{"id":71380,"date":"2015-03-25T11:30:29","date_gmt":"2015-03-25T17:30:29","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=71380"},"modified":"2021-03-16T10:29:53","modified_gmt":"2021-03-16T16:29:53","slug":"2015-03-25-strike-price-vsgoal-priceleave-money-table-negotiating","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2015-03-25-strike-price-vsgoal-priceleave-money-table-negotiating","title":{"rendered":"Strike Price vs. Goal Price: How to NOT Leave Money on the Table When Negotiating"},"content":{"rendered":"<p>There is no question that having a strike price is an invaluable tool not only\u00a0when it comes to real estate investing, but with any sort of large purchase. After all, there&#8217;s a reason auctioneers talk so fast. As <a href=\"http:\/\/www.slate.com\/articles\/news_and_politics\/explainer\/2010\/11\/why_do_auctioneers_talk_like_that.html\" target=\"_blank\" rel=\"noopener\"><em>Slate<\/em><\/a>\u00a0pointed out, the speed is &#8220;intended to give the buyers a sense of urgency: bid now or lose out.&#8221; But as any decent real estate investor knows, not buying a deal does not mean you &#8220;lose out.&#8221;<\/p>\n<p>Having a\u00a0strike price (a price that&#8217;s the highest you&#8217;re willing to pay) ahead of time is what prevents us from getting carried away in the competition of an auction or negotiation. It prevents us from confusing buying a property with winning. Oftentimes, buying a property means you lose. So never go into a real estate negotiation without a strike price.<\/p>\n<p>But that being said,\u00a0there is a downside to the strike price. It can subconsciously become the goal to aim for that could prevent you from doing even better.<\/p>\n<p><em><strong>Related:<\/strong> <a title=\"The Top 5 Ways to Negotiate Major Discounts On Your Next Property\" href=\"https:\/\/www.biggerpockets.com\/blog\/2014\/10\/08\/top-5-ways-to-negotiate-major-discounts-on-your-next-property\/\" target=\"_blank\">The Top 5 Ways to Negotiate Major Discounts On Your Next Property<\/a><\/em><\/p>\n<h2><strong>Aiming for the Strike Price<\/strong><\/h2>\n<p>Not too long ago, I was trying to negotiate the purchase of an apartment complex and had done pretty well up front. I had met the seller at the property and asked all the questions I needed to know in order to make an educated decision. I had spent two hours there, just talking with the seller and building rapport. I had also collected all the necessary documents, such as the profit and loss statement and rent roll.<\/p>\n<p>I then went back and crunched the numbers. I came up with an offer price and a strike price. It looked like this:<\/p>\n<ul>\n<li>List Price: $795,000<\/li>\n<li>Offer Price: $690,000<\/li>\n<li>Strike Price: $725,000<\/li>\n<\/ul>\n<p>I still had a few questions to answer, and I figured the best way to do this would be to go over the deal face-to-face (especially since there was no agent involved). Face-to-face negotiations are usually\u00a0the best, as they allow you to tailor your approach to the individual seller instead of just being another justification-lacking offer, bound to get lost in the netherworld of someone&#8217;s email inbox.<\/p>\n<p>So I invited the seller to our office, and we again talked for about an hour before negotiating anything (he&#8217;s a bit of a talker if you haven&#8217;t figured that out yet). I then went over my questions to make sure my assumptions still held. Then I made my case: I explained that I took his numbers from 2014, then plugged in a few more (such as a management fee) and also increased a few things (such as utilities because the property would operate at a higher occupancy and some of the utilities are paid for by the owner). I then said we needed to hit a certain cap rate, and that would put us at $690,000.<\/p>\n<p>He responded by saying that was way too low. I didn&#8217;t flinch. Instead, I leaned forward and asked, &#8220;So at what price would you be willing to sign a contract today?&#8221;<\/p>\n<p>Then I paused.<\/p>\n<p>So far I had done pretty well. You can argue that I should have asked for a reduction before making my offer, but I think it&#8217;s often better to justify your price first. It&#8217;s a process called &#8220;framing,&#8221; which I will write an article on in the future. But it works similarly to anchoring, or setting the ballpark of the negotiation, which I discuss in more detail\u00a0<a href=\"https:\/\/www.biggerpockets.com\/blog\/2015\/01\/21\/negotiating-101-make-first-offer\/\" target=\"_blank\" rel=\"noopener\">here<\/a>\u00a0and <a href=\"https:\/\/www.biggerpockets.com\/blog\/2015\/02\/18\/power-anchoring-use-perception-gain-competitive-eduge\/\" target=\"_blank\" rel=\"noopener\">here<\/a>.