Many investors don’t negotiate properly in real estate. Actually, only forty-percent of real estate agreements have ended with a successful closing. Now, this may be surprising. So, why is this? Well, this is because most sellers and buyers are not negotiating correctly. The general assumption is that you come out better than the other party, you’ve completed a successful negotiation. Whether you are buying or selling, renting or just contracting for a home improvement, you will need to negotiate the deal.
Yet, this is false. In real estate, if the deal is too one-sided, it probably won’t go to closing. This is why (and it may seem counter-intuitive), you should make sure in every negotiation that each party come out equally satisfied. Negotiating skills are often minimized or overlooked completely in training and coaching programs for real estate professionals. Successful negotiation results in favorable deals, not just deals for the sake of finding agreement.
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. Below are the steps of how to really negotiate in a real estate transaction.
Be willing to walk away
The best stance you can take when you are negotiating a real estate deal is be absolutely willing to walk. Too many investors make it far to obvious that they want the property, and will do anything in their power to make the seller sell to them. You want to do the opposite. You want to pretend to be hesitant to purchase the property, even if you want it badly. What you really want is the other party convincing you to purchase it. That way, all you have to do is evaluate. You must, from the very beginning, be willing to walk away.
What are they influenced by?
Often a party’s position is based on an outside influence and until that influence is known and understood the negotiation is ineffective. A seller could be motivated to sell because they have a sick relative out of the area, a transfer at work, a new child or some other factor. Without knowing that factor, a buyer will just throw money at the deal when money doesn’t solve the invisible motivator. In the illustration, perhaps a quicker closing would be more valuable than more money to the seller.
To find the unknown, a top negotiator asks many open ended questions with effective pauses that get the other side talking. Until you know why they want to negotiate, it’s impossible to close the deal on optimal terms. Remember, negotiating is happening every time the parties are interacting, whether they are talking deal or just about the weather. Always keep your negotiating switch on when dealing with your counterpart and stay focused on eliciting your counterpart’s negotiation drivers.
Talk to every “decision-maker” in the process
Real estate can be very confusing in general; and so is negotiating. It can be very tough to keep a clear head when so many other people are involved like family, managers, or real estate agents. The fact is, you cannot successfully negotiate a deal if you don’t have full, clear communication with everyone involved in the decision making process. You cannot successfully profit in real estate if you don’t communicate clearly with the property owners (as opposed to being represented by an agent).
What happens when agents are involved, is that the buyer and seller never even communicate with one another. Rather, the agents do. This means that the real decision makers (buyer and seller) never even speak to each other, and the decision is ultimately made by agents. This is bad news. You must work directly with sellers that are not represented by a real estate agent. Even if a buyer (or seller) has a representative, you still need to speak directly to the buyer (or seller).
Many agents will argue that it is detrimental to both the seller and the buyer to converse. That it can hurt the deal for them. Know that it is the middle part of the negotiation that is the most important; also, it is where the most misunderstandings occur. Of course, keep the agent posted on the situation and what is going on, so that they can properly advise their client to the best of their ability. But every aspect of the communication cannot go through the realtor. You need to speak with the buyer or seller personally. Equally as important is talking to every decision maker; for example, if the couple is married. You want to not only speak to the wife, but the husband too, for example. Or a situation where a family is selling the house. You want to speak with each member of the family.
Find out whether they’re a motivated seller or not
You’ve got to discover the person’s situation, whether it be the buyer or seller. Why are they selling? Why is the person looking to buy the house? Realize that the price is not nearly as important as the “Why.” Without knowing the answer to questions such as these, you can’t make a deal that benefits everyone. The reason why someone wants to do something (in real estate, or anything else) is going to tell you how much they want it for. So, if you’re trying to sell the property and an insulting offer comes in, you’ll have no idea what to counter for.
What if it’s an investor that wants to give you practically nothing for the house in order to profit on it for more? What if the buyer is making numerous offers but just wants to see what you’ll take for it? Lots of times, a buyer will submit an extremely low offer just to see if you’re dumb (or desperate) enough to accept it. Which, sadly, many sellers do. In order to do a successful deal, you need to know all of the “Why’s.”
