I often get asked what my best “weapon” as an investor is.
Some think it’s my background in journalism—no idea why—which for some reason makes people think you’re automatically a good writer.
(Nothing could be further from the truth.)
“Oh, but you went to business school and know finance!”
(I have an MBA; it’s pretty much useless.)
Yes, I know how to write a bit, and I know how to count. And while I did take a corporate finance course in business school, my greatest skill by far is my understanding of psychology, people, and their motivations.
Psychological tools can help you across the entire spectrum, from negotiating deals to finding partners to screening tenants to selling the asset.
Truth is, by implementing psychological tactics, you can enter into wildly profitable deals that look crazy on the surface—and just because you looked at the intangibles.
And you don’t need a master’s degree to use it either. Here are three tactics you can use psychology to help you close a deal.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
3 Deal-Making Tactics That’ll Help You Find (& Close) Real Estate Transactions
1. Motive: What’s the seller’s real motivation?
Whenever you look at a deal, you also want to find out why someone why give you a good one to begin with.
Think about it. If you have a well-performing asset, why would you sell?
There are several reasons someone would put a deal for sale, each with varying degrees of urgency (or desperation). One could simply be because they’ve managed to build, lease out, and leverage the asset and now want to cash in.
Others may think it’s the right time in the market. These guys are harder to deal with because they don’t have to sell.
Then you have some who have to. (I talked about this a bit in my 3D story.)
Let’s face it—it’s a cutthroat business. If you know someone is getting divorced, sure, it’s sad, but this ain’t the support group; this is business.
A recent deal we had on the desk was a 4-unit close to Journal Square in Jersey City with plenty of “juice”: functional, but definitely upgrades to make, convertible parking space to monetize, month-to-month leases under market value, and a booming area where values are shooting up.
Naturally, I wondered about the “why.” In this case, seller was based in Brooklyn, wanted to expand his Brooklyn portfolio, and, quite frankly, had a 1031 he wanted to deploy with about the same money he could get for this one.
In other words, he wasn’t desperate but wanted to move fast. So we put a cash bid in $100k under asking price, which he said he’d consider. (We were ultimately outbid. Ish happens…)
Another guy had a beautifully done triplex—same area but even better location. This seller was emotionally attached to the property; he had built it from scratch, it was his first property in a fairly decent portfolio, and he had lived there himself.
For all intents and purposes, this was his baby. So he screened all potential buyers himself, did the open house, and ruthlessly dismissed any cash offers before meeting buyers in person.
Even though one group bid higher (around $25,000 more, if I recall), he felt more comfortable with us as buyers and ultimately accepted our lower bid.
If you can figure out the “why,” you can work that “why” to your advantage and negotiate yourself the best deal.
2. “What’s in it for me?” Unlock the agent’s motivation.
On first glance, you’d think the motivations of agent and seller are aligned, right? The higher the price, the higher the commission.
If you’re selling a property and you have a deal on the table today for $475,000 that could go for $500,000 in two weeks, your real estate agent will advise you to wait, right?
No, he won’t. Here’s how he gets compensated.
A broker gets a 6% commission, which he might have to split with a co-broker. From there, your agent has to kick back half of that to his firm, leaving him with just 1.5%—or $7,125.
For him to wait two weeks—a period where he could be out doing other deals—his cut is a mere $375 more for a possible deal then over a sure thing now.
Despite repping your “best interests,” better believe he’ll push for the deal to close now. And you can take advantage of this by offering just the right amount that will incentivize the agent to push for your better offer—an offer that could save you $25,000.
3. Tap into the psychology of instant gratification.
Negotiation is a give and take. (This classic BiggerPockets post breaks down seven good rules of negotiations.) But humans are hardwired to want things now.
You can use this to your advantage. By unlocking the agent’s motivation, you can know the range of “incentivization” where you can push the deal in your favor. But you still need to know the ballpark of the number.
Old boxing promoter Don King used to joke (well, not really) that the best way to get a cheap deal was to show up with a bag of cash. The psychological effect of, say, $50,000 in cash was far more effective than a $500,000 check three months down the road.
(He actually got Muhammad Ali to drop a $1.1 million lawsuit using this exact trick.)
A good way to do this in real estate is through a cash offer, quick close, with limited contingencies.
“The last thing a seller wants to do is tie themselves up with a buyer just to have them walk away because they can’t deliver the money,” Steven Christmann, a New York City-based investment fund manager with $6 billion in assets says.
With bank mortgages taking as long as 90 days to close, a seller could get to day 87 only to find out last minute the buyer ain’t buying.
In practice, let’s assume a buyer has a $650,000 offer on the table, paid with a mortgage, but with a financing contingency—i.e. an option to walk away if the buyer can’t secure the loan.
“A typical buyer with 25 or 30 percent to put down,” former executive VP of Halstead Property Peggy Aguayo told the New York Times in 2013. “If they don’t waive [contingencies], the seller will go with someone else.”
Says Christmann, “It happens a lot, and it’s one of the most irritating things in the world to a seller.”
But if you pull up with a $525,000 offer, Christmann adds, a short due diligence period (10 days, for instance), and in all CASH, you have a great shot at getting the deal right now.
“If you pull the old Don King, you can get yourself a really good deal, even better than you might think,” he says.
In other words, by appealing to seller’s desire for right now, you can get a better deal by using the desire for instant gratification in your favor.
What psychological strategies do you use when negotiating deals?
Let’s chat in the comments below.