I have been engaging in negotiation for half a century, and I must confess that I don't know how to be effective dealing through a middle man. Over the years, anytime that I've been subjected to mediation in order to resolve litigation, I've invariably wound up with far less than I might have been able to obtain on my own.
For this reason, I rarely enter into any negotiation through a broker, attorney, or accountant. I insist on sitting down with the seller or buyer without interference so I can try to put a deal together. For this reason, I usually negotiate directly with owners of unlisted properties when buying, selling, or exchanging real estate.
The starting point for all negotiation is knowledge of the facts and circumstances surrounding the deal. The more you know about the product, and all the people involved in any particular negotiation, the better. One of the reasons that so many pages of the book were devoted to goal setting was so you would know what benefits you expect to get and what you would be willing to sacrifice to get them. Usually, this boils down to financial terms and timing, but it can also include the amount of work you are willing to do to make a deal.
If your objective is to build long term income from a portfolio of rentals, you should probably focus more on terms that will produce cash flow at the earliest date more than on a low price. On the other hand, if you were a high tax bracket investor, you might be willing to pay a high rate of deductible interest in order to buy at a low price that would guarantee you relatively lower taxed capital gains. Dealers willing to pay higher taxes in order to make a quick profit by reselling a property would also be more interested in trading off terms to get a lower price.
What about the objectives of the seller? Until you discovered what these were, you wouldn't be able to structure a creative, non-cash transaction that would motivate him to sell. If he needed income, you might be able to offer higher payments in return for a lower price. If he were in a high tax bracket, it would be natural for him to accept lower interest and payments in return for a higher price; particularly if he were exempt from all capital gain by virtue of his selling his primary residence. If he needed quick cash to resolve a personal problem, then you might offer an all cash deal for a big discount. But, until you actually know what the other party needs, you'll be spinning your wheels.
Now, just to show you how circumstances can alter negotiation strategies, reverse positions from buyer to seller. Imagine yourself as the seller with each of the above goals, and the other party as the buyer. When you do this, suddenly it's a whole new ball game. Now, what would you prefer? By getting inside the other guy's head, you will be able to do a much better job making offers and getting the transaction you need to meet your goals. If you don't know what you really need to get out of the deal, there's little chance that you will do as well as you could, whether buyer or seller.
There are often other factors in every negotiation that you won't know about unless you take the time to gently persuade the other party to tell you about them.
Motivation is the product of the positive and negative influences of family, in-laws, lenders, friends, co-workers, neighbors, school schedules, work requirements, and personal finances.
In many instances where because of local custom attorney's are needed to close transactions, the lawyer may be a stranger to both buyer and seller. He may proceed to judge the merits of the transaction without any inkling as to what benefits either party needs the most. As a result, you may wind up doing most of your negotiation with him rather than the seller per se. Last but not least is the accountant who at the last minute decides that his client can't accept the deal because of tax reasons. The more you know about these third party influences, the better a deal you'll be able to negotiate.
So much for the people; what about the property itself? You've got to research the local market to find out what fair market value for the particular property is before you try to set a price. That doesn't mean merely seeing what comparable properties sold for a year ago. It means seeing what they're worth at the time you get set to buy them. You're going to have to invest time to really get to know your market place by talking to other entrepreneurs, appraisers, lenders, other sellers, and real estate brokers.
Regardless what comparable properties have sold for, there will be variations that you have to be aware of. Is the target property better or worse than the comparable? Is the lot bigger or smaller? The neighborhood more or less desirable? What about the number of bedrooms, baths, amenities, extras, quality and square feet? The desirability of the floor plan? The type and quality of construction? Amenities? The aspect on the street? The neighboring properties? The age? School district? Noise? Condition?
This is going to be a daunting task when you first start out, but after a time, it will become almost automatic. Author Bill (Tycoon) Green advised visiting at least 100 homes and engaging the owner in
serious negotiation before entering into any contract at any price with any of them. By practicing making offers far below their expectations, and becoming accustomed to rejection, you'll learn more about true house prices than most of the professionals in your area. Why? Because they'd never do this. Unfortunately, few entrepreneurs do it either.
Although no house will exactly measure up to your expectations, if you are seriously interested in buying it, it's a good idea to make a check list of features that any house “must have” if it is to help you fulfill your objectives. You can add some “will take” benefits too; that might be of secondary importance. Weigh each benefit as a percentage of the value according to its importance to you. Only pay for the benefits you want.
