though, you need to establish quickly if they are motivated enough or just wasting your time.
    Nathan Emmert Investor from San Ramon, California
    Replied almost 6 years ago
    LOL, sorry, loved the toddler tantrum. I took a class on negotiating at a former company and discussed many of these things (especially the staking) and we’d naturally split into teams to “practice”. One of those practices involved buying a company and negotiating the per price of some shares… expected value was likely in the $20 – 40 range… the “other” sides first offer to sell was $900 a share… my counter offer was for them to pay me $50 a share just to take the company off their hands. Yep, I threw a tantrum 🙂 Apparently having been on the “winning” team and performing best in the previous 3 negotiations in the training worked against us in the end!
    Frankie Woods Investor from Arlington, Virginia
    Replied almost 6 years ago
    Great article! Very practical knowledge that can be used with a direct mail campaign!
    Alan Mackenthun from Prior Lake, Minnesota
    Replied almost 6 years ago
    Thanks Andrew. I just got recruited to help with the advanced giving campaign for my church to raise money for a new expansion. I’ll be meeting one on one with people expected to be able to give significantly. I’ll need to be throwing out some carefully considered anchors 🙂
    Lauren Myers Renter from Seattle, Washington
    Replied almost 6 years ago
    That’s pretty interesting. Most stuff I’ve read on negotiating up to now has in common the suggestion to make your offer and basically then talk as little as possible, walking out if need be. Would you consider that a tantrum, or the opposite? I’m wondering what sorts of responses people have given to unrealistic first offers from the other party, and what results they got.