I tell my clients there is just no short cutting the negotiation process even though everyone wants to. Even the most astute buyers and sellers, prefer the easy negotiation to the tough slog. When an offer comes in, a seller must be prepared to go back and forth a few times, maybe more than a few. Why is that? The answer might surprise you: trust. The seller doesn’t know the buyer and therefore hasn’t established any level of confidence that the “other side” isn’t trying to take advantage. When the Israelis and the Palestinians begin the laborious task of trying to settle their arguments over land, security, repatriation, etc., the level of their success has hinged on who the negotiators are and how much mutual trust exists. Remember back to when Yitzhak Rabin was breaking with his conservative party and making broad concessions to Arafat, and vice a versa and peace actually for a fleeting moment seemed attainable? This was only possible because the two adversaries knew each other well enough to know, that if one said they were going to do something, the other knew that he meant it. Fast forward to today and the parties have so much distrust, that any meaningful progress has been scant, with each step seemingly like trudging through mud.
Apply this concept to home buying or selling. Let’s say for argument sake that we have a home priced at $665,000 and a buyer comes in with an offer of $610,000 (8% off asking) and well below even the lowest of comps. This type of initial offer does nothing to establish a level of trust between the two parties and is usually doomed from the get go. The buyer is probably thinking, “I’ll come in low and worst case, meet the seller in the middle at perhaps a target selling price in this example of $637,500 or $640,000;” or maybe they really want the home and are even willing to pay fair market for it, but believe the only way to not get “taken” is to start really low. To the seller, the buyer appears ridiculous offering so low. I tell my sellers that when a buyer comes in really low, you really have almost nowhere to go. However, I also tell them that we always want a deal to fall apart on the other side of the table, not our side, so you try and you counter. I might suggest to the seller that they come back with a counter offer just a little off asking, maybe $663,000 or $662,500; something that shows the buyer that the seller is willing to negotiate and serious about selling but that there is much work to be done and they have to get “up” if that work is to be fruitful. Yet, there is little optimism at this point, and let’s face it, some serious doubts exist in the sincerity of the buyer and this creates distrust. If the buyer by contrast had come in at $630,000, the spread between the two sides is much smaller and the middle is around $647,500, still apart but at least the seller can kind of see where the target price for the buyer is. When the offer is low, the buyer’s target price is a total mystery.
For the benefit of this example, let’s just say that the seller actually had priced the home spot on with the comparable sales of similar homes in the neighborhood; and that market value is somewhere between $650K and $660K. Obviously even a price of $647,500 is still too low and further, may be well beyond the scope of what the buyer is willing to pay. So here’s what typically happens; either the buyer quickly realizes this is not going to be fruitful negotiation and quits or presuming they really do want the home, they will quickly get up into a range where a successful conclusion can potentially be reached. The target is clearer. This however, is not how you “steal” a property. To do that, the seller has to be vulnerable; ie: they are under distress or have been languishing on the market for a really long time and just ready to deal and get out of the property. If a seller is not in a weak negotiating position, as steal simply isn’t possible and the only way a buyer can buy this property, is to “come correct” and bring a reasonable offer.
Consider this alternative scenario; the buyer wants the home and recognizes that the market value is somewhere in the a fore-mentioned mid $600K range, so they offer $635,000. Now the two sides are only 4.5% apart with the middle $652,500. Immediately, the seller perceives a little more trusting relationship because the offer is not insulting and rather suggests there is a buyer who wants to make a deal and buy the house. Clearly, the higher the initial offer, the greater likelihood a deal can be put together; the seller is more apt to get to the middle a little more quickly. We still have to “ping pong” some, but at least now the seller might be willing to come off 1% or more to show they are genuinely interested in selling. This occurs because there is a greater sense of trust that at least both sides really want to make a successful transaction. By the way, having two agents that know and like one another is also a very important component. If they have trust between them, that will go a long way towards building trust between the principles. What’s interesting here is that it raises the importance of agent selection. How is that agent perceived in the real estate community? If you are working with someone who is not well liked, as a seller or buyer, you may find that you are immediately at a disadvantage. If you are a Realtor, it is essential that the reputation that precedes you is one that helps, not hinders. This is especially true in small to midsized communities where everyone knows everyone.
Back at our negotiation table, we still have a gap. We also may have much tighter limits as to how far we are willing to go up if we are the buyer. If the buyer has come to the negotiating table with a strong opening offer, there may not be a lot of play in the amount they are willing to go up; and that’s OK. I tell my clients that if we come back with a with a near-end-game counter, we can dig our heals in and stand pat or come back with a very slight increase in the next counter. This is OK and it’s also OK to walk away. Ultimately that is the trump card that both side have; the willingness to quit and move on. But here’s the idea: when I negotiate, my goal is to get the chasm between the buyer and seller close enough where one side, the other or both, recognize they are within striking distance of a deal and the bird in the hand is worth two in the bush. By starting close to an asking price, a buyer very often actually gets a better deal because they have developed trust with the seller and the seller better understands the buyer’s wants and will often be willing to take a little more off the price. Naturally much depends on the level of motivation of the parties and the realistic-ness of the asking price. For this reason, I counsel my sellers to price their home correctly and not price it too high. The argument for “leaving room to come down,” and “the buyer is just going to offer lower anyway,” is not an approach that I believe is successful, because if a home is overpriced, it takes longer to sell, the price reductions are ultimately much larger than an initial lower price and if think we back to the “steal a home scenario I mentioned earlier, a seller becomes vulnerable as time is not a seller’s friend, even if they all the time in the world.
One last thought, when we negotiate, it is often forgotten that we are negotiating price and terms. Very often we can give concessions on terms, and this in turn builds trust further. Terms are concessions too and are often traded in exchange for price or other terms. A seller for example may need a rent back until school ends and might be willing to come off price a little sooner in exchange; a buyer may be willing to come up if the seller will close faster perhaps preserving an interest rate lock expiration or even sell to a buyer, based on the buyer’s current home closing first. If a party wants or needs certain terms, it is very reasonable to expect the other side will offer those terms in exchange for some other concession on additional terms or on price.
In the end, a successful transaction requires a measure of trust. Establishing that trust early in negotiations and building on it throughout the process is the great secret to great negotiating.
Published on 2012-04-12 03:11:14