by John V. Gallant
To achieve success in a transaction you must first define what success is to you. As simple as it sounds, there are complex facets. Simply put: you have to know what you want, you have to ask for it, and you have to show the value you bring to the table.
There is always the temptation to make your goal a moving target, but you can avoid the temptation to “go for that little bit extra” if you initially set clearly defined goals.
Too often, people work from the position that everything is a zero-sum game, meaning that one person has to lose for another to win. In my opinion, nothing could be further from the truth. A good price point is reached when the buyer and seller are equally happy (or equally unhappy). Obviously it would be best to have both parties equally happy. My grandmother’s real estate playbook included the phrase, “Take a little; leave a little.”
On a few occasions, a good friend of mine who owns Newmeyer Mortgage has said to me, “John, it’s not the problems in real estate, it’s the people.”
And although Mr. Newmeyer was speaking about issues he has experienced concerning residential property transactions, the same holds true for business transactions. Be the buyer or seller you would want to see across the table! Hard-nosed, crude, and abrasive may work for an entertaining television or movie personality, but in a real-world situation it falls well short of its intended purpose. Deals often fall apart due to personal conflicts. Stay focused on what you want out of the transaction, not on how the other parties in the transaction are acting. After the deal is done, it doesn’t matter whether the other guy liked the wrong football team.
Extraordinary Popular Delusions and The Madness of Crowds – Charles MacKay
The above-mentioned book is one of the best I have read detailing the pitfalls of human nature, what we place “value” in, and irrational behavior. There is a cycle pertaining to assets comprised of hope, fear, and greed. Although these feelings are sometimes unavoidable, they are never helpful in a transaction, and if not kept in check, they can be disastrous to a potentially positive transaction.
Pay particular attention to where you get your information. Years ago I was involved in purchasing 10 lots in Cape Coral, FL for a German investor. We purchased the lots for an average price of $35K each. We sold 9 of the lots at prices over $200k each. A “friend” of the investor convinced him to hold out on the last lot in 2006. He still owns it, and the value has been substantially reduced.
Keep an open and friendly tone; should you take a hard line stance at the onset, the other side will follow suit. Following an offer and acceptance, is often a period of due diligence and inspection. If the initial negotiation was intense, and the other party feels slighted, you can bet that any issue that surfaces during this inspection period will turn ugly.
Listen, and then speak. But actively listen first! Understand the needs of the person sitting across the table. This is particularly important to a seller. Showing a potential buyer how what you are offering meets their needs is adding value, as well as solidifying a deal. There are no skills more special and more effective for negotiations than listening, understanding, and addressing the needs of the other party.
Obviously the asset has value, or there wouldn’t be two people sitting at a negotiating table. Both parties should be negotiating in good faith, to reach a meeting of the minds. Rotary International has a great set of guidelines, illustrated in their four-way test of the things they think, say, or do. You don’t have to be a Rotarian to use it.
The Four-Way Test.
- Is it the truth?
- Is it fair to all concerned?
- Will it build goodwill and better friendships?
- Will it be beneficial to all concerned?
Make a strong offer. Don’t believe the hype about starting low to “see if they will bite”. A strong offer closer to the ask is more likely to be accepted for a myriad of reasons, but the most important was imparted to me by a good friend. When you have a strong offer, and the seller is considering touching anything but the signature line, a good agent will make sure that the seller understands that a counter offer is just that, an offer. Acceptance makes it a binding contract. I consider a strong offer to be within 3-5% of the asking price. If I feel the asking price is too far above marketable value, I will usually advise a buyer to walk away.
Never forget that walking away from the negotiating table is an option. No one ever went broke walking away from a bad deal, but the list of people who tried to make a bad deal work and ended up broke is constantly getting longer. Always be prepared to walk away.
Finally, using an agent or broker to handle negotiation adds a considerable amount of benefit. It adds a layer of insulation for both parties, and keeps the majority of interaction between buyer and seller on a professional level. Choose your brokerage, and your agent carefully.