Don't pay extra for things a seller might want to use to justify his price unless they are on your list. Swimming pools are something I'd never pay extra for, and might even deduct from my offering price because they are too much trouble for me and too costly to maintain, and I don't need them. On the other hand, you might be willing to pay extra for a pool. It all goes back to our respective goals.
The key to making money with single family houses is to try to buy, buy, buy twenty four hours a day, 365 days a year. To do this, you'll have to let the telephone do the heavy lifting. Do yourself a favor and run a special line into your house or office with a good answer machine hooked to it that you can access and program from remote locations. Next, put this special number on all your advertising. Spend some time scripting a message that will get the caller to leave his telephone number and address of the house he wants to sell, buy, or rent.
Negotiation can be like a game of chicken in which each party tries to get the other party to “blink” first. By getting sellers or buyers to call you and to leave this information, you're already one up on them in any ensuing negotiation. The very fact that they call and leave a message is evidence of some degree of motivation. By patient questioning, not interrogation so much as exhibiting a real interest in why they want to buy or sell, and what they hope to achieve by it, you can delve into their reasons for calling, and their time frame for completing a transaction. You'll also want to test their bottom line cash requirements by validating what they need it for.
Negotiation involves personal style. Some people are super aggressive. Some take a “good old boy” stance. Some feign ignorance and inability to understand anything but a lot of cash when they sell, or little cash when they buy. Some rely upon their financial or personal power to get what they want. Some are totally dispassionate. It's up to buyers and sellers to use their strong points if they expect to do the best job of negotiating a transaction.
For myself, I'm always “willing” to buy, sell, trade, lease, or option, but rarely “eager” to do it. I learned a long time ago that the only certain profit a person can count on when buying lies in obtaining a price and terms that are below prevailing fair market values. My goal is to not pay more than 80% of fair market value, based not on the seller's price, but on my personal appraisal of market value.
When selling, I try to either get close to full retail market value, or above market interest rates, whatever they are. I don't always achieve my goals, but have discovered that being patient about buying or selling pays off in the long run. Most of the time, whether buying or selling, I try to be matter of fact about the deal, totally unmotivated one way or the other. This isn't a case of showing a “poker face” so much as it is that I genuinely don't care whether I buy or sell or not. I've discovered that deals come along every day, and I'm always willing to tear up all the paperwork and wait for the next one. This is an attitude I want to convey to everyone with whom I negotiate in as many situations in my life as possible. (Incidentally, this drives my wife and kids nuts . . .)
I like to be the least motivated and most disciplined person in any negotiation. There's an old maxim in negotiation that goes like this: “He Who Cares Least Wins”. I try not to become emotionally involved in the outcome, and to able to break talks off and walk away anytime I see my negotiation goals aren't going to be met. I don't think time is ever wasted by negotiating. Even when a deal falls through and fails to close, I always learn something in the process that I can use another time to buy or sell another property, another time.
This attitude is copied from some of the most successful buyers that I have had the pleasure of watching, and the pain of negotiating against. When the other party attempts to get them to exceed their respective bottom lines, they simply walk away. This serves them well both in the stock and real estate markets. Thus, in emulating them, I don't try to buy property so much as I to buy bargains. When I depart from those goals, I often pay too much, or receive too little.
Once you've discovered the other party's go-no/go, walk away bottom line, then it but remains to find a way to help him achieve this at the lowest possible cost to yourself in terms of time, money and effort. Never allow the other party's sense of urgency dictate your time frame. A great negotiating tool is to take advantage of the other party's sense of urgency, and your willingness to put off coming to a decision until later. The more desperate their need to act fast, the slower I come to a decision to buy or sell. I try to never give anyone a clue as to how badly I might need to complete a transaction, or my own time frame.
As I explained to one person who was confronting foreclosure and eviction, equity is often more perceived than real; thus, the closer he came to the forced sale date, the less equity he had. The sooner he made a deal with me, the more incentive I had to give him something for his equity, but with every hour that the foreclosure date came closer, the less I would be inclined to offer him, and the less cash there would be.
Learn how to be a better negotiator with Jack Miller's NEGOTIATIONS WORKBOOK. This 200-page manual contains lessons learned from Jack's 45 years of real estate investing experience. You'll learn how to get better prices or terms… or BOTH when you negotiate.
