Want More Profit In Your Real Estate? Then Lower Expectations

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Real Estate investing is all about relationships.  Having the right contacts and pleasing those contacts is a pretty sure path to wealth for any investor, but the question is – how do I please those contacts?  It’s easy.

Set expectations low early and consistently exceed them.

Every investor has heard the expression “past performance does not guarantee future results,” but what I have found is that “past promises lock you into future performance”.  In other words, if you tell people you will do something, you will disappoint people if you don’t come through.  However, if you don’t promise – then everyone will be happy when you do something unexpected.

The key is to make sure you don’t promise too much.  Actually try promising a little less than you can do.  That way when you actually do what you promise, or do more than you promise, people will love you for it.  You know the phrase – “Under Promise and Over Deliver”.

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If it’s So Easy, Why Isn’t Everyone Doing It?

You probably read the paragraphs above and thought – “No kidding Sherlock”.  But how many of you actually do it?  There are all kinds of examples in real estate where people inflate their estimates of what will happen and it leads to disappointment.  Here are some examples:

  • Realtor to Investor/Buyer: “This property will have very little maintenance expense.”
  • Buyer to Lender: “I will have no problem renting this property out and making my payments.”
  • Landlord to Prospective Tenants: “Sure I can add an automatic garage door opener.”
  • Contractor to Investor: “This job shouldn’t take more than a week.”

Can you think of any other examples?  I could fill several pages.  Every one of these examples sets people up for disappointment.  By creating an expectation with someone that isn’t fulfilled later, that person will not feel as good about doing business with you.

Think about it: two investors could look at the same property to buy; the seller will take $100,000.  One investor will be delighted because he thought the house would sell for $110,000.  The other will be disappointed, and maybe won’t buy it, because her realtor thought the seller would come down to $90,000.  Same price – two completely different emotions.

Wouldn’t it be better to delight your real estate contacts instead of disappointing them? However, it’s much easier said than done.  In the heat of the moment, your natural inclination is to be much more accommodating than you would prefer.  The pressure is on:

  • That realtor wants to sell that house
  • The buyer needs the loan to close
  • The landlord has shown the place to 10 different tenants and is getting worried about renting
  • The contractor doesn’t want the bid to go to someone else

Suddenly you find yourself promising things you know you will have a tough time delivering on – or you know it will eat into your profit.  At the least, it will tick off your customer if you don’t deliver – which doesn’t help your reputation.

Negotiations are ALL about Expectations

There are a lot of posts and articles on BiggerPockets that help people learn how to negotiate.  Good negotiators do very well in real estate.  But the next time you read about the latest negotiation technique, think about it in terms of setting expectations.

Everyone tells you not to make the first offer because the first offer is the first expectation being set.  That is why buyers can never go down and sellers can never go up.  That’s what everyone expects.

How about flinching?  When someone names a price, and you recoil in horror (or something a little less dramatic), aren’t you setting the expectation that the other person is way off?

The party to the negotiation that is silent is not setting an expectation, so there is much less chance that the person talked first will be disappointed.  In fact the silent party is learning about the other side’s expectations in order to use them to her advantage.

When you move from an offer, the size of the movement sets an expectation with the other party of how much you are willing to move.  If your first concession is a big one, the other side thinks you can continue to make big ones.  If it’s small, the other side would expect more small moves.

In fact – a big move after several small moves looks like a REALLY big concession, and it would be much easier to ask for a big concession in return.  The other side would expect you to ask.

What Expectations Do You Set for Yourself?

When you look at a property and estimate the repairs, don’t you find yourself a little overly optimistic?  Do you add 10-15% to your repair costs to cover contingencies?  That is you setting the expectation that it will cost more than it really will to fix it up.  Then when the actual costs come in less, you are feeling much better about yourself.

Next time you are with friends or relatives, watch the conversation.  Inevitably a Mom will brag about their kid, or a professional will bring up something great about their job or their company.  This is also setting an expectation that the other people feel obliged to match.  Watch as everyone jumps in with their stories to show they can live up to those expectations.

How to Profit From Expectations

Both in my ‘cubicle’ job as a manufacturing supply chain manager and my real estate moonlighting, I negotiate a lot.  I have found myself thinking about how to use expectations or a lack of expectations in many of these negotiations.

It’s good to be a student of expectations, so watch how the pros do it.  The stock market is a great place to learn – you can see one company’s shares fall even with big earnings increases because ‘they didn’t meet expectations’.  The way people manage expectations can mean a whole lot to their bottom line.

Remember that every time you meet with anyone having to do with your real estate business, that you can create one of two emotions in them – delight or disappointment.  Then before you meet with them, ask yourself how you can delight them long term.

Short term delight (blowing smoke up their you-know-what) could be setting them up for long-term disappointment.

When you meet with people try to set very low to no expectations.  Some people call this sand bagging.  I call it good business strategy.

