Understanding a seller’s psyche and rationale behind their business negotiations is the key to success when closing a deal.
The most skillful investors create “win-win” scenarios for all parties involved in the real estate negotiation process.
Time and information are two real estate negotiation pressure points investors should employ if they want a transaction to end in their favor.
Have you ever asked yourself “how can I become a better negotiator?” If yes, you’re in luck, because the answer is simple: all you need to successfully negotiate on the same level as the most successful investors is to learn the psychology behind business negotiations.
The psychology of real estate negotiation sounds like a complicated theory conjured up by scientists at Harvard, but I digress. In reality, it’s a relatively easy concept to grasp once you understand the true meaning of the word negotiation.
Mary P. Rowe, a professor at MIT, defines negotiation as “all interactions between two or more points of view.” When you think about the psychology behind real estate negotiation, it really means learning how to navigate diverse perspectives and expectations. Still seem a little confusing? Fortunately this relatively complex topic can be broken up into easily digestible parts. Let me explain.
You don’t have to be an expert investor to learn the art of real estate negotiation. Whether you’re new to the field or a seasoned player, practicing different negotiation strategies will help you close more deals and make more money. The following real estate negotiation tactics are a good place to start.
Create Win-Win Scenarios
The most skillful negotiators are those who create win-win scenarios for both parties in the equation. Just because you are trying to score a deal, does not mean there’s nothing in it for the seller. For example, investors hoping to acquire an investment property for a low price may offer some concessions to the sells, like offering to cover moving costs. In the big picture, moving costs are a small expense for investors but could be a large gesture to the seller.
In fact, smart investors never negotiate over just one issue: they always have topics in their queue ready to go. Try to learn as much as you can about who you are meeting with beforehand so you are familiar with their wants and needs before meeting. That way, you can make sure everyone gets a little bit of what they want.
The next key to successful negotiating is compromise. As you anticipate how to create a win-win situation, look for areas you are willing to budge on within the contract. Perhaps you are willing to clean out the property in order to knock a few thousand off the sale price. Or maybe, you want to pay a little more for a quick closing date. Just be sure to think through potential areas for compromise before you sit down at the negotiation table. This will help you avoid conceding too much, or walking away from a deal unhappy. Compromise is key to real estate bargaining, but so is holding your ground where it matters.
Be Prepared To Walk Away
Arguably the most crucial skill of a successful negotiator is knowing when to walk away from a deal. Even if a property is your dream investment, it is bad practice to negotiate with all of your cards on the table. No matter how perfect an opportunity may seem, remember to keep your focus when entering negotiations. If you truly want to become a power negotiator, you must convey to the seller that you can and will walk away if you don’t get what you want.
One way to combat losing your footing in front of a seller is to make sure you have other investment properties lined up simultaneously. If you want to be confident walking away, it can help to know what you’re walking towards. Always keep a few properties on your radar in the event plan A, B or even C do not go your way. While your extra plans may not be as flawless as your first, they are crucial to keep on hand.
Include An Escalation Clause
An escalation clause is typically used when one or more parties think a home will receive multiple offers. It states that the seller agrees to pay a certain amount more than the highest offer received. There will usually be language capping the total sale price, to ensure investors do not agree to more than they can afford. An escalation clause should be discussed when negotiating in competitive markets to help lock down the property for investors. To learn more about escalation clause real estate, be sure to read this guide.
Use Affirmative Language
The best negotiators are always decisive and direct. A negotiation room is not the place to change your mind or doubt yourself, making affirmative language a helpful bargaining tool. Affirmative language by definition expresses the truth of a statement, and should not include any negatives like “not”. Some examples could be, “The property needs renovations” or “The neighborhood is up and coming.” From the perspective of a negotiator, affirmative language shows confidence and assurance. It also makes it easier to anticipate other perspectives (For example, “This property does not need renovations”). Try writing out a few things about your deal, and get a better idea of how to incorporate affirmative language in your negotiations.
Negotiate In Person
No one could have predicted how the rise in technology would impact basic interactions; however, the power of email and texting have left a lot to interpret in daily conversation. This is why negotiations should always be held in person when applicable. A face-to-face conversation helps make sure everyone is on the same page, as it cannot be misinterpreted in the same way that written communications can.
That being said, when dealing with long distance deals or busy schedules a face-to-face meeting may not be possible every time. If this is the case for your real estate deal, the next best option is to speak over the phone. This does eliminate your ability to read body language or basic reactions, but it is still more effective than an email. Finally remember, that negotiations do not have to be completed in one conversation. It is perfectly acceptable to set an agenda and separate meetings as necessary.
