Have you ever wondered “how seasoned real estate investors accumulate profit-generating assets?”
Many of the seasoned investors I’ve worked with have always attributed their success to the art of negotiating a good deal. As I have emphasized in the other posts, it is important for real estate investors to have a personalized analysis system to identify a good real estate deal. However, being able to negotiate a better deal would be the cherry on top, turning a good deal into a great deal.
Negotiating a real estate deal is important because there is potentially a lot of cash at stake and to the average joes, the purchase of a home is perhaps the largest transaction they will make in their lifetime. Being able to negotiate a 10% reduction can also mean 5 years of savings potentially gained.
When it comes to negotiating a deal, it is natural for the sellers to want the highest price and buyers to want the best deal. Hence, it is crucial that you know and stick to your main purpose of participating in a negotiation.
Generally, the main objective in going through negotiation is to reach an agreement that serves both parties in their own interests. It can be an agreement on a lower property price in exchange for more cash upfront or to accept the structural defects as is with the property.
While I do not claim to be a master negotiator, I had the opportunity to observe from some of the most seasoned real estate investors and here are some of my observations.
When it comes to negotiating a deal, these are my personal takeaway on how you can prepare for a negotiation and the different negotiation tactics commonly used in the real estate industry.
8 tips in negotiating a real estate deal – takeaway from seasoned investors
1. Listen and understand the opposing party’s situation
It is really easy to go into a negotiation fully focused on what you want and hope to achieve. However, to achieve what you want, you need to be able to convince the other party that your offer is mutually beneficial for both the seller and yourself.
To do that, listening is really important. Without giving the other party room to express their situation (other than asking for the best price on the house), how will you ever know what the other side wants?
Once you understand the opposing party’s situation, it becomes easier to find a common ground for negotiation. Surprisingly, in most negotiations, price is not the only matter of concern. Other factors that appear commonly are,
- Urgent need for cash
The seller may need higher down payment or have the property transacted with cash to bypass the lengthy loan process - Liability concerns
Perhaps the property is bought under a limited liability partnership (LLP). There may be liabilities involved with the LLP entity that may concern the buyer - Removal of furniture or built-ins
The buyer may not like the furniture that comes with the property. Being flexible by offering to remove the furniture might even help to sell the property at a higher price - Sentimental value
The seller may be reluctant to sell off the house due to their sentiment of the place. In some cases, being understanding and giving confidence that the place will be well taken care might just push the needle on the deal
When I say listen, I do not mean passive listening. If you do not ask probing questions, you will never touch the key concerns the other party may have. I believe asking and listening come hand in hand, you ask key probing questions while listening and understanding what the other party has in mind.
2. Do your research on the deal
If you are negotiating a deal through a real estate agent, it will be worthwhile doing research on the agent to have an insight into their negotiation tactics. The best way to go about this is to have a network of individuals involved in the real estate industry, people that can supplement you with inside information – agent, location and trend.
The art of negotiation is really all about matching the same energy in a discussion. If the opposing party is forthcoming with its demands, it will be beneficial for you to be direct with your requests.
On the contrary, if you are dealing with someone who is meticulous with their analysis and facts, you stand a better chance with an offer where all information is clearly laid out, helping the opposing party dissect and digest the deal.
Besides having insight into the individual, you will want to gather as much information about the property. Any defective wiring or leaking plumbing can be pain points used in a negotiation.
On a macro level, you also want to have key data on the neighbourhood before making an offer to the opposing party. One common tactic property agents use is to keep track of previous transaction prices and to use the difference in prices as a point for negotiation.
In negotiation, having data of any kind can give you the advantage. Being able to provide data of specific examples that prove your case and is not available to the opposing party can turn the tides of a discussion.
3. Time your proposal to your advantage
As I mentioned in the first 2 points, it is very important to know the situation of the opposing party. Having intel on their situation and pain point allows you to strategize your negotiation tactics.
One common negotiation tactic is to use timing to your advantage. Much like how the best time to heavily discounted fresh produce is at the end of the day when the butcher is about to close shop. The same is true for the real estate industry.
