Negotiating Techniques in the Real World

I’m fascinated by deal making. I’ve studied it my whole adult life and love trying different things when putting deals together. Most negotiations are pretty minor and don’t give you the opportunity to employ different techniques. However, buying real estate is one of those times when you will probably have a chance to use negotiating techniques to make a deal.

There are a wide array of techniques that can be used in negotiations to help you get what you want. Your ability to use various methods will somewhat be determined by the sophistication of the person on the other side of the table. If they too are an experienced negotiator, they many see through or counter some or all the things you try. Keep that in mind and learn as much about your counter party as possible.

Sometimes people have a hard time bridging the gap between the theory and practice in negotiation. Most books on negotiation are full of tips and tricks that you can use to help you get what you want.But in the heat of battle, people don’t remember them or aren’t sure how to actually employ them. Prior planning is the best way to ensure you are ready to use a particular tactic and sometimes simple little moves can make a difference in getting a deal done. Not every deal needs to be an epic stroke of negotiating genius. Simple moves can pay off with big wins. I’ll use a recent example to illustrate.

We are in the process of adding single family homes to our rental portfolio. Recently we came across a home for sale that looked like it might be a good deal.

Two bedroom, one bath home. One car attached garage. Roughly 1000 square feet. Stone siding, structurally sound but interior was a mess. House was built in 1965 and never updated. House was owned by two sisters that inherited it when their mother passed away. They had been renting it out for the last 5 years but were now ready to be done with landlording and sell the house. The inside was rough.It was going to be pretty much a complete gut job. But the house was in a good neighborhood and as I said, had good bones. It was a nice value add opportunity to buy it, fix it up and keep it as a rental.

The seller was asking $83k and was trying to sell it themselves. They had not hired a realtor. We called and asked to see the house.  During our look around I noticed that the seller was in the process of painting the interior. She said that she knew it needed some work and they were going to start working on fixing it up enough to get it sold. After looking it over, I estimated that the ARV (After Repair Value) of the house was $110-120k and it was going to need about $10k or so worth of work. Even at their asking price it was a deal, but we were going to negotiate for a better price. I’ll tell the story of the negotiation then come back and illustrate the techniques I used to close the deal.

I called the seller and offered her $70k for the house. My wife (and business partner) was a little worried we might offend the seller with such a low offer, but I didn’t want to pay more than $75k and needed give myself room to move if need be. When I made the verbal offer the seller paused for a bit then told me she would have to talk to her sister and would get back to me. So we waited.

She called back the next morning and countered with $75k. There we go, she’s willing to play ball. I told her that I’d talk it over with my wife and get back to her.

I called her back that afternoon and had a script prepared. Here’s specifically what I said. “We’ve talked with our banker about the repairs we’re going to need to make and the most we can offer is $71,800. We’re buying this house as an investment and that’s the best we can do. We’ll take it as is. You can stop painting and any other work you’re doing.” Then I shut up and let her respond. Again she paused for a bit and said she would have to talk with her sister again and get back to us. So we waited.

The next day she called and accepted our offer. We arranged to meet her at the property that evening to sign the purchase agreement and deliver our earnest money. You could visibly see the relief on her face once we signed the papers. You could tell this house was weighing on her.

So what techniques did we use in this negotiation? Did you spot them? I used two specific techniques to bring it to a close and get a great price.

First technique: Invoke a higher power. I made sure we told her that we talked to our banker. In this example, the bank is being used as a higher power figure. It’s not very different from a contract negotiator saying that they’ve talked with their boss and this is the best we can do. Most people are constrained in their major purchases by what a bank is willing to loan them. They determine the house or car they can buy based on what a banker tells them they can borrow. To most people the banker is seen as the ultimate higher authority for major purchases. That’s not really the case for us. We have money we could have put into the deal and I hadn’t actually talked specifics with my banker yet. But I was pretty sure the seller would take the mention of the banker as an indication that we were at a maximum limit and if she didn’t accept she would be starting over looking for a buyer.

Second technique: Use a specific number. We offered $71,800. Not $70k, not $72k but rather, $71,800. In the realm of buying houses this is still a fairly round number, but it was intentionally more specific than the numbers we had been previously discussing. Using a specific number implies that you’ve done a bit of work in figuring out what that number is. Again, it makes the person on the other side of the table think you’ve really done your homework and this is really the best you can possibly do. How did I come up with $71,800? I pulled it out of thin air. I was comfortable going up to $75k if need be, but was also pretty sure we could get it for less. By moving our offer up a little, we made a concession, which helps the seller feel like they are getting something out of us, but then the specific number closes off the discussion. This is it. We’ve done a lot of homework on this and this is the best we can do.

The third thing we did wasn’t really a negotiating technique. It was just part of our offer, but I feel it was a very important part. The seller already knew we were planning to renovate the house, but I made sure to tell her that we will take the house “as is.” You can stop painting. I knew the condition of the house was weighing on her so reiterating that she can stop working on it and walk away was the closer.

Negotiating is about solving problems. If you can figure out what problem the other person needs solved you can usually craft a strategy and employ some techniques to get the deal done. In the heat of the moment it can be hard to remember different tactics, so doing some prior planning will help make sure you are using a variety of tools to get a great deal and get the deal closed.

This was originally posted on my personal blog Rent Money