Should You Negotiate For Price Or Terms?

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Topics: Buying & Selling, Negotiating

     In general, there is no incorrect answer. It all depends upon the viewpoint of the people involved. Who’s buying? Who’s selling? Why? What are their objectives? How much cash must actually be required to make the transaction work for all parties? What are their income levels and tax brackets? What are their ages? How sophisticated are they? What has their previous financial experience been? What are their security needs? How motivated are they? Why?

     Seeking and finding the answers to these and other questions is the key to entering into buying and selling transactions that are profitable enough for both parties to be motivated to proceed. It requires patient questioning, creative listening and the ability to contrive solutions which will serve as a middle ground upon which both vendor and vendee can base the ultimate transaction. This process is what negotiation is all about. It’s what we’ll be looking into this month.

     Negotiation is more art than science, however, it contains elements of each. On the side of science, it’s a brew composed of psychology, philosophy, mathematics, economics, law, taxes, and expertise in the subject being negotiated. Negotiating principals are applicable to virtually every aspect of human existence, but since this is a real estate letter, we’ll limit our presentation to real estate transactions.

     Our objective will be to focus on purchase rather than sale since this is what most readers are concerned with, however, the same considerations and approaches to negotiation are applicable whether buying or selling, and the same degree of expertise is required.

     Learning as much as we can about the above subjects is only half the battle. We’ve got to apply what we’ve learned in the most effective way. That’s where the art of negotiation comes into play. It involves the ability to deal with strangers in order to assemble private financial and personal information. It’s essential to discover who the real decision-makers are. Negotiators must learn how to sort the wheat from the chaff to solve problems and attain goals of the other party and/or their third party influences.

     We’ve got to find and confirm the degree urgency and motivation of the other party, the time and financial constraints under which they must work. Hopefully, we’ll be able to get them to reveal their ‘hot button’ which will overcome their objections and get their full commitment to an agreement that’s acceptable to us. Finally, we’ve got see it through to a successful conclusion to our mutual satisfaction.

WHO? WHY? WHAT? WHERE? WHEN? HOW?

     Both parties entering into negotiation should have specific objectives, otherwise, nothing is going to happen. I’d like to have a dollar for every real estate agent I’ve talked to who didn’t have a clue as to the goals of his or her client. They always assume that it’s cash, but they don’t really know. Sometimes they don’t even know whom they’re really working for. Verifying ownership and control is essential in any negotiation! Let’s start with the ‘WHO’ question.

TRY TO ONLY NEGOTIATE WITH THOSE WHO CAN SAY YES!

     If you’re going to be able to use negotiation skills, you’ve got to negotiate only with people who can make the ultimate decisions. The reason that I don’t work with brokers is that they can’t accept my offers. It’s only in rare instances that they can even explain an offer which is anything other than cash, so they do a de facto rejection simply by advising their client not to accept it, or refusing to present the offer at all. It’s just as futile to negotiate with junior level executives in corporations, partnerships and government, or any arrangement where negotiated terms have to be explained to a board of directors or advisory group.

     The clearest example of this is when you’re trying to get a bank or the RTC, VA, FHA, or HUD to accept any variation on a bid invitation. They’ll reject a million dollar bid because it’s on the wrong form or submitted after a deadline even when there’s no other bid in sight. The reason is simple. They don’t get promoted because they make good decisions, and they risk demotion and career stagnation by making bad ones. Ergo, they don’t make decisions at all, nor many deals. You may have noticed that all would be out of business if it weren’t for annual injections of tax subsidies.

     Dealing with heirs, large families, churches and other groups where everyone has an equal say in the proceedings is also a low yield proposition. The same holds true for those who must check with third party influences such as mom, dad, siblings, assorted relatives, lawyers and accountants prior to making any decisions. While the ‘limited authority’ technique can be quite effective for the person employing it, you don’t want it to be used against you. One way to goad the other person into making a decision is to ask, ‘Do you think for yourself, or do you have to get other people to do it for you?’ That’s one way to counter what I call the ‘sales manager’ approach in which all offers must be approved (and modified) by the sales manager.

     It’s imperative that you negotiate only with those who have the authority to approve a transaction. The first thing you need to establish in buying a house is that you’re talking with the title holder. I usually ask to see the ‘house papers’ among which I look for a deed, title policy, mortgage note, closing statement, etc. In the case of legal entities, you might ask the party directly, ‘Do you have written authority to bind the organization to our agreement once we’ve reached it, or must it be approved by others?’ ‘Who?’ Next, I ask for copies of corporate resolutions, partnership agreements, trust instruments, etc. to confirm that the other party has the power to sign a binding contract and/or conveyances.

     What about those times when there’s no clear cut, identifiable authority to buy or sell an asset? When I can’t get to the decision making level in person, I’m prone to write a ‘letter of intent’ to the Chairman of the Board or the highest officer I can identify and lay out my case, requesting a direct interview. From time to time, this has worked on larger properties where financially sophisticated people are involved, but not often. Failing to get acceptance of the terms I’ve offered or a face to face interview, I move on to more rewarding opportunities. Why waste time?

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