In a typical economic crisis, the demand for real estate is low due to the shattered confidence in the market. The number of buyers in the market will be far less than the sellers. In such a situation, desperate sellers in need of urgent cash are more likely to negotiate.
On a separate note, the speed of response can be an indication of interest. While it is not always an indication of interest, a buyer/seller who is quick with their counter-proposal may have inadvertently told the opposing party that they need this transaction done soonest possible.
This opens up weaknesses in the negotiation and allows room for further pressure from the other party.
4. Frame the negotiation to benefit both parties
When it comes to framing a negotiation, it is about guiding the opposing party in finding the best perspective to understand the offer. This means helping them view the situation beyond just the price, taking into consideration factors such as timing, quality and delivery lead time.
Taking a past experience for an example, a desperate seller may need cash for multiple reasons. It can be because business is failing and a cash injection is necessary to keep it afloat. Or, it can also be a situation where a family member has fallen ill and the property is to be liquidated for the medical expenses.
Understanding this situation, as the buyer, I have a number of perspectives to help the seller understand how my offer would help him in his situation. While I am indeed asking for a lower price compared to offers from other buyers, I am also offering a 30% down payment. The additional 20% down payment can be used immediately to kickstart medical treatment, preventing the disease from complicating further.
Merely saying that you are offering an additional 20% down payment will not make the cut. If you do not clarify and frame how the additional 20% down payment can help with the medical expenses, I am afraid the seller might miss your implicit intention.
Hence, if you frame a negotiation correctly and effectively, you will be in a better position to negotiate on points that matter to you.
5. Don’t show all your cards early on
I perceive negotiation as a game of strategy. In this game of strategy, it makes sense to not show all your cards at once. If your strategies and intel are exposed at the get-go, you might find yourself in a disadvantaged position throughout the negotiation.
When negotiating a real estate deal, I recommend that you take it easy and not rush into offering a counter-proposal after a home viewing. If the house attracts your attention, do learn to hold in your emotion or risk letting the seller know how keen you are interested with the property.
Whenever I’m pushed to name a price after a home viewing, I would deflect the situation by asking for the seller’s asking price.
If you are unsure about the deal, there is no harm in telling the seller that you will be back after making your survey. This puts you in a position where you are in control of the discussion.
6. Adopt confidence and affirming language
Having a confident posture helps in a negotiation. The last thing you want to be perceived as is being uncertain about your offer. There is much research online that helps you understand how facial expressions, voice and body language convey interpersonal communication.
While we might not be aware, our facial expressions can relay information that may oppose our negotiation objective. Having a frown or crossing arms when trying to frame a mutually beneficial offer may come off as being insincere.
On the other hand, the physical action of smiling can change our vocal cord to appear friendly. This helps when you are trying to connect with the opposing party to understand their situation.
When it comes to the language of communication, using affirming words can help break the ice between both negotiating parties. This helps the other party feel heard and that their concerns are welcomed and considered in your offer.
In some cases, the use of affirming words can help to implant your ideas into their words.
One thing to note, I am not telling you to be fake. I am merely telling you to mindful of your posture and the words you use in a negotiation. Like it or not, words that work helps get the message across effectively – putting you in an advantageous position in a negotiation.
7. Put an expiration to your offer
Now that you have communicated and framed your offer. I recommend communicating a deadline for the offer.
Here is 2 potential scenario if no expiration is communicated with the offer.
- The opposing party intentionally chooses to delay on their response
This creates a potential trap where any follow up from your side may be interpreted as being desperate. Subsequently, this gives the opposing party a weakness to capitalize on – sealing the deal in their favour. - You may have been waiting on a party who is no longer interested to negotiate
While blindly waiting on this negotiation, some other opportunity may have passed you by.
Another good thing about communicating a deadline to your offer is to keep the other party engage. If no response is provided at the end of the deadline, then the best thing for you to do is to move on with other opportunities.
