SECRETS OF PROFESSIONAL NEGOTIATORS
You are a negotiator—we all are. Some are better than others because they have learned from their experience how others react to certain offers. You can level the playing field with these good negotiators by recognizing their techniques and being prepared for any negotiation that involves a lot of money.
A penny saved is a penny earned.
I suspect that Benjamin Franklin was an excellent negotiator. He understood that saving a penny when you buy something is the equivalent of earning that same penny—and that was before we had an income tax.
Today, when you save $10,000 because you buy something at a below-market price, you have saved even more than the discount you made. To pay the extra dollar to buy something, you first have to earn that dollar plus the tax you owe on it. Saving $10,000 when you buy something is the equivalent of earning the $10,000 plus tax.
Two of my students use this idea to significantly reduce the amount of tax they pay while at the same time increasing their yearly “profits.” These high-income individuals choose to reduce the number of hours they work at their normal professions. This reduces their taxable earned income and taxes that they owe.
They then use the time they are not working at their jobs to buy property at bargain prices. They may earn $100,000 working “part-time” and then buy several properties at a discount of even more than $100,000 during the hours that they spend as buyers. The discount they earn is untaxed until they sell the property, if ever. Plus, the properties they buy grow in value, untaxed until they sell.
If you are going to buy, sell, and manage real estate, then you need to learn to negotiate. As you become good at it, you will make a lot more money. Negotiation is probably the most valuable skill that you can acquire.
Negotiating has a bad reputation. It is not the art of taking advantage of someone else. It is the art of putting a deal together.
An important element in negotiating for a house, especially one that you would like to buy with owner financing, is developing trust with the seller. If you are truthful in your statements, if you don’t try to manipulate him with emotional statements, he will then be more willing to trust you as you negotiate.
Some sellers never sell because they have no skills in getting a buyer to commit to buy, even when it would be very good for the buyer. Landlords have vacant houses because they never get potential tenants to commit to renting.
Negotiating is a skill you can acquire, although many people seem to be born with it. Take a three-year-old to a store and you will experience how a persistent negotiator, one who won’t take no for an answer, can get what he wants.
There are several secrets that successful negotiators use to reach an agreement. Notice I did not say to win, but to reach an agreement. Unless both parties to a negotiation receive some benefit, the deal generally will fall apart, with one party failing to perform as agreed.
An example of a failed negotiation is when a salesperson uses an emotional argument to get a buyer to sign a contract. Such a close might be that this house is offered way below the market value and that another buyer is on his way over to sign a contract. If you want to buy it, you need to make an offer right now, or it will be gone.
After a contract is signed under this kind of pressure, the buyer may check out other houses for sale and learn that the house that he bought was not a bargain. He would then do what he could to get out of the contract, using excuses such as a lack of financing or deficiencies in the property for not buying.
Another example is a buyer who drives a hard bargain with a builder and negotiates such a good price that the builder cannot build the house at a profit. The builder may then cut corners during the construction, delivering an inferior house, or simply refuse to build the house.
Some people are quick to hire an attorney to enforce their rights under a one-sided contract. The argument is that once everyone agreed, then every party should be forced to comply. Hiring an attorney and going to court to enforce a contract, however, is rarely a profitable adventure.
If you find that you have negotiated a one-sided deal and determine that the other party cannot perform reasonably, then reopen the negotiations. See if you can negotiate a deal that will work. If you consider the cost of both sides hiring an attorney and going to court, it is far cheaper to give a few dollars on each side to make the deal work. In addition, going to court will delay your closing and take a lot of your time. The total cost makes suing someone to enforce a contract that was one-sided to begin with an expensive misadventure.
There are many approaches you can take to a negotiation. Figure 12.1 presents four examples of results that are somewhat predictable, depending on the approach that you take.
FIGURE 12.1 Negotiation Matrix
Here are outcomes for each of these types of negotiations:
You are buying from a seller who is short on time and resources and must sell. You make the seller a low “take it or leave it” offer. The seller takes it but goes away mad.
Another example may be when you are dealing with another professional negotiator, such as a lawyer, a banker, or a Realtor. You know you have the advantage and use it to make a profit. It’s not personal, just business. An example may be when you find a property in foreclosure and recognize that a bank will lose a significant amount of money unless it makes a deal today. You make the bank a low offer, which it accepts for a small loss but recovers most of the money it loaned.
