Negotiation Principles In Real Estate

Before I read The Book On Negotiating Real Estate by J. Scott, Mark Ferguson & Carol Scott, I knew absolutely nothing about negotiation. Their book has been my personal guide through what I thought was a cryptic and seemingly magical undertaking—business negotiation. The principles in this book are real estate oriented, but they can apply to all parts of business, and to all parts of life. I have used these tactics in everything from real estate investing, to buying a car. These are some of the principles, tips, and tricks that were featured in their excellent book. All credit to them. 

• Negotiation falls into 5 main areas:

1. Planning & Research- The guy with the most info wins.
2. 
   
3. Building Rapport- you build trust with the other person so that they reveal their motives, needs, and wants to you. They aren't going to do that if they have their guard up. 
4. 
   
5. Initial Offer- this is where you make them a written proposal offer.
6. 
   
7. Bargain- the back and forth trading of concessions.
8. 
   
9. Renegotiate- when contingencies arise such as problems during the inspection period or financing the deal needs to be renegotiated. When something troubling happens there has to be a renegotiation of the deal.
10. 
    
11. Close- the settlement and outcome of the negotiation.

-Always write down your target (ideal deal) and your MAO (minimum allowable offer, or worst deal you will take) before going into negotiations. This is so that you never know if you are offering too little or too much. You don't want to accept a deal that gives you buyers remorse. By writing down exactly what you want, and the minimum you will accept you can avoid taking bad deals. Negotiations get heated and sometimes we forget.

-Always try to get the seller to throw out the first offer. By doing this we can essentially define the midpoint of the negotiation and avoid splitting the difference.

-If you DO happen to be the one throwing out the first offer, use this opportunity to anchor the other party to a price point of your choosing.

-Avoid the use of round numbers. If you use round numbers the seller will think that there is no specific significance to those numbers and that you can budge on them. By going into the negotiation and saying something like “i'm really glad i met with you today, I just sold a house and have some cash” and then later in the negotiation give them a non-round number like $204,200 (as opposed to $200,000 or $250,000) they will assume in their minds that this is the amount of money you have to spend. You are anchoring them to this price point.

-The use of non-round numbers can help you win in a competitive highest and best situations while not going too high over. If you know everyone is offering $90,000 but you come in and offer $90,150 then you will win, and with relatively little extra cost.

-Always use subtlety. Expert negotiators use subtlety.

-The more motivated a seller is, the lower your initial offer should be.

-Always hold back some concessions. Don't just throw everything out there on the initial offer or beginning of the negotiations.

-Only state what you absolutely need in the initial offer and beginning phases of the negotiation and ignore what the seller wants. Have a secret list of concessions that you know you can throw out later, and then when you do, ask for concessions in return. This can move a stalled negotiation forward and give you more of what you want.

-To calculate the sellers MAO range take the payoff amount on their house and any money they needed to walk away with (a down payment on a new home, $10,000 with which to start their new life etc etc). Add those 2 numbers together and that is the bottom range of their MAO. the top portion of their range is what they said they would be willing to walk away with. The more motivated they are, the closer to the bottom of the range they will be, the less motivated they are, the closer to the top of the range they will be.

-Next compare your MAO range with that of the sellers. If there is overlap or they are far below your MAO then you have a good shot at a deal. The more overlap there is. The more room there is for negotiation.

-Negotiating when agents are involved is much more difficult than direct- to- seller because the seller is anchored to the listing price the agent lists the home for. Additionally, we do not have direct contact with the seller so it is difficult to extract information from them

-SPLP- stands for sale price to listing price ratio. This is a ratio of what homes are typically selling for compared to what they were listed at in that specific market. If homes on average are selling for 80% of their listing price then the SPLP is 80% if they are selling for more than their list price then the SPLP is over 100%. SPLP is a great gauge of market heat and activity.

-When offering on a property on the MLS we use the same methodology of creating an MAO range. The high end of the range is the listing price. The low end of the range is the SPLP price. If the seller is extra motivated they may even dip 5-10% below the SPLP price. 10% below SPLP is the lowest you should ever expect a sellers MAO to be.

-ALWAYS make sure you are negotiating with the or all decision making parties. Don't negotiate with someone who doesn't control the final outcome! You don't want to repeat the negotiations, and you don't want the initial contact to act as a gatekeeper for a secondary negotiation in which the seller parties grind you further down.

-People may try to look tough in front of their spouse. Get them alone so they can make concessions without losing face.

-Determine the ultimate decision makers by asking this simple question “Is your name the only name on title?”

-If you encounter a person who is not the key decision maker, don't walk away. Instead use this chance to gather more information about the sellers, their property and their situation.

-Always summarize your offer and contract to the seller. Don't just hand it to them. This may confuse them or have them negotiating each term of the offer line by line or on its own. You want to avoid this.

-Prime the sellers mind with terms that are most favorable to them in order to get them saying yes a bunch of times, and becoming more agreeable. Then present your more contentious terms.

-Always give them the least amount of information possible about your situation. Always say less than you need to say.

-Present your offer confidently and then shut up. Do not attempt to justify your offer.

-If the seller doesn't take your offer in a multiple bid situation, ask for your offer to be held as a backup. Offers fall through all the time so you never know!

-Here are the best times to make offers on listed properties: during the winter, long weekends such as Memorial Day and Labor Day, over Christmas and New Years (The Holidays), at the beginning or end of the month. And on Tuesdays.

-Never be too serious or tense in a negotiation. Always try to smile, insert small talk etc.

-Always reiterate what you and the seller agree on, focus on common ground while minimizing differences.

