When negotiaing a purchase, the ‘WHY’ question precedes What, but when selling, the ‘WHAT’ issue should come before the ‘Why’. You can’t scratch an itch until you find it. Because negotiation is essentially a problem solving technique, you’ve got to understand the motivation of the other party. I have a sort of pecking order for motivation. I place greed at the very bottom in terms of probably negotiating success. What I look for are personal factors.
In the case of individuals, some of the reasons that have produced the most consistent results have been: to get away from school bussing, neighborhood brawls, barking dogs, family upheaval including divorce, death, kids moving out and moving back in, health problems, change of job and/or unemployment; balloon notes coming due, law suits, business failures, relocation to a different area, overwhelming income tax and/or credit problems. With institutions and investors; management problems, property liability, public image, remoteness of the property, liquidity, and fear of the regulators has prompted most transactions.
There’s an old saying in real estate that ‘buyers are liars’. So are sellers. That’s where the psychology comes into play during the questioning process. Never be judgmental. Indeed, its wise not to react in anyway until you’ve got the information you need to fully understand and to rationalize the motives given for wanting to sell. Until their motivation and the degree of urgency makes sense to you, keep on probing to get at the real story behind the one given.
You don’t want to give the impression that you think the other party is lying, but you do want to get at the truth, not only about the motivation but also about the property you might be buying. You should try to insinuate comments into the conversation to keep the other party talking, giving you more information. This is especially important when you don’t feel you’re getting the whole truth. It’s pretty embarrassing to solve the wrong problem. It’s worse yet to find out after the transaction is closed that the property itself was also misrepresented. Implying that the other party is not telling the truth isn’t productive. But you can avoid direct challenges to the veracity of his or her story and still get more information with well timed comments. Or no comment at all.
SILENCE CAN BE GOLDEN AND BEING DUMB CAN BE SMART!
One of the most powerful negotiation tools is silence because it challenges what was last said without seeming to. It’s almost impossible for the person who is telling the story not to offer additional information to back up what has just been stated. The old saying, ‘Oh what a tangled web we weave when once we practice to deceive’ is never more evident. After a direct statement, just say ‘Oh?’. Then maintain silence until they continue explaining the explanation.
An old interrogation technique is to get a person to tell a story over and over again, and to look for inconsistencies. One way to achieve this is to act confused. You might say, ‘I still don’t understand. I guess, I’m not very bright today. Could you try to make it a little clearer to me?’. Having established your credentials as a slow thinker, you can bore in with probing questions to get the other party to further restate and explain what has been said until you feel reasonable certain that you understand the motivation.
WHAT YOU SEE MAY NOT ALWAYS BE WHAT YOU GET . . .
The ‘WHAT’ and ‘WHERE’ questions deal with the property itself. We’ll assume you’ve inspected it, but that might not necessarily be true. As an Exchangor who’s owned real estate properties in 25 of the 50 states, I can tell you that you can become blase about property ownership. When that happens, take a long vacation in some expensive resort. It will still save you a lot of trouble, time and money. You haven’t lived until you’ve owned an island with no water supply, a farm that floods in the Springtime, acreage with no access roads or easements, an apartment complex zoned for single family residential use. It gets worse.
I once traded a luxury home on the waterfront for lots that were on a slope too steep to build on. Even a cursory examination would have prevented what amounts to a loss in excess of $100,000. In Florida we have sink holes into which houses can be swallowed up that are often concealed by covering them up, then sowing grass over the area. A few years later, the lots are sold to unsuspecting newcomers.
It pays to look before you leap, or to employ a specialist to look for you. And there’s nothing wrong with specifying that all statements made by the seller will be reduced to writing in the form of a disclosure statement to be signed prior to closing. Of course, you’ll also want a title insurance policy to confirm the condition of title as of the closing date.
That’s why you’ll question the seller at length to get warranties as to the stability, size and zoning potential of the plot of ground; property taxes, the age and condition of various systems, room sizes, things like insulation R factor, drainage, prior use that might suggest EPA problems as well as the presence of lead paint, asbestos, radon gas, etc. You’ll want to know which school district the house will be in as well as the presence of any special tax assessments. And the existing loan terms as well as loan assumability will figure largely in your eventual buy/don’t buy decision.
You’ll also want to gauge the willingness of the seller to ‘throw in’ various items of personal property such as appliances, window coverings, insurance policies, impound accounts, etc. These add value and profit to you at little cost, thus it pays to add them to your negotiating strategy. Only by getting full agreement on precisely what’s being sold can you establish the value, price and potential profit. These factors in turn determine part of our original question: what’s more important, price or terms?
Of course there are exceptions to this rule of thumb, but, in general, price is more important when you are buying with the objective of reselling the property within a short period of time. Terms assume greater importance when you expect to hold the property over a longer term and to use it to generate income during the holding period. The underlying financing, tax and economic factors can dictate your holding period in many instances despite your best laid plans.
FINDING OUT ‘WHEN’ REVEALS OPPONENTS’ DEADLINE!
This brings us to ‘WHEN’. Seller’s urgency can drive the profits up for the buyer. By finding out the time deadlines of the seller, both delay and acceleration of the deal can be used as bargaining chips in negotiating either price or terms – – or both. The right to close early, but allow the seller to continue to occupy the premises until later can work well. Until January 31st of 1994 I ended 14 years with no vacancies renting to a man who’d sold me his house at a heavily discounted price then leased it back. He wanted all his kids to attend school in the same district. My guarantee that he could renew his lease annually until that time made the price and terms all work out.
I’ve also bought properties at discounted prices and on wholesale terms because I could move swiftly to close and to get cash into the seller’s hands in time to stave off financial disaster. In this case, the seller had an Option on the controlling shares of his company and needed cash to buy them. He sold a small house and two mobile home lots for $10,000, but was able to gain control over his corporate employer. He then promoted himself to President, and gave himself a $25,000 annual raise in pay. I’m glad I asked why he wanted to move so fast and what he was going to do with the money he received from the sale.
Let’s agree that the usual distress situation makes it much easier for a property to be purchased at highly discounted prices and terms, but without the questioning, distress might never be revealed. Only by understanding the needs and motivation of the sellers, would the above transactions have been made. The questioning process is vital to bringing effective negotiation to an acceptable conclusion for everyone.
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