May 1994
Vol 17 No 9
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?
WHEN BUYING, ASK 'WHY', WHEN SELLING SAY 'WHAT'!
When buying, 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 busing, 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.
Thus far, we've only talked about the portion of negotiation that deals with information gathering. The real key to negotiating profit lies in being able to devise a transaction which will exploit the information we've gained. That's the 'HOW' question. We'll deal with this in next month's issue.
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