When one party in the negotiation has most of the power, typically the party with the money, then that party can overleverage the other party by making an offer that so offends the other party that he won’t take it or continue negotiations. A “take it or leave it” low offer to a homeowner who is behind in his payments is an example.
Sometimes it is wise to lose a negotiation. I had a long-term tenant call me to ask if I would pay for half the cost of the paint if he would provide the labor to repaint the interior of several rooms. I said no, that I would not pay for half the paint—I would pay for it all if the tenant would use my favorite color, antique white.
When a seller is under a lot of pressure to sell, you make her an offer that allows you to make a reasonable profit but leaves her enough money to move and rent another home to live in, and you also give her the time to move.
With smaller transactions, such as a purchase at a store or when borrowing money at a bank or buying a car, you typically are dealing with an employee, not an owner. The owner would have authority to negotiate and make a binding decision. An employee may have some negotiating authority but typically will seek approval before making a commitment.
When borrowing from a bank, the banker who interviews you when you apply for a loan may give you the indication that he will make you the loan, but typically he will need the approval of the loan committee, which may be a committee of one, the boss. Bankers typically have a certain loan authority, the amount that they are authorized to lend without further approval. The higher you move up in the bank hierarchy, the larger the loan authority, until at some level a real committee would approve the transaction.
When you are buying or selling a house, you are often dealing with a married couple or sometimes two partners who own a house together. The decision to buy or sell is typically a joint decision, and you need to involve both parties in the negotiation, because they both will have to sign the contract. One person may be the decision maker. When you identify the decision maker (it may not be the one doing all of the talking), ask him or her what it would take to make a deal today.
Once you reach fifty, you should not have to negotiate for everything.
—Jimmy Buffett, A Pirate Turns Fifty
Most day-to-day negotiations involve little potential to make a profit. Plan ahead to be well prepared for the bigger negotiations that are worth hundreds or thousands of dollars to you. By being prepared for the big negotiations, you will profit considerably, allowing you to follow Jimmy Buffett’s advice.
Many negotiations lead to another negotiation. The first interaction sets the stage for the second. Those with whom you negotiate can be a source of referrals—or result in lost business. If you aim to be a long-term success in your business, then positive referrals can be a large part of your business.
When you rent to a tenant, the tenant has the potential to be a source of income to you for a long time. The tenant also may refer other friends to you or steer others away from you. How you negotiate with this tenant will affect how she treats your house and what she tells others about you as a landlord.
Many of my tenants have been referred to me by other tenants. This is not because I am a pushover but because I deliver a good house at a fair price, and I’m predictable in how I respond to tenant requests. McDonald’s has built a billion-dollar business not because its food is the cheapest or even the tastiest, but because its food is predictable. You know what you are going to get. I have built my tenant management business using the same principle. Fair and predictable. No surprises. It works.
When you are the buyer, you get to choose when and where to negotiate the purchase. You want to be well prepared and in good shape both physically and mentally before you begin the negotiation.
Have a good meal, be well rested, and take plenty of time to think through what you plan to say. Only when you are at your best and well prepared should you negotiate for tens of thousands of dollars.
You want to have a plan. If things are not going according to your plan, take a break and regroup. When you are the buyer, you are in control of the situation. Walking away and then starting again can work in your favor as the buyer. The seller will see you as a serious buyer when you come back, and you can pick up the negotiation where you left off last time.
Although I close some properties within a week, I often take weeks, and occasionally months, to buy other properties. I visit with the owners a number of times, and each meeting moves me a little closer toward my goal.
When you are buying a family’s home, it is better to negotiate the purchase somewhere other than in the home—for many reasons. The first reason is distractions. Their home is full of distractions, from kids and pets to perhaps the neighbors dropping by.
If you are going to make an offer in their home, you need to take charge of the situation and eliminate as many distractions as possible. One of my students is a very successful buyer and often buys sitting at the seller’s kitchen table. To eliminate distractions, he first pulls the FOR SALE sign out of the yard and puts it alongside the house. Once inside, he takes charge of the situation by turning off the TV and asking the sellers to turn off their cell phones. He wants to reduce the distractions while he is buying the house. If the sellers object to this, he knows that they don’t want to sell to him that day.
I prefer to ask the sellers to meet me outside their home. I ask them to bring their file on the home, including their purchase documents, current insurance and tax bills, and a current loan statement. This is asking a lot of these possible sellers, and it is a test.
If the sellers are only mildly interested in selling, then they will decline my offer. If they really want to sell, they will meet me with all their information. Because I am a wholesale buyer, I only want to meet with sellers who are ready to sell and need to sell now.
