Negotiation principles

[Jas]

BrendanG had a question http://www.somersoft.com/forums/showthread.php?t=43377 on what is a reasonable offer to make on a house, which received a number of specific replies. I thought it might be useful to go back to some questions and principles on negotiation, so they can then be applied more generally.


How important is negotiation?
Fair Market Value (FMV) is when a knowing and willing buyer and seller meet and agree on value. This means equally educated on the property’s advantages and disadvantages, on house prices in the area and neither side have any deadlines to which they must buy or sell the house in. Not always true in reality. So, ‘negotiated value’ is what we generally get. This can be quite different.
However the house price changes based the average change of similar houses. If one house price is a statistical blip from similar houses, in the short term, there will be an impact. In the long term it will be brought into line. For example, if you bought a house for $320K and five other similar houses in the street were sold for $350K, you have an instant equity gain of $30K. If you bought for $380K, you have then lost $30K. In the long term, all six houses will go up roughly the same. In 10 years time, all six houses would be worth (10% growth to make the maths easy) $910K – the original $30K plus or minus would be less relevant.
Principle 1: Negotiation is inversely important to the length of time the house is held

How to choose negotiation tools and tactics?
In any negotiation, there are two things at stake - The house and the relationship with the other side. This isn’t just the owner of the house, it is also the real estate agent. This leads to four quadrants:
1) Issue important, relationship important
2) Issue unimportant, relationship important
3) Issue unimportant, relationship unimportant
4) Issue important, relationship unimportant
Principle 2: Tools and tactics used in a negotiation are dependant on which quadrant the deal falls into

What style of negotiation should be used?
There are two main styles of negotiation, win/win and win/lose. They differ on what is at stake, what outcomes are possible and what is ‘success’. It is important to realise that a single negotiation can involve both types of elements or phases. It’s also important to realise that a win/win negotiator can meet a win/lose negotiator and vis versa.
Principle 3: Individual preference on negotiation style is acceptable, but awareness of the tools and tactics of both styles allow for greater flexibility.

Thoughts?

Jas

 

[HiEquity]

Nice breakdown!

One thing I like to focus on is the concept of "resistance point" which can be applied equally well in a win/win or win/lose negotiation. Resistance point is basically the point at which your counter party will walk rather than do the deal. The more you know about where that point is for them the better able you are to pitch a firm, highly defended, "take it or leave it I don't care" offer. The counter party's resistance point is difficult to determine but some factors that help in finding it include:
- Time property has been on the market
- Personal circumstances of the vendor (divorce, foreclosure, bought elsewhere etc)
- Unique features of the property the vendor may be concerned about (presentation, unusual property for the area etc)
- State of the market - number of competing buyer's etc
- Amount of advertising / auctioning already spent
- The list goes on...

Of course if the seller's resistance point is above the potential buyer's resistance point then no deal will be done, so move on to the next one.

The main key to success IMO is to find out as much information about your counter party as possible. What did they buy it for and when? Is this their life savings or a tiny proportion of their portfolio and a pain in the a$#e? This information will help you to identify win / win outcomes for everybody as well as give you the biggest slice of the win / lose pie as well through pitching as close to their resistance point as possible.

Of course, you should also, (from principles 1 and 2 above) form a clear view of your own resistance point and what particular terms and conditions are worth to you prior to entering into a negotiation. This will not only increase your confidence but also help identify quickly if it's not going to go anywhere so you can move on.

Hope this helps...

 

[Jon Chown]

Jas,
This is a well written article on the Art of Negotiation and one that most people would do well to understand and practice.

As an addition to your points, I would add that there are perhaps a few other factors in the equation. Apart from the fact that the Property in question must actually be on the market, that is to say that the Seller is prepared to meet the current market price. (Many bad experiences have been learnt from this situation by both Agent and prospective Buyers)

Given that most Sellers believe that they are selling too cheaply and most Buyers believe that they are paying a premium we must also be mindful of those two emotions called Pride and Ego and not let stubbornness get in the way of a fair deal. I have witnessed this on more occasions than I care to remember. These are the would'ves, could'ves and should'ves

While it may not be relative or of concern to all Investors, below is how, as an Agent, I see your relationship structures. Have you ever wondered why someone else always beats you to the good deals – mostly it is because of the relationships that some Investors are good at fostering with Agents.


1) Issue important, relationship important

Pay what it’s worth once real comparisons / sales can be provided as examples by Agent and you asses them as accurate and feel comfortable with your decision.

This is the Client that all Agents are looking for when selling a property. Win - Win

2) Issue unimportant, relationship important

Make sensible offer based upon your decisions and if not accepted – let it go (but don’t blame Agent if property is still on market in 6 months. It probably means that the Seller is not motivated to sell, or wasn’t at that time.)

Many Buyers fit into this category especially those who say ‘If I don’t get it, it wasn’t meant to be’. I think that they are still waiting for a sign from above or they are just too nervous.

3) Issue unimportant, relationship unimportant

Make silly (Lowball) offer, don’t listen to Agent after all you know more than them. Grow big chip on shoulder and despise all Agents.

Mostly Investor Buyers with lots of time on their hands who are just looking for a nick. I honestly wonder why they bother and if indeed they ever purchase anything. I guess they must.

4) Issue important, relationship unimportant

Most Agents can handle you too and will help to a point, just watch out if there happens to be another possible Buyer – you will get used and cut out. After all, if you don’t care about me, why should I care about you? Blunt, but unfortunately true to nature.

Jon

 

[FelixL]

A few observations as a buyer

1. Desperate sellers
2. If agent knows you are serious, he/she works harder for you
3. Low balling works best in 3 steps, first a ridiculous low amount, then raise by a pretty large portion, then finally raise it a little to "take it or leave it". Even if the final amount is still very much lowballing, the seller won't be as offended usually

 

[harb]

3. Low balling works best in 3 steps, first a ridiculous low amount, then raise by a pretty large portion, then finally raise it a little to "take it or leave it". Even if the final amount is still very much lowballing, the seller won't be as offended usually

FelixL, I think I had one of these buyers last week.
This guy calls me in the evening and interrupts me watching a movie to put an offer, 150k below the asking price. So far I'm still waiting for him to proceed to stage 2 but I doubt he'll ever call back after I told him to "Get f****d ! and closed the phone on him.