What does a motivated seller look like?
A truly motivated seller is less inclined to engage in lengthy negotiations, because they just want to get the deal done. For a newbie investor, the negotiations start once the seller receives a written offer. Since everything is negotiable, agents for the buyer and seller go back and forth in writing, whether that communication is via email or signed forms. The objective is agreement on the deal’s terms, which include price, time lines, contingencies and items that may convey with the property. There’s a constant negotiation until you actually close the deal.
One of the most common mistakes that real estate investors make (frequently) is trying to do a deal with a seller who doesn’t even really want to sell. People that are successful at real estate investors find sellers who are highly-motivated to sell. This actually is a very small pool of sellers. Most aren’t really that motivated to sell. Actually, only between five and ten percent of all sellers in any market aren’t really that motivated about selling their property. You can only figure out if a seller is motivated by going through the “discovery” process of finding out why they really want to sell. And, if the opposite party refuses to share important details, be forewarned that you probably have an unmotivated seller on your hands.
Ask your real estate broker precisely what was said, how the words were expressed and the timing of when everything was said during the negotiation. Only through hearing the other side, rather than just listening to what they said, can a true negotiation strategy be created for the next right strategic move.
What are their options?
Realize that transactions regarding real estate take a minimum of one month to close; many times longer. Buying or selling a house is one of the largest decisions that any given person will make in their whole life. This is why the wisest approach to negotiating a real estate deal is for them to explore every single option. So, if you are dealing with a seller who is renting out the house themselves, or it isn’t selling, then what?
Be sure to explore every option with a seller so that they can make an educated decision on what they should do with the property. Buyers don’t want to overpay or price themselves out of a resale in the future, while sellers want to make sure the deal makes sense for their financial plan.
Describe the best-case and the worst-case scenarios. Suggest that their experience will be somewhere in the middle but probably closer to the best case because you have worked hard to help all parties feel like they have won while you’re getting the most for them. When you prepare your client this way, you create their expectation for how it will go. This gives them tremendous peace of mind and confidence in you. It makes them much calmer during what is probably a very stressful time for them. Understand that if you don’t prepare them, once the negotiations begin they may try to control how it will go. They become tense, stressed, less cooperative, and distrustful of you.
Present your offer to the seller
After you’ve done all the things listed above, presenting the offer shouldn’t be too difficult. What it comes down to is presenting an offer that benefits the both of you mutually. Understand that the most important part of negotiating in real estate this way is how you formulate the offer. People like to think that they came up with an idea. Make them think that they are getting the most out of the deal, even if they aren’t. Structure the terms to what you want, but in a way that makes it sound like they are winning. The steps above are going to ensure that a mutually beneficial deal is created; so that you aren’t a part of that 60% fail rate when it comes to completing a real estate transaction.
Sellers can negotiate for speed when they need to get their capital out of the home fast; and closing dates will affect buyers’ monthly cash flow once they own the home. Keep in mind, when a buyer closes on the house, they skip the next month’s mortgage payment. Maybe they want to close at the beginning of a month so they skip the next month.
Can you remember the last time you went into a negotiation, and the other person quickly accepted your offer without too much protest or countering? How did it make you feel? If you’re like most people, you probably felt like you didn’t get as good a deal as you could have. You probably felt that, because the other party didn’t put up too much resistance, they were likely very happy with the deal, and therefore, you got the worse end.
Oftentimes, though, the other party feels the same way! There wasn’t enough friction in the negotiation to make both parties feel like they earned a great deal. And because of this, what you will often find in negotiations that go quickly and smoothly is that one or both parties will want to back out of the deal. So, if you really want to ensure that the other side doesn’t back out after the negotiation is finished, make them work hard to get to a common agreement; this hard work will often translate into feelings of successful outcome for the other side. This is especially important, because the other party often has several days (if not weeks) to back out of an agreed-upon deal.
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, 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.