-Never just accept the seller's first offer. Always say something along the lines of, can you do better?

-People like to feel like they worked for something. Like they have earned it. Make the negotiation difficult if you must. This makes people invested in the process and far less likely to back out of it as the deal progresses. Remember the sunken bridge effect in psychology. People will keep investing into something they have already heavily invested in. for no other reason, other than the sheer amount of time, energy, and resources they have already sunk into the project.

-You can manufacture friction in a negotiation either through asking for more concessions- typically small things. Or through long pauses. The goal here is that you don't want the other party to think you are too ecstatic about the deal, you don't want them thinking that you took advantage of them or that they were too generous.

-You can always use reports or official documentation such as comps from the MLS or inspection reports, Market data etc to back up your claims to the seller supporting your price point.

-You can always leverage the use of experts or professionals such as realtors, appraisers, contractors, hard money lenders, banks, lawyers, property managers etc to add credibility to your claims. Our credibility kit will have this.

-Shut Up. Silence is golden in negotiation. The less you say the more you get. People get very uncomfortable with prolonged silence in our society. If the seller throws out something you don't like or asks for a concession that you don't want to provide, just shut up and don't say anything. They will break the silence themselves in an effort to rectify the situation.

-Appealing to a higher authority is generally good. If we are close to a deal but im unsure or something we can say something like “I have to consult with my partner before finalizing the deal.

-Don't bluff in negotiations. Bluffing generally doesn't work. Negotiations are built on trust, not this take it or leave it attitude.

-If you have to walk away from a deal make sure you keep the door open. Tell the seller that if anything should change on either side, that you would love to re-establish talks/negotiations. Never burn bridges!

-If you have to walk away from a negotiation but find yourself really wanting to go back, provide the other party with reasons or good news on why your situation has changed. Your position will still be weakened but not by an incredible amount. You don't look desperate here, your situation has just changed.

-Negotiations are all about momentum. You don't want the negotiation to stall so if you feel yourself or the other party getting tired during the negotiations take a break, go to lunch, go make a phone call, resume conversation the next day etc.

-If the negotiation stalls, review the negotiations thus far, remind the other party of all common ground, of all the things both of you agree upon. This leaves them optimistic that a deal can still be reached.

-Try to find some new creative concessions to move the negotiations forward should they stall.

-If things stall, remind the other party of the negative consequences of not reaching a deal. Are they in foreclosure? Need to sell to get a new house? Need to move ASAP for that new cushy job?

-If negotiations stall, ask the other party a series of questions they will answer “yes” to. This primes the mind of the other party to keep moving forward.

-Most real estate negotiations do not end in a deal and that is ok. NO DEAL IS BETTER THAN A BAD DEAL. Even if you can’t reach a deal, try to point the other party in the right direction through a referral to a realtor, a bank, a lawyer, or a contractor, or a property manager who can help solve their problems. Your show of goodwill will come back to you in future business through a referral. Word of mouth is the best marketing or

advertising you can ask for.

-Avoid giving concessions, always trade them. Concessions are the currency of negotiation.

-Always phrase your concessions as if-then scenarios, or hypotheses. Tell the other party you are willing to give them A if B happens. The use of if-then statements, and hypotheticals allows you to test concessions without locking you into anything or allowing the other party to counter your concessions and ask for more.

-Always start with the most important concessions and terms first.

-Always trade concessions of equal value. Do not trade greater value concessions for lesser value concessions.

-Concessions lose value shortly after you give them away. This is because people get happy once they get something but then quickly take it for granted. For this reason: always seek to get a reciprocal concession as soon as possible. Don't just give something and not get something back; get it back right away.

-Use giveaway concessions to your advantage. For example, use something you were going to do anyway (like handling the closing documents and paperwork) as a concession. The other party might have been unaware that you were going to do this anyway and it may be a big deal to them, but to you it is natural or no sweat off your back

-Always thank the other party for the concessions they made that you accept, say something along the lines of “Thank you, I appreciate that Mr.Seller” this encourages the behavior more since people love praise.

-Try to always use people's first names. People love hearing their name

-Always get the final concession. Train the other party that everytime they ask for something you will ask for something in return. If they understand this they will ask you for less.

-Have a penalty for concessions. If the other party throws out a concession we dont like we can institute a penalty, like making them wait for a response, doing cumbersome paperwork, or having to go do something themselves.

-When the other party suggests that they can make a concession, take the opportunity to turn it into an agreement. So if they say “We might be able to throw the fridge into the deal” say “Great so you'll throw the refrigerator into the deal...now let's talk about price or closing...etc”

-Defer to a higher authority such as your attorney. If the other party asks for something we don't want to give them we can simply say, “my attorney really doesn't want us to do that because of the liability”. You can even use this tactic when you would give up something but want to make a show of it in order to get a big concession. You can say “My attorney typically does not allow us to do this as it causes unnecessary liability, however I will talk with him and ask”. Then you come back later with the ‘good news’ that the attorney said yes, and then ask for a big concession in return.

-Be bold and simply ask for what you want. You would be surprised at how many people will say yes to a crazy request.

-When making a big price concession never use round numbers. Always use non-round numbers such as $8,192. To make the other party believe that there is a specific reason or a specific amount of cash you are working with.

-Try to negotiate concessions and terms in simple easy to remember chunks or bits that are written down.

-When working with an agent or a “get-it-done” kind of seller, you can bundle concessions or terms that go together and are small and unimportant so as to reduce the back and forth haggling that the other party does not want.

-Never assume people want the same things you want.