Look for an office you might have access to because of other business that you do, such as a conference room at a bank or a title or escrow company. This more professional setting has advantages over a coffee shop, such as copy machines, but a coffee shop can work. When I teach classes on buying property, my students actually find sellers and make them offers. Many of those offers have been made in coffee shops or 24-hour restaurants, and hundreds of successful negotiations are concluded there.
1. Know the value before you make an offer. Based on the rental survey you conducted, you will know how much rent the prospective tenants will pay and therefore how much you can afford to borrow and repay if you buy this house. You also will have tracked comparable houses that have sold and be able to establish a price range within 10 percent.
2. Negotiate for the things that are least important to you first. You may begin by negotiating for the appliances. If the sellers won’t agree to include the appliances, you may adjust your strategy to continue to ask for several minor items, such as making repairs to the house or a delayed closing date. It’s okay to lose on these issues, but wait to negotiate the issues that are more important to you last. At that point, you have reached agreement on many issues, and the sellers will have a lot of time and emotion invested in selling you their house. You can use the momentum created because you have made concessions to conclude the negotiation at a price and on terms acceptable to you.
3. Invoke the doctrine of fairness. One of the best negotiators I know is Jim Napier. One of his favorite negotiating techniques is to raise the issue of fairness when it appears that one party is taking unfair advantage of the situation. An example might be when one party continues to prevail on every issue. After one side wins on several issues, it only seems fair that the other side should win something. Jimmy would ask, “Is that fair?” When they asked for an explanation he would review all the points of negotiation that he had conceded on and then ask “Is it fair that if you get to name the price that I get to name the terms?”
By negotiating with a plan, you can strategically lose many issues that are less important to you, holding out for the one item that is critical to you in the negotiation. It might be the price, the down payment, or the terms of the financing.
After you spend considerable time negotiating seriously with the sellers, they become confident that you will buy their house. After you have reached agreement on many points, it is time to negotiate the point or points most important to you. Now you can invoke the doctrine of fairness, if necessary, reciting all the concessions that you have made to try to put this deal together.
4. Never bid against yourself. I once sold a house at an auction. There were only a few serious bidders, and one bidder got so excited about buying the house that he bid twice in a row. He bid $65,000, and when no one else acted, he made another bid of $70,000. He raised his own bid, bidding against himself.
You may think that this seems funny, but during actual negotiations for a major purchase, such as a house, it is very exciting—and it is easy to raise your own bid. It generally happens when the other party just does not respond to your offer.
Silence can be a powerful tool. If you offer the sellers a price for their house and they simply don’t respond, what is your reaction? Typically, it is to offer more. A seller who understands this can get you to bid against yourself.
I once bought a property from Jim Napier. I made him an offer, and he just looked at me. He said nothing, but I thought his look conveyed that he did not think that the offer was good enough. After what seemed like a long time, I asked him what he thought would be a fair price. He still did not respond, so eventually I offered him a little more, trying to get him to engage in negotiation. His silence eventually forced me to bid against myself. It’s a powerful tool, but it takes some practice before you can use it effectively.
5. How to negotiate with an agent. The best deals I have ever made have been brought to me by agents. In Chapter 13 you will learn how to negotiate with and through an agent.
6. When there are two or more sellers and they are hostile to each other. When there is a divorce or another partnership that is breaking up on less-than-friendly terms, you need to negotiate with the parties separately. Sometimes, when an estate is settled, several heirs will end up with a property. They may not even know each other, but it is almost certain that they will have different needs and demands. One may need cash right away and will sell quickly to get it, whereas another will want a higher price and be willing to wait for it.
This can become an advantage to a buyer when handled carefully. Anything you say to one party may be communicated to another party, so you want to take the high ground and never disparage the other parties, even though the person you are with may have a lot of ugly things to say.
Your job when dealing with multiple sellers is to find out what each one needs and when and then to structure an offer to buy just the one share on those terms. Then approach the other, or another, heir as noted in the preceding section on multiple owners.
A twenty-something heir may want quick cash to buy a new car or take a vacation. You could agree to buy his share at a wholesale price and close quickly. An older heir may want a higher price but be willing to accept payment for her share over a number of years to supplement her retirement income. A third heir may want to occupy the property for a time or even keep an interest in the property, thinking that it will be worth substantially more in a few years. You can make a separate deal with all three.