Listen Before Reacting
The worst case scenario in a negotiation room is for one party to lose their temper and walk away from the deal. This not only puts an end to the immediate deal, but can also be harmful to the reputation of that investor (thus impacting future deals as well). Always check your ego at the door when entering negotiations and listen carefully before reacting to any statements. After reading this you might be confident and well spoken in your negotiations, but that does not always go for everyone else. Give others a chance to respond fully before coming up with a counter offer or moving on.
Focus On The Outcome
Never lose sight of your end goal when negotiating. It can be easy to get distracted by counter offers or tangents, but remember you are there for a property. Stay on task during the meeting and cite your notes when necessary to ensure you bring up each of your talking points. One of the worst feelings as an investor is realizing you forgot something when negotiating real estate deals.
Similarly, don’t let a few concessions make you lose sight of why you are there. Let’s say the sellers don’t agree on the closing date you want, but you still get a great price on the property. While you may not have gotten everything you wanted, that deal can still count as a win. After all, you just secured a great deal didn’t you?
Real Estate Negotiation Tips: Understanding Pressure Points
If you’re unfamiliar with the term “negotiation pressure point,” just think about it as different aspects of the deal that influence the outcome. If negotiating was all about following steps, everyone would be an expert. Instead—there are certain areas to focus on that will boost your ability to control the deal. By familiarizing yourself with potential pressure points you can almost guarantee success with negotiation in real estate. So, without further adieu, commit these pressure points to your memory:
Have you ever asked your boss for a day off just as they were heading home for the weekend or rushing out to an important meeting? Did it work? If so, you (perhaps subconsciously) extorted the “time” pressure point.
Under the pressure of time, people become more flexible. If a seller is motivated to sell fast, for whatever reason, you will be more likely to receive the deal you want. Some examples of time pressure points include, but are not limited to:
When a homeowner is nearing foreclosure.
When a homeowner is underwater on their mortgage.
When a homeowner is relocating to a new job.
When a homeowner is closing on another property.
When a homeowner is going through a probate case.
When a homeowner is tax delinquent.
That is just a short list of reasons why a seller could be motivated. It is up to you, as the investor, to pinpoint those stressors and use them to your advantage.
Another way to gain the upper hand with this pressure point is to spend a decent amount of your time with the seller. Did they attend your alma mater? Are they interested in similar hobbies?
Find a commonality between you and your negotiation competitor and bond over it. In addition to building an authentic relationship with the seller, spend time asking questions. In what year was the house built? What is the area of the attic crawl space? When was the last time the house was tented for termites? Walk around the property with a pen in hand and write down anything and everything you see. At the end of the day, you will have spent so much time with the seller, they will start to think, “I can’t come away from this deal with nothing after spending so much time with this potential buyer.” Once you have your seller feeling like this, there will be no term you can’t negotiate.
Time is an investor’s most powerful asset. Use it wisely.
In any business negotiation, the side with the most information will triumph. The more information you have or can learn about the property and the seller, the more you will be able to uncover the seller’s motivation. Most of the time, it will be necessary to ask the seller tough questions in a direct manner. There’s no reason to tiptoe around issues like whether or not there are back taxes owed on the property or the foundation problems that haven’t been fixed. If the seller refuses to answer these “tough” questions, you are still receiving valuable information (chances are if they refuse to answer, there’s probably an issues somewhere).
Talk to neighbors, talk to other investors in the market, talk to your real estate broker, talk to anyone who might offer up a tip or two about the property you couldn’t get answered from the seller. Helpful information can come from a number of sources—keep that tip in mind when utilizing this pressure point.
As with knowledge, the party with the most flexibility in a negotiation has the most power. I am not necessarily referring to flexibility regarding the requirements of a given deal, but instead the flexibility to walk away. In essence, on of the most powerful pressure points in negotiation is making it clear that you have other options. You need to be able to demonstrate that you are considering more properties than the deal at hand. By making it clear this property is not your only option, you are giving yourself much more leverage to negotiate.
On the flip side, sellers may also know about this pressure point and say they are receiving multiple offers as well. If both parties focus too much on options, the deal will not get anywhere and you both will have wasted your time. To avoid this mention that you are considering other properties only when appropriate. Be confident in your negotiations, and as I said before do not put all your cards on the table. Learning the right way to navigate this negotiation pressure point will go a long way throughout your career as an investor. And remember, options are not only good for negotiating but also for your portfolio.
The psychology of real estate negotiation is an art form to be studied. If you want your offers to be accepted more than not, understanding basic negotiation strategies is a must. Review the above tips and learn when to walk away from the closing table. As you become more comfortable with investing, you will be able to enter any deal with confidence and determination.
Have you ever engaged in a fiery real estate negotiation that resulted in your favor? If so, be part of our conversation, and tell us how you closed the deal in the comments below.