Negotiation (Part 1)

October 13, 2008 · 0 comments

A reader of mine asked me if I would write a bit about negotiation. While I’d love to say I know everything there is about negotiating property purchases and negotiating with contractors, I’m still learning the intricacies of real estate negotiation. That said, there are a lot of very general negotiating principles that span any industry or negotiating situation, and keeping these general negotiating strategies in mind should help in most real estate situations.

Because I very much enjoy the topic of negotiation, I imagine I’ll probably write more on this subject in the future, so let’s call this Part 1. If you’re familiar with negotiation, you probably won’t find any of these tips to be revolutionary, but if you haven’t, this could potentially be very helpful to your real estate negotiation.

Here are some basic negotiating tips that I’ve found helpful in this business:

  • Make the other party state their position first: This is sometimes stated as, “Make the other party throw out a number first.” When negotiating, you rarely want to state a first offer; instead, if the other party states their offer first, you will likely be in a much better negotiating position. There are two basic reasons for this:
    1. It allows you to define a mid-point. Many inexperienced negotiators will find themselves “splitting the difference” in their negotiations; for example, if one inexperienced negotiator starts by asking $200 in the negotiation and another inexperienced negotiator starts by offering $100 in the negotiation, the negotiation result generally will end up somewhere around $150 (the mid-point). This is human nature not to want to give more or less than you’re getting, so people tend to increase or decrease their offers by the same amount as the other party. But, when the other party states their position first, you have the ability to define the mid-point of the negotiation. In the example above, if the seller had stated the $200 ask first, the buyer could easily have offered $60, thereby reducing the mid-point of the negotiation (where they expect to end up) down to $130. On the other hand, had the buyer offered $100 to open the negotiation, the seller could have increased his ask to, say, $260, thereby increasing the midpoint to $180. As you can see, the person who states the first position is at a disadvantage to the person who waits, as the person who waits can define the mid-point.
    2. It’s quite possible that the other party’s first offer will be better than the first offer you would make. For example, let’s say you want to hire a plumber, and your budget is $500 for a particular project. While you could state upfront that you have $500 to spend on the plumbing work (in the hopes that the plumber doesn’t ask for more than that), what if the plumber was only planning to charge $300? You’ve now told him that you’re willing to pay $500, so he has little reason to quote you anything less than that. By stating your position first, you’ve given away valuable information to the other party (you maximum price), and he will use that information to extract the most money possible from you.
  • Information is power: I’d estimate that in 95% of all negotiations between experienced negotiators, the one with the most information (pertaining to the negotiation) will walk away with the better outcome. When negotiating, it’s important to know as much as possible, not just about the object of the negotiation, but also about the party you’re negotiating with and their motives. Most people tend to assume that negotiation is always about money, but often it is not. Smart negotiators realize that in many cases, it’s more important to solve a problem than to offer the most money. For example, let’s say two buyers show up at an open house and both want the house. The first buyer assumes that the seller wants the most money possible, and offers full asking price, but needs two months to close in order to get financing in order, get inspections, etc. The second buyer asks the seller why he is selling, and the seller says that he has received a job offer in another state, and needs to move in the next two weeks; the second buyer makes an offer for $10,000 less than asking, but agrees to close in two weeks, and has no financing or inspection contingencies. While the first buyer offered more money, the second buyer likely solved a problem that was more important than the difference in the offers. All because he gathered some information from the seller before making an offer.
  • Speak less: One of the strongest maneuvers when negotiating is to keep your mouth shut. Unfortunately, it’s also one of the most difficult. People are naturally uncomfortable during a negotiating silence, but this is exactly why you should work to ensure those silent periods occur. If you’re uncomfortable, you can be sure that the person you’re negotiating with is uncomfortable as well. And the common result of this uncomfortable situation is that one party will make a concession to break the awkward silence. Next time you are negotiating and the person on the other side of the table throws out an offer, make a point to say nothing. Whether it be 10 seconds or 10 minutes, make the other person break the silence. You’ll be surprised to find that he or she will often interpret your silence as anger or disappointment at their offer, and will break the silence by revising their offer or offering a concession. Master negotiators will use this tactic to get less experienced negotiators to make successively lower offers without ever having to throw out a counter-offer themselves. This may be the most basic — but most useful — negotiating tactic you’ll ever employ.

I’ll post additional negotiating tips in future posts…in the meantime, I hope these were helpful…

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