7. Getting on the same team with the other party. Have you ever made an offer to buy a car from a dealer and have the salesperson leave you to get the approval of his sales manager? What happened? Typically, the salesperson returns with the bad news that he could not give you that much for your trade-in car or that he could not sell the new car to you for that little, and then he will try to talk you out of more of your money.
He blames the other party (in this case his manager) for the higher price and tries to befriend you. He will work hard for you to try to get you the best deal he can.
Notice this technique, because it is one of the best negotiating strategies. Rather than set up an adversarial relationship with the buyer (you), the salesperson puts his arm around you (figuratively, if not literally) and becomes your ally in this battle against the sales manager.
Together, as a team, you will come up with a strategy that the sales manager will accept. The salesperson will become your knight in shining armor and do battle with the enemy until you finally prevail.
In the end, the salesperson will congratulate you on being a tough negotiator and for making a great deal. You will go away thinking that you really made a good deal and feel good about your purchase. That is the way a successful negotiation should end.
You don’t have to worry about the car dealer going out of business. They are professionals, and before they started talking with you, they knew the lowest offer that they would take for the car you bought. Their process is geared toward getting you to pay more than their lowest number.
I took my son with me the last time I bought a car and told him what was going to happen at each step of the negotiation. He was pretty impressed that I knew almost exactly what the salesperson would say and what techniques he would use.
Buying a car is actually pretty predictable. The salespeople have done it hundreds of times and know what works and what doesn’t. The next time you buy a car, pay attention to the salesperson’s technique, and rather than playing the role he expects, have a little fun. On a slow day, it can be fun and good practice to drop by a dealership and negotiate to buy a car even if you don’t really want to buy one. If it’s a slow day at the dealership, the salespeople will be happy for a little practice themselves, and if they are good, they may make you a deal you can’t refuse. Be careful, unless you want a new car.
The next time you buy a car, do something unexpected, and see how the salesperson reacts. After the salesperson comes back with the bad news from the sales manager, rather than increase your bid, ask to use the phone and call somebody. Call a competing car salesperson whose card you brought with you and explain the deal. I guarantee you that that salesperson will promise you a better deal.
Now give your car salesperson one more chance to reduce the price rather than increasing yours. Be nice. Tell the salesperson that you would rather do business with him because you do like his car and his dealership better. Turn the tables on him, and get him to bid against himself.
If he tells you that he can’t do any better, thank him for his time and stand up and start to walk out. Before you hit the door, he will ask you to give him one more chance to get his manager to meet your price. If he thinks that you are ready to buy that day, he won’t let you leave without doing his best to make a deal.
If you are in the business of buying or selling something and you have a real customer who wants to do business with you, you don’t want that customer to walk away without making a deal. Buyers or sellers who walk away often make a deal with someone else. When you find yourself with a seller who needs to sell or a buyer or prospective tenant who likes your property, work hard to make the deal now. If they leave to think it over, you rarely will see them again.
8. Know when to walk away. Some sellers are in so much trouble that you may not be able to buy their property even though they desperately need to sell. One seller had several young children, and her spouse had walked out on her. She was months behind in her payments and desperate for some cash to move into a rental property. The lenders would not cooperate, so she had no equity in her house, and there was no profit potential for an investor.
In cases like this it is tempting to pay the seller too much for her house, just to help her out. What this seller needs is charity, not for you to pay too much for her house. If you truly want to help, write her a check for moving expenses, but don’t buy her house for too much money. Try not to confuse business with charity. Make money in your business operation, and then be generous with your charitable gifts. There are a lot of people who need your help.
Not everyone plays by the same rules. Some people will do anything to win a negotiation, including lying and outright stealing. It is foolish to think that you can outsmart these people or that you can keep them honest even with a great contract.
Avoid negotiating with people you find to be dishonest. Even if they agree to a deal, they will not honor their agreement. They will either refuse to close, or they will start negotiating all over again.
The great majority of people are honest, and once they have reached an agreement, they will perform as they agreed. If you find yourself dealing with a dishonest person, walk away. It will save you both time and money.
If a seller is ready to make you a great deal on his property, stop negotiating! Don’t ask for anything more; just accept his offer. To do this, you need to be ready to buy. You need to know what the property is worth, know how to fill out a contract, and know how you will pay for the property.
The best deals happen quickly. Selling and buying a house are as much emotional decisions as business decisions. The day the sellers decide to get rid of the house and move on, they will make some buyer a good deal. If you happen to be in the right place at the right time, that could be you, if you have the ability to make the deal right then.