So, I’m in the market to sell my current car and buy a nice used car. The whole “Dave Ramsey” thing, y’know?
This got me thinking about a negotiation course I took a few years ago. Somehow I was able to find my notes from it, and the phrase below caught my eye because I had underlined it about a dozen times.
Never show up to a car dealership in a taxi.
Although it’s admittedly a bit tongue-in-cheek, the lesson to be learned is quite universal. Don’t put all of the power in the hands of the person you’re negotiating against. This concept goes by a more formal name called BATNA.
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BATNA stands for “Best Alternative to a Negotiated Agreement,” and was invented by Roger Fisher and William Ury in their book Getting to Yes: Negotiation Agreement Without Giving In.
The concept is rather simple. Always have an acceptable alternative in the event that the negotiation falls through. If you don’t, you’re more likely to give in and accept a poor deal.
How to Determine Your BATNA
- Brainstorm a list of available alternatives to consider if the negotiation does not work.
- Determine a course of action to attain these alternatives.
- Identify the best of these alternatives and keep them as a “fall back” throughout the course of the negotiations.
Negotiations come is all different shapes, sizes, and scopes. From peace talks at Camp David to buying a donut, they’re all negotiations in one form or another.
Every day we take part in dozens of negotiations without even realizing it:
- Deliberating over television time for the kids
- Defining business deadlines
- Asking for a raise
- Debating where to eat dinner
For those of us actively investing in real estate, the list grows much longer:
- Paying for contract services
- Purchasing a house
- Selling a house
- Deciding rent price and terms
These lists could go on for ever, but I think you get the point. Now let’s dive in a little further with a few examples of how BATNA can be used to your advantage in a real estate setting.
#1: Buying a House
Let’s say you’re a buy & hold investor and find a motivated seller after having sent out a round of yellow letters. They call you up and offer you their house for $100k. Unfortunately, you’ve run the numbers and found that you can only accept this property for $90k in order to cash flow.
- BATNA 1: Use your $90k to buy a different property.
- BATNA 2: Ask if they can use their insurance to pay for a new roof, therefore saving you the $10k difference.
- BATNA 3: Turn the property into a duplex, therefore increasing your cash flow.
#2: Selling a House
In this instance, let’s say that you’re a house flipper and are looking to sell the property you just completed a rehab on. In order to make a sufficient return on your investment, you have the house on the market for $149,900, and within a few days, you get an offer for $140k. This is less than what you were hoping for, but it’s the first offer.
- BATNA 1: Leave the house on the market longer.
- BATNA 2: Invest the money to stage the property and have an open house in order to get more offers.
- BATNA 3: Rent out the property until the comps in your area support your $149,900 valuation.
#3: Agreeing on Contractor Quotes
Ah, working with contractors. Everyone’s favorite part about investing in real estate. Let’s say you just bought a buy and hold property and want to do a remodel of the kitchen and bathroom in order to get a better tenant. You get a quote from a contractor that is $20k. This number seems pretty steep, and after you run the math, you find that it’ll take years before you’ll break even.
- BATNA 1: Find at least three more contractors to provide quotes for the same work. Choose one with a more reasonable estimate.
- BATNA 2: Buy books and watch YouTube videos in order to learn how to do the work yourself.
- BATNA 3: Find some cost saving substitutions for the remodel (i.e. laminate instead of granite, black or white appliances instead of stainless steel, etc.).
To Say or Not to Say?
The final play that you have in this negotiation is the decision on whether or not to tell the other person what your BATNAs are. Unfortunately, there is no one right answer to this question. Each negotiation is different, and you’ll have to make that decision on your own.
A good rule of thumb is this: If your BATNA is better than their BATNA, bring it up. If your BATNA is worse than their BATNA, keep it to yourself.
Any good examples of using BATNA in a normal everyday setting? How about in real estate negotiations?
Leave your comments below!