Price negotiation and the art of reciprocity
Price negotiation is a skill that will come into play at multiple points within any real estate transaction, and I would argue is one of the most important skills a successful real estate investor should develop. A skilled negotiator will pick up a property for less than the asking price, will get the property rehabbed for less than originally estimated, and will likely get more during the sale than the buyer initially offers. When you multiply that across a large number of properties, it’s not difficult to see how a skilled negotiator will make considerably more money over the long run than an investor who avoids negotiations. In the grand scheme of things, an investor cannot be successful if they’re unwilling to hone their negotiation skills.
That being said, the art of price negotiation can often come with a few misconceptions, primarily the stigma of a negotiator being a “salesman.” Just to clarify, the art of successful price negotiation has nothing to do with taking advantage of someone else; it’s centered on an individual’s ability to ensure that a mutually beneficial agreement is reached. The best negotiators are those who are able to walk away from any deal with both parties being satisfied. If your negotiation tactics are built on the idea of a “win/lose” strategy, then you’re likely taking the wrong approach. At the very least, you’re hurting yourself in the long run.
Think about it, if you think there’s an obvious winner and loser in a negotiation, and you aim to win every deal, you’ll quickly find yourself with a long list of people who are either unwilling to negotiate with you in the future, or worst case, not willing to work with you at all. This is a horrible approach to business.
How to negotiate successfully
To be successful, you want a list of people who will go out of their way to work with you. This doesn’t mean you make people think they’re winning, but means you close deals with everyone winning in some way.
Sound impossible? It’s not.
One of the most effective negotiation tactics deals with the art of reciprocity, or the age-old approach of “You scratch my back, I’ll scratch yours.” This is not to say that a successful investor engages in any nefarious or questionable business deals, but actually means they’re great listeners in-tune with the needs of others. I’m not saying you offer to close a deal at any cost, but simply recognize the power of situational awareness.
Leverage professional relationships
While every entrepreneur is interested in making money, the ways they make money will often vary depending on their niche. Many real estate investors will recommend other investors avoid using a Realtor because commission can cut into profit margins. While this is true in the most basic sense, it also leaves a lot of missed opportunities (it’s not difficult to understand the benefits of using an experienced Realtor®). Using an agent can often be the difference between selling a house in 1 week versus 12 weeks.
But that cost more money!
Sure, you may have lost some profit due to commission, but what is 11 weeks worth to you? This answer will be different depending on where you are in your own investing, but I know a number of investors who would gladly pay a commission if it meant turning a property in a fraction of the time. I also know a number of Realtors willing to work out long-term partnerships that are mutually beneficial for themselves and investors if it means they’ll get 20 listings a year. This is where it situational awareness comes into play. Many real estate agents and investors will make more money if they find a way to increase volume rather than operating under preconceived notions of traditional professional relationships. This can be applicable to a number of other services as well.
You’d be surprised what kinds of deals you can get if you work with vendors who value volume. If a painter charges $2,000 per house, they might be willing to charge less if you plan on using them for your next 5 flips, or you’re willing to advertise their services in a newsletter or on your website. Some might even be willing to work out a referral program.
How does reciprocity apply to private homeowners?
The scenarios so far have been focused on professional services, but how can this apply working with an individual?
Simple: find out the pain point of the other party.
What’s the situation? Are you trying to buy a property at a discount? Why?
The last question may be easy enough to answer (because the less I spend, the more I make), but it can also provide insight into the appropriate bargaining tactic that will get the deal closed. Obviously, you want to buy the property for as little as possible, but if you take a minute to evaluate each property independently, you’ll likely find an answer that will help you during the negotiation.
Ever bought a property that would require a considerable amount of time cleaning before you can begin the rehab? That’s going to cost time and money, and is a perfectly acceptable reason to make a discounted offer. The key to successful price negotiation here is to gauge the impact this problem will have on the seller. If they are unable to clean the property themselves, then it’s likely a pretty strong selling point in your favor.
How is that reciprocity?
Reciprocity works here because they have a problem that they don’e have the means to solve. The key is determining the threshold for what they’re willing to reduce the cost compared to the expense you’ll incur. My main recommendation here is to not get greedy. Don’t over-emphasize your personal cost. Be honest and try to work out a deal that’s fair for everyone.
Is there another service you can offer that would be helpful to the seller? What about helping them move out, or connecting them with a contact with an available rental property or storage facility? This is an opportunity to cultivate that network you’ve been building with local service providers. It’s one of the main reasons I place so much emphasis of developing a strong network in my primary markets. Once again: reciprocity.
Hopefully you’ve cultivated enough positive relationships that you have a bank of professionals who are willing to do small favors. Always remember, reciprocity is a long-term strategy, and quite possibly one of the most lucrative and fluid business strategies around.