Any time you are looking to make a deal, you have a negotiation on your hands. Even if it is buying a chicken sandwich at the local fast food restaurant, a negotiation occurs. Except that with fast food, you’ve already agreed to pay their price when you walk in the door. That sure speeds up the transaction when you are hungry, but it isn’t smart when in the market for something bigger.
Imagine if the fast food approach was done in real estate. It’s not too far off – some automotive dealerships are adopting ‘no haggle’ pricing schemes. Their strategy is to attract people who don’t want to do any negotiating with a price that the buyer believes is fair. Because they have elected to shop at a ‘no haggle’ place, they are consenting to either pay the asking price or walk away.
Sometimes real estate sellers will state in their offering materials that the price is their ‘bottom dollar’ or that the ‘price is firm’. Unless you are well-known in the market, once that offer makes it to you, then no one else has accepted their ‘bottom dollar’ and it is priced too high. You, like other potential buyers, will avoid making a counter offer, because you know the seller will be inflexible.
Even those ‘firm price’ offers have a negotiation involved. What is lacking is an element of trust. Except with the chicken sandwich – where you might have eaten at that place before and you trust that they will make the same sandwich again for you (once you pay their asking price) – you don’t know anything about whether you can trust the seller. Already, they seem unapproachable, and you are more likely to avoid the offer than discuss it with them. You already don’t trust them and that puts them in a poor position to achieve their goal of selling their property.
Typically, real estate negotiations involve an offer price that is higher than the seller thinks they will get. They believe they will have to drop the price a certain amount, often around 8%, to make a deal. If the offer is $100,000, then the final sale price is thought to be $92,000, and the buyer should consider targeting that final sale price in a typical transaction. That means that the buyer believes their initial offer needs to be somewhat lower than that price. The problem with this mentality is that then the initial offer price is another 8% lower, or around $84,640, which is an offer almost 16% lower than the asking price! Many would consider this a low-ball offer, causing the seller to dismiss it out of hand. That also speaks to a lack of trust, and the deal dies. There must be a better way. Here are the steps you need to take:
Step 1: Determine Your Need
You need a roof over your head or you need income from an investment. Either way, your need is usually met by the purchase of a new property. This is a need that could be filled by a few different things, not just the offer in front of you. Remember this when negotiating. If the deal doesn’t satisfy the need, walk away immediately.
Step 2: Determine The Moon
‘Ask for the moon’ is a common thing said in real estate negotiation. I’m not saying you ask for this, but consider what is the highest price you could pay for this hypothetical 100k property that you would feel like you got a fantastic deal. Many buyers and sellers come straight out of the gate asking for the moon and this looks arrogant and inflexible. Either that the seller doesn’t really need to sell or the buyer is sending out low-balls to see what sticks. Both ways ruin any trust that could be built. Figure out what is your moon in the deal before making the offer.
Step 3: Determine Your Wish
The wish should be a price you would be happy with, though it isn’t asking for the moon. Getting it for this price satisfies your need. Determine the highest price you would be willing to pay for the property and your wish price is somewhere between this and the moon. That range of prices is what you will need to shoot for.
Step 4: Determine the Other Party’s Need, Moon, and Wishes
This is the step that rarely gets done. Most people go into it with an offer price and hope to settle on somewhere in the middle of both parties’ prices. This step means taking the time to have a discussion. How do you figure these out? Ask.
Ask Open Ended Questions
Ask the innocent questions, such as “Why are you selling right now? The interest rates are so high.” Or, “You offered to do seller financing, please tell me more about that.” Open ended questions are great. I borrow this from medicine. It encourages the person to talk about themselves. Be sure to add a compliment about how nice you think the property is. Contrary so some negotiators’ beliefs, this is unlikely to drive the price up, but much more likely to build rapport with the other person.
Show Interest in the Other Person
Ask them questions about themselves (as that relates to the property). If you see a flower bed, give them a compliment and ask how they were able to grow such beautiful flowers. Showing interest helps them to believe that you like the same things. It helps them to like you.
Add Some Information About Yourself
No one wants to sell their beautiful place to someone who will tear it down, or to someone they don’t like, and most would rather have less money but sell to a real person rather than an institution. Make yourself human and likeable.
Explain Why You Want to Buy the Place
Give them a good reason to sell to you over someone else. You don’t intend to give them their moon price, so you need to make them happy they got it for something lower. Maybe you have a great family and the kids would love to play in the backyard. Again, I stress that this is more likely to get you a better price, than worse despite showing interest in the property.
Once you have done these things, you should be able to build a picture of what their needs and wants are and determine exactly where you can negotiate. Tip: It’s often things that aren’t the price. For instance, a seller needs to get $30,000 out of their house to pay off medical bills and their mortgage is $70,000. Anything less than a sale price of $100,000 is a no-go for them. They won’t even consider it. Now that you have built rapport, you can get creative. They will be more likely to listen to your explanation of how seller financing or a master lease works. They might be willing to make the repairs you require before the sale. They might take a lower price and carry a personal loan that they use to pay off their monthly medical bills.
There are plenty of creative ways to do a deal, but the other party won’t even open up to you until you have built some trust first. Do this by making yourself human, learning about them, and showing some of your own needs. One last thought – if agents are involved, they usually don’t like seller and buyer talking to one another. They put up walls to this because it often introduces an element that makes it more difficult for them. There are no rules against this. If you want to try this strategy, you need only to ask, but don’t do it behind the agents’ backs.
There are other strategies to negotiate, but this one is about building trust. This strategy won’t help you squeeze that extra 5 or 10 thousand dollars out of the deal, but in the long run, it’s more important to actually do the deals, then let them go for that small potatoes money. Take the time to build that trust and you will get those deals done.