The Negotiating Game
At Liz Moore & Associates, we train relentlessly. We recently had a national trainer conduct a 3 hour seminar on Negotiating. She opened with a game of tic tac toe, and stated the objective as “get 3 in a row.” What happened next was fascinating – everyone defaulted to their childhood, and the game became all about blocking your opponent. So, although it would have been easy enough for everyone to get 3 in a row (win-win), human nature takes over, and the game becomes a no-win for everyone. Too often, real estate negotiations are the same way. Because both sides feel compelled to win at the expense of the other party, too often the result is win-lose or even lose-lose, when it could have – and should have – been win-win. Real estate transactions are ripe with opportunities to negotiate: initial offer price and terms, home inspection items and repairs, closing dates and timelines, just to name a few.
The Value of an Objective Party
A skilled negotiator as an agent is worth his or her weight in gold, and will save their client thousands of dollars over the course of a transaction. As a principal in a negotiation, it is easy to get caught up in the emotion, and lose sight of the ultimate goal. All negotiations are part emotion and part logic. Think of it like a see-saw. The agent’s role is to present all of the risks and benefits (both logical and emotional) and help you make an informed decision. Because we do this every day, we are experienced at not only negotiating, but overcoming the obstacles that you are likely to encounter during the course of the transaction. Many buyers and sellers make the mistake of playing hard ball during the initial offer process over price, only to be frustrated when they have alienated the other party when it comes time to negotiate repairs during the inspection phase of the contract.
Will You Cut Your Commission?
It’s not unusual for a prospective seller to ask an agent they are interviewing to reduce their brokerage fee. And, if the agent agrees, the sellers foolishly feel as though they have “won,” only to find that an agent who can’t protect their own value in a negotiation likely won’t protect the seller’s bottom line aggressively, either. I tell clients all the time that discounting the commission is the first test of an agent’s negotiating skills. Whatever you do, don’t hire an agent to represent you who caves at the first test.
Knowledge is Power
Nowhere is that old adage truer than in real estate. The most effective way to begin a negotiation is with as much information as possible. Top agents ask a million questions. The more you understand about the motivation and situation of the other party, the better the odds of creating a win-win.
A fair amount of information is available on line. What the sellers paid for the home, the original mortgage balance (and any refinances), liens on the property, tax assessed value, any building permits that have been pulled for renovations – all of that info is easily accessed, and can provide a foundation for appreciating the perspective of the other side. Social media and simply “Googling” the other party can also provide some insight into the person on the other side of the negotiating table. What do they do for a living and how long have they been in the area?
The more you know, the more likely you are to understand the other side. That perspective can be invaluable when looking for common ground (see Blue Chips v. Bargaining Chips).
How is the Market?
Most real estate negotiations are all about choices. It comes down to what options each party has, and that is often tied directly to market conditions. The party with the most choices has the leverage.
For instance, if it’s a buyers’ market and there is a lot of inventory (more than a 6 month supply), then unless the home is very unique in some way, chances are the buyer has other similar options if this negotiation fails.
If it’s a seller’s market, however, and inventory is tight (less than 6 months) – then the buyer is probably better off to pay the seller’s price than to risk losing the home they’ve chosen, and trying to find another in the same range/condition, etc.
So, your agent will advise you on market benchmarks that will influence decisions on both sides: months supply of inventory, absorption rates and trends etc. Being a student of the market really pays off when assessing which side has the most leverage. One statistic that top agents always keep top of mind is the average sold price to list price ratio in the current market. It’s just an average, and so it’s important to note that means that some sales will be above and some will be below. That being said, your negotiation has far better odds of being successful if you end up close to the market median or average.
Before we can answer a buyer’s question about “what should I offer?” or a seller’s question about “what should I accept?” we need to determine what the market value of the house is.
For instance, if a house is grossly overpriced, a buyer may make an offer that is 10% below list price, and still end up paying too much. Conversely, if a house is aggressively priced, a buyer may end up paying over list price in a multiple offer situation, and still get a good deal.
We also counsel our clients not to get overly focused on price –
there are many other factors in a negotiation that are important:
the condition of the property (does it need repairs, or even
remodeling?), possession date, concessions like assistance with
closing costs or a home warranty, and contingencies.