It really helps to think about how to do this ahead of time.

When you are renting out a place and prospective tenants ask for the moon, tell them you will write it down and take it into consideration.

If a prospective seller says another Realtor told him they could get much more for the house, let him go.  He’ll be back – either because he thinks you are being honest or because the other Realtor did not deliver on his expectation.

When contractors tell you a job is ‘easy’, counter their expectation with your expectation.  Add a penalty clause to their contract for not ‘meeting expectations.’

For yourself, prepare for the worst and hope for the best. Don’t price yourself out of deals because you plan on $100K in repairs for a place that needs only paint, but estimate repairs very conservatively.  Then you won’t be disappointed.

Delight people by not feeling you have to live up to the expectation they set.  When a Mom brags about their kid, just say ‘that’s wonderful’.  Then be silent.  Or when another investor tells you what a killing they made (even though they probably didn’t), just tell them you are really happy for them.  In both cases they can keep their expectations that they might have done a little better than you.  Then they will be much happier to be around you or do business with you in the future.

In fact, if you ‘under promise and over deliver’, you often make people very happy – even if you don’t think you did much.

None of this is New, but it Works

Experienced investors probably know about the negotiation skills, sales techniques and contract (penalty) clauses I mentioned above.  After all, I don’t want the readers to set their expectations too high for this article:) What I am trying to show, and what has really helped me, is to ask myself how I can set expectations that I know I can fulfill or exceed.

I also tell myself not to set any expectations when someone brings up something at the last minute or in the heat of the moment.  I really think about it before I meet people. If someone asks for something unexpectedly, I forewarned myself to say ‘let me think about it’, before setting that expectation.  Then I can set the expectations when I am calm and can determine if it is worth me doing what they ask.

Photos: Amplified2010

About Author

Hal Cranmer

Hal Cranmer runs the supply chain department for a aerospace machining company in Minneapolis. He also has flipped three properties and acquired nine, mostly multifamily rentals in the past six years. His blog focuses on how to use technology to improve your real estate investing.

11 Comments

  1. Brandon Turner

    Thanks for the great first article, Hal! I’m definitely guilty of this one – over-promising. I tend to tell people about the past successes (“the rental market is so good, I just rented out a unit without even advertising!”) but that aren’t necessarily normal. So thanks for the great reminder!

  2. Justin Stamper on

    It’s so hard to do! So often I find myself slipping saying to my partner “oh man the market is on the move, we could probably get 325 for this!!!!” when I should be saying 275 and making everyone happy with a bonus!!!

    • Yeah you always have to price things out based on the best current info.
      And conservatively on that!
      I have probably lost out on some good deals because the market was going up but current comps didn’t justify the higher price but I have also avoided buying things that I thought that about and the market did NOT change to the higher values.

      As you said if you buy it and the numbers work for a $275K sale and you get $325K than you hit a home run just on the difference!

  3. Hi Hal,
    Liked the article, but I disagree with your negotiation strategy. IME, the best way to negotiate is to move from your opening offer about 1/2 way to your target price, then 1/2 way again, etc., so that each move is about 1/2 the size of the previous one. This sets an expectation in the other party about where you are willing to go.

    Adrian

    • I think you are talking about his statement about making a big first concession sets the expectation level that big ones can keep coming.
      I think that your first concession should be the biggest and they diminish each time thereafter. However doing a blanket 1/2 your negotiating room each time might be too much.
      Like if you have a lot of room to play with I would do much less than half often.
      For example say I’m selling a house and I can go $40K less than I list it for and still meet my minimum targets. I get a lowball $50K less, I would not drop my price $20K off the bat. I may do $10K and see how serious they are. I have done this and they come up $30K on the next shot since they do in fact really want the house and we settled in around $16K. Since I figured out they wanted it I only went down $3K which they matched and I then only went down $1K and they took it.
      In the end I think they felt like they won since they got me to come down multiple times and it felt like I was at my bottom line.
      At the same time I did 3 price drops and in theory came out $4K ahead of that system of doing 50% drops each time.

      • I’m not suggesting you move 1/2 way to your bottom line, just approximately 1/2 way to your target price, which might be close to or far from your bottom line. The problem with randomly sized moves is that the expectation that is set is that the other party never knows what you will do, but hey, your next move might be a huge one, so let’s keep pushing to see what happens. When your moves diminish in size it sets the expectation that you are getting close to your limit.

        Of course, each situation is different and you don’t want to use a rigid structure for all.

        • Hey Adrian I think we are actually more or less on the same page.
          Personally I think you always make the biggest concession first and each one after that is smaller, on rare occasions maybe have the same size twice. NEVER go higher on a subsequent counter though.
          Totally agree that if you do a bigger one later on then it will just confuse the other side on where you are going. If you continue to move smaller they get an idea of where your bottom line is and expectations will get set to not expect a big discount from there.

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