Lately, I’ve been working on getting my CCIM certification, and as part of the coursework, I got a very helpful re-introduction to interest-based negotiation, a concept I first came in touch with in college.
Interest-based negotiations are sometimes called “win-win negotiations,” which, of course, all of us have heard more than a few gurus and self-help authors go on about. Indeed, some of us may have even developed a sort of Pavlovian rolling-of-the-eyes response to such external stimuli.
However, interest-based negotiating is much more in-depth and useful than the feel-good, happy-go-lucky “win-win” negotiations we hear about so much. The idea behind interest-based negotiations is simply to figure out what the other person wants or needs so you can come to an agreement (or not) based on the best fit of your needs and theirs.
Interest-based negotiations comes in contrast to position-based negotiations. A position is based on a need, but is explicit. So, for example, an interest is “I want to get as much money as I can from this sale,” whereas a position is “I want to sell the property for $350,000.”
A good rule of thumb to differentiate the two is that if a specific name or number is mentioned, it is a position.
The advantage with interest-based negotiations is that almost every seller or buyer has more than one interest, and there are often many ways to satisfy any given interest, whereas there’s usually only one way to satisfy a position. Here are a few examples of interests in a typical real estate transaction:
- Financing (i.e. seller financing, cash offer financed offer)
- Terms of seller financing if applicable
- Time to close
- Earnest money
- Likelihood of close (how strong is the buyer)
- Creative contracts (subject to, contract for deed, etc.)
The website BeyondIntractability.com gives a good illustration of how the position-based versus interest-based approaches differ:
“Positional Bargaining (PB): Disputants are adversaries.
Integrative [Interest-Based] Bargaining (IB): Disputants are joint problem-solvers.
PB: Goal is victory.
IB: Goal is wise decision.
PB: Demand concessions.
IB: Work together to determine who gets what.”
How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties
This is the dream right? Going from zero to 10+ rental properties, providing stable cash flow and long-term wealth for you and your family, and building a scalable business model to boot! Learn how this investor did just that, in this exclusive story featured on BiggerPockets!
When to Use (and When Not to Use) Interest-Based Negotiating
First and foremost, I should give you a quick disclaimer: There are times when it doesn’t make sense to use interest-based negotiating techniques. As reactionary as it may sound, there are times when a simple “win-lose” negotiation technique is the best way to go—although referring to the other side as “losing” is not really necessary.
This is true when you’re making an offer on a property you don’t want or are just making rapid-fire lowball offers. In these cases, sitting down to determine the interests of the seller will likely just take too much time.
It also often doesn’t make sense when dealing with rigid sellers. For example, with houses owned by HUD, there are no terms but price. You just make your offer through HUDHomeStore.com, and they’ll take whichever is highest for the most part. With these, just make your best offer and move on.
Generally speaking, the bigger or more important the deal, the more useful interest-based negotiations are.
How to Analyze Interests
The first thing to do is to simply figure out who the stakeholders are and what their interests are. Sometimes, there may be more stakeholders than just you and the party you are buying from or selling to. For example, an anchor tenant at a retail property could be an subsidiary or “non-essential” stakeholder.
To do this, make a chart that looks something like this:
As you can see, we mostly disagree on our interests, but not everywhere. You want to then highlight in one color which interests are the same, which are opposite, and which are different but don’t conflict. That would look like this:
After that, you want to figure out which interests are simply something you can’t do without or the seller can’t and which are important but not crucial. The best way to move forward is to give on issues that aren’t crucial to you and get in areas that are. In the next picture, issues listed in bold and underlined are items you and seller find essential:
As you can see, in this scenario the seller doesn’t want to give seller financing, but may be willing to do so and do so with good terms at the right price. The things he really cares about are closing quickly (which you agree on), selling to a strong buyer (which you are), and price. While you want the lowest price on this property, great terms on seller financing may make it work. So this analysis shows you where the best places to come up with actions are.
Of course, all this depends on knowing what the other party wants, which makes fact-finding all the more important. To do this, you want to ask yourself, “What does each stakeholder care about?” And then you need to talk to them to figure it out. Luckily, since you can do this while building rapport (another thing that is critical for negotiating), it allows you to hit two birds with one stone.
Actions and Alternatives
After determining interests, you want to brainstorm potential actions (something that satisfies an interest, i.e. offer $225,000 or ask for a “subject to” purchase). You should withhold judgement and only analyze the effects of each action would have on each stakeholder’s interests afterward brainstorming.
You should also analyze alternatives or things a stakeholder could do if no agreement is reached. For example, a seller could let his house be foreclosed on instead of selling it to you. Knowing these alternatives can be very helpful, as highlighting them during a negotiation can clarify that your offer may not be perfect, but it’s better than any alternative.
In a deal where we purchased a 32-unit apartment complex (which I describe here), we were mostly interested in price. On the other hand, the seller needed to get out of it and had just had a seller fall through, so he was very interested in the strength of the buyer.
In our long conversations with him, this became clear, so all it took was a lot of time and energy to prove we were a strong buyer who could purchase the property and wouldn’t walk away. That was enough to convince him to sell it to us at a substantially lower price than he was originally asking. The fact that his alternative was to wait for another buyer and he had had quite enough of that was probably what allowed us to purchase that property.
Abraham Lincoln once said, “Give me six hours to chop down a tree, and I will spend the first four sharpening my axe.” Preparation is critical, and that’s as true in negotiations as anything else.
In addition to good preparation, the interest-based negotiation model allows you to work on the same side as the other party to find a solution rather than as antagonists. This will usually result in better agreements and is far less likely to lead to hostility between the parties. In other words, it’s a win-win.
Do you use interest-based negotiation in your real estate business? What’s your favorite strategy?
Let’s discuss below.