8. Be ready to walk away
Finally, do not be emotionally tied to the negotiation. While I do encourage you to be optimistic, aim high and expect the best outcome, you need to be realistic and have the ability to say NO if the deal does not conclude in your favour.
In my observation, successful investors have always been able to take emotion out of the equation. When the negotiation is less personal, it is easier to be rational when discussing the terms with the opposing parties.
Being ready to walk away also puts you in a less desperate position. In a negotiation, the party who is more desperate tend to give in easier to the opposing party, taking the less advantageous term in the transaction.
5 negotiation strategies commonly used in the real estate industry
1. The Hot Potato
The hot potato technique is about passing personal challenges that are preventing the buyer from purchasing the house into the hands of the seller. This puts pressure on the seller to resolve the buyer’s problem.
Example: The buyer is considering a $500,000 home but argues the down payment is something he does not have. This argument shifts a personal issue to the seller, pressuring the seller to reduce his price in hopes of meeting the buyer’s down payment capability.
Remedy: A skilled negotiator will want to test the validity of this concern. By asking indirect questions to probe the situation, the buyer is then forced to own up to the problem. For example, the seller can ask the buyer if he is interested in other similar properties that are slightly above this amount. If the buyer is still interested, he is likely to be able to afford the down payment.
If you are the seller, just be mindful that there are buyers who will push their personal challenges as a way of negotiating for lower prices. You can choose to stand firm on your proposal, address the issue one by one.
2. The Bidding War
The bidding war technique is about creating an environment where the demand is high while the supply is scarce. In the real estate industry, this can be achieved by listing the home on the market, refusing to accept any offer until the open house that is scheduled to happen a few days later.
Oftentimes, the home will be listed at slightly below market valuation to garner attention from potential buyers. The refusal to accept any offer until the open house is designed to introduce hype and scarcity.
In this situation, potential buyers are expected to compete and the seller hopes to get a higher offer as a result.
Remedy: As the buyer, you have a few days to do your own homework about the property and the surrounding market valuation. It is best to have a mental walk-away price before the open house. If prices have indeed exceeded your walk-away price, I would recommend you to walk away and consider other opportunities.
3. Good guy, bad guy
The good guy, bad guy technique typically involves an agent in the negotiation. In most cases, the agent will play the role of a good guy, acting as the liaison between the buyer and the seller, while referring to the seller as the bad guy or the higher authority.
Remedy: As the buyer, you want to be careful not to fall for the ploy. It is dangerous to assume the agent has taken your side in the negotiation and is indeed fighting your case with the seller. The best way to get out of this trap is to be aware of the ploy since a ploy perceived is a ploy foiled.
4. Delay and stalling
The delay and stalling technique is common in a negotiation when one party seeks to gain an advantage by postponing a decision. This could be a case where the party stalling is looking to gain a stronger negotiating position where the future situation is advantageous to them.
Remedy: If the other party is deliberately stalling on their decision, it is important to focus on the intention behind the behaviour. In most cases, the delay technique is deliberately employed to agitate the other party, getting them to be more flexible with the terms.
Personally, I would recommend 2 ways to go about this,
- Give a deadline on your offer
It should be made clear iff no decision is made when the deadline is due, the offer is automatically withdrawn. This creates urgency for the other party and it keeps them engaged. - Be emotionally detached
If you are not emotionally attached to the negotiation, any delay technique employed by the opposing party to wear you down will not work. Instead, you want to focus on other possible reason behind the delay. Perhaps the opposing party is going through their own difficulties and is unable to revert to your offer.
5. Withdrawn Offer
The withdrawn offer technique is an effective counter against the walk-away tactic. It typically involves taking away any other prior agreement due to a misquote or a change of heart. The desired result is an impromptu acceptance of the terms currently being negotiated.
Remedy: The best way to counter the withdrawn offer technique is to walk away and test the validity of the situation.
Final Words
Thank you so much for reading this article. I hope the information shared through my writing has been helpful in your journey in building your investment portfolio.
Until the next article, take care and stay safe.
