Are you spending hundreds to thousands of dollars a month in advertising? As real estate investors, we spend a lot of money on advertising to get the attention of real estate sellers and buyers. However, if our negotiation skills are not up to par, then you may be wasting a lot of your advertising dollars from a poor “close rate.” This post is going to look at how to increase your returns by increasing your negotiation skills.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
What is Negotiation?
According to Wikipedia, negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual to craft outcomes to satisfy various interests of two people/parties involved in negotiation process.
I used to think that negotiation was simply showing up to the proverbial negotiation table and pushing hard for your position while giving up little to the other side. I did it that way for years until I looked into my success stats. Guess what – I found out that my stats were miserable! My stats were miserable as I only won 10% of the deals that I negotiated. I was loosing money!
I started to do the math on my Lead Cycle to see what it was costing me to get a deal in the door.
Cost per Deal Analysis (Lead Cycle)
Monthly Marketing Budget: $1,000 for 1,000 leads mailing list ($1.00/handwritten letter and envelope)
Call Conversion Rate: 20 Calls (2%)
Appointment Conversion Rate: 10 Appointments (50%)
Deal Close Rate: 1 Close (10%)
Cost per Deal = $1,000 (Mailing Fee) + 5 hrs @ $500 per hour (My Time) + $100 (Call Center Costs) = $3,600 per deal!
It was costing me $3,600 to get to a deal on table. This excluded all the other costs that occur thereafter i.e. attorney, home inspection, environmental inspection etc. That is a lot of money lost if I could not close a deal due to some issue that arises at the time of attorney review or inspection period.
Being the analytical type, I started to review where could I actively cost conserve. I first started looking at the traditional cost savings parts of the marketing funnel i.e. cheaper marketing vendor or bigger bulk of mailing list to bring the cost down. The savings associated with these parts were not substantial enough for me. Then I started to look closely at items that I could control better and the biggest part that was directly influenced by my skills set was the Close Rate.
Improving the Close Rate
My close rate was directly influenced by my ability to negotiate with seller/buyers. I started looking through various websites and publications to better understand the science of Negotiation. I stumbled onto the Harvard Negotiation Project website which has great articles, strategies, and tactics on how to become a better negotiator along with the book Getting to Yes by Roger Fisher. Based on these two sources, I started developing a win-win oriented negotiation framework that has served me well for the past year.
The goal of the framework is to help create win-win agreements for both parties while avoiding positional bargaining. The framework aims to utilize the lessons from Fischer and other negotiation authors:
- Separate the people from the problem: Recognize that emotions and egos are part of being human. These feelings or emotions can get entangled with the problem in negotiations, and that this will adversely affect your ability to see the other party’s position clearly. This results in adversarial rather than cooperative interactions. Try to keep calm and have a level head during your interaction with the other negotiating party.
- Focus on Interests: Interests define the problem. Explore the true interests underlying the positions of each side, rather than a focus on the superficial positions with which the other side comes to the table. It is therefore essential to: Ask questions to explore interest and talk about your own interests rather that you positions. Interests can typically be oriented towards basic needs of the other person. So when someone states that they want money; try to think if they have other basic needs (security, respect, authority etc) that is the underlying cause for that want of money.
- Generate Options: Do not come to the negotiation with one offer rather come with multiple options. The idea is that parties contribute together creatively to generate possibilities for a win-win agreement. The contribution can be completed through various techniques: brainstorming together, broaden the view of the problem by looking at it through other parties lens, and utilize shared interests as the base of a mutually agreeable option.
- BATNA: Best Alternative to Negotiated Agreement is important to consider. You must consider other side’s BATNA as well as your own. As a negotiator you should know your BATNA prior to stepping into a negotiation and think about how to strengthen it before stepping into a negotiation. In addition, you should consider the other parties BATNA and think about how you can influence it to be less appealing than presented options.
- Ask Questions Not Statements: When you meet a positional bargainer (key traits: forcefully assert positions, attack ideas, attack you as the negotiator), ask questions. Asking questions offer the other side no position to attack and questions do not criticize, they educate.
- Build an Agreement Bridge: Instead of pushing the other side toward an agreement, you should state their interests and how you think two or three options would be a solution to their interests. You should help reframe the agreement as an advance towards a better solution rather than a retreat from their position. You can do this by involving the other side by:Asking for constructive criticism on the multiple options you presented to them. After involving the other side you should be closer to agreement. However if you still meet resistance then there is an unmet needs that is not statisfied.You can statisfy these needs by asking the other side of interests or needs that they still are concerned about and then look for low-cost, high-benefit trades.
- Agreement: Draft a fair agreement so that the other side does not feel regret as that can lead to “seller’s or buyer’s remorse” and can kill the deal after you have finished the negotiation.
This framework has helped make me a better negotiator and, in turn, improved my close rate.
Do you have any negotiation tips or tactics that have worked well for you? Share them in the comments below so that we can all benefit from them.