There are a number of considerations in an offer that may only be apparent to your agent, but can literally mean the difference in a smooth transaction and a nightmare.
A few examples:
• Who is the other agent? Are they experienced?
• Who is the mortgage company and the loan officer?
Are they local?
When the inevitable problems arise, communication is critical, and having local relationships and experienced professionals can make all the difference.
Blue Chips and Bargaining Chips
A very useful exercise to prepare for a real estate negotiation is to take a piece of paper, and make 2 lists:
Blue Chips – the factors that are highly important to you,
that you just won’t compromise.
Bargaining Chips – these may be the things that would be
nice to have, but aren’t essential.
In any negotiation, it’s important that both sides feel they are getting something, and so it helps your agent immeasurably when they understand your priorities. That way, they can guide you to trade off things that are less important, in order to keep what’s more important.
Splitting the Difference
It is common for parties to resort to familiar tactics when negotiating. After an offer and counter offer
has gone back and forth a few times, one side will frequently offer to “split the difference” to settle. The problem with that is that it may not reflect a fair deal, depending on the starting point of the negotiation (see Anchoring). Be careful when the other side offers to split the difference.
This is a very important part of any negotiating. If you’re the buyer, and the first one to make an offer, the initial price is the “anchor” and begins the offer-counter offer process. In most negotiations, the ideal scenario is to hit the “sweet spot”- the lowest offer that the seller will accept without triggering
a counter offer. That is generally the best you’re going to do. If your offer is too low and forces the seller to counter back, you’re generally going to end up at a higher point than had you hit the sweet spot to begin with. Or, worse, if your offer is so low as to insult the seller (see Ugly Babies), then you may lose the house altogether. Sometimes the other side is simply unrealistic about value. In this case, you will need to assess how badly you want the deal. There are times when the best advice that we can give you is that it may be time to pass, and move on to the next property.
Of course, when it is a seller’s market, there is the possibility that there will be multiple offers (competing bids) on the same house. This can even happen in a balanced market when a listing is either aggressively priced, or has a unique and desirable location or feature. When that’s the case, negotiating can be particularly nerve-wracking if you’re the buyer, and fun if you’re the seller!
Ugly Babies (Low Offers)
There is a reason that low offers are often referred to in the real estate industry as “ugly babies.” The reason is that they offend the other side, which is NEVER a good idea. I wish I had a nickel for every time that a seller’s reaction to a buyer’s low offer was to refuse to negotiate at all.
The same can be true when a listing is overpriced, and a buyer makes what looks like a low offer in relation to the list price, but is actually quite close to actual market value. This is a tricky situation, and is best addressed between the agents before the offer is presented. I recommend that the buyer agent present a market analysis along with the offer, and ask for the other agent’s help (“my clients love the house, but we can’t quite justify an offer close to list price based on the comparable sales we’re seeing. Could you please help by forwarding any additional sales we may have missed?”)
The Cost of Waiting
Another decision that factors into negotiations is the timeline.
Perhaps it makes sense to walk away from the deal at hand, and wait for a better one. Before you make that decision, you need to consider the potential cost to wait. Factors that will influence this decision include which direction is the market heading…up or down? Prices going up or down will play into whether or not it makes sense to wait.
The bigger factor in waiting is what is likely to happen with interest rates. Don’t underestimate the impact that a higher interest rate will have on your mortgage payment – as it is always more significant than the impact of price.
You can download the worksheet that we use to analyze the cost differences here: lizmoore.com/costofwaiting
The Cost of Money
One of the biggest tragedies in a real estate negotiation is when the parties come to a cross road on “principal” and the deal dies. Especially when either the buyer really wanted the house and won’t be able to find anything comparable, or when the seller really needed to sell. When this happens, experience has taught us that it can be helpful to break down the difference into a daily cost, so that
both sides can really focus on the true costs.
For example, a $5,000 counter offer in today’s market (4% interest rate) is equivalent to .80 cents per day to the buyer – far less than the cost of a cup of coffee!
You can download the worksheet we use to analyze the cost differences here:
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