<\/p>\n<p>Either way, I then made a mistake. He came back at $740,000. That&#8217;s a substantial drop. But instead of thinking &#8220;What&#8217;s the best deal I can get?&#8221; I had the strike price stuck in mind. I came up all the way to $715,000, thinking (or maybe not thinking) we could meet in the middle at $725,000. In my defense, I knew as soon as the words left my mouth that I had come up too much. But the reason I came up so much wasn&#8217;t temporary insanity or bad negotiating skills (well, that&#8217;s debatable, I guess), but simply that I had that strike price stuck in my mind as <em>the\u00a0<\/em>goal.<\/p>\n<p>What I should have done is pause again. Go back to my analysis and explain why it would be tough to go over $700,000. Maybe he would come down a little more before I even countered. If not, I could come back at &#8220;an even $700,000&#8221; or something like that. Maybe I could get him down to $715,000 or $710,000. Instead, I left money on the table of the sacred strike price.<\/p>\n<h2>Aiming for the Goal Price<\/h2>\n<p>Now, that&#8217;s not to say this negotiation was a disaster. We went under contract at the price I wanted to get the property for: $725,000. However, upon reflection, I knew that I had not only done something wrong, but was also going about things wrong in a structural way. I was putting way too much emphasis on the strike price.<\/p>\n<p>Remember what a strike price is; it&#8217;s the highest price you&#8217;re <em>willing<\/em> to pay for a property. What it is not is the price you <em>want<\/em> to pay for the property.<\/p>\n<p><em><strong>Related:<\/strong> <a title=\"Negotiating 101: You CAN Negotiate Anything!\" href=\"https:\/\/www.biggerpockets.com\/blog\/2009\/12\/05\/negotiating-101-you-can-negotiate-anything\/\" target=\"_blank\">Negotiating 101: You CAN Negotiate Anything!<\/a><\/em><\/p>\n<p>So I&#8217;ve added a number. I still have an offer price and a strike price, but I also have a goal price. The goal price is the price I really want to get the property for. In other words, the goal price is what you&#8217;re aiming for and the strike price is what you will settle for. Looking at it this way can even\u00a0make you reconsider your offer price. &#8220;<em>Am I leaving too much on the table?<\/em>&#8221; After all, had I offered $675,000, the seller probably would have still come back at $740,000, maybe even a little less since I anchored the price lower. You want to find the lowest\u00a0offer price that isn&#8217;t so low as to offend the seller. I doubt an extra $15,000 would have done that.<\/p>\n<p>So if I had another chance at the above situation, I would have probably come up with the following:<\/p>\n<ul>\n<li>List Price: $795,000<\/li>\n<li>Offer Price: $675,000<\/li>\n<li>Goal Price: $700,000<\/li>\n<li>Strike Price: $725,000<\/li>\n<\/ul>\n<p>Would it have worked out better? There&#8217;s no way to know. But what I can say with a lot of confidence is that the strike price should not be something to aim for; it should be something to settle for. You should always try to do better. Our subconscious minds will aim for the price you set ahead of time. So why not set a lower price to aim for and if you can&#8217;t\u00a0get\u00a0there, then settle for the strike price? That way, you won&#8217;t let your subconscious mind leave money on the table.<\/p>\n<p><em>How do you set price points when negotiating real estate deals? What has worked for you to get the best possible price?<\/em><\/p>\n<p><strong>Leave your comments and tips below!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>There is no question that having a strike price is an invaluable tool not only\u00a0when it comes to real estate investing, but with any sort of large purchase. After all, [&hellip;]<\/p>\n","protected":false},"author":1689,"featured_media":71491,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4252],"tags":[5252,623,5288,1471,5289,5290,5287,1484,5286],"class_list":["post-71380","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-deal-analysis","tag-anchoring","tag-apartments","tag-auctioneers","tag-auctions","tag-framing","tag-framingframing","tag-goal-price","tag-negotiation","tag-strike-price"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/71380","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/1689"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=71380"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/71380\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/71491"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=71380"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=71380"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=71380"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}