As a real estate investor and reformed realtor since 1986, I have found the “key ingredient” to a successful deal is how you conduct yourself during the negotiations. It is the make or break part of this business that you as an investor must master quickly if you want to complete even one discounted foreclosure purchase. I’ve summarized my negotiation strategies into five essential principles that will get you the results you seek.
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You are always better off if you can get the other side to commit to a position first. Several reasons about this are obvious:
- Their first offer may be much better than you expected.
- It gives you information about them before you have to tell them anything.
It enables you to set their proposal. If they state a price first, you can state a lower price that works so if you end up splitting the difference, you’ll get what you want. If they can get you to commit first, they can then set your proposal. Then if you end up splitting the difference, they get what they wanted.
The less you know about the other side or the proposition that you’re negotiating, the more important the principle of not going first becomes. If by chance both sides have learned that they shouldn’t go first, you can’t sit there forever with both sides refusing to put a number on the table. But as a rule you should always find out what the other side wants to do first.
Remember this: smart is dumb and dumb is smart. When you are negotiating, you’re better off acting as if you know less than everybody else does, not more. The dumber you act, the better off you are (unless your apparent I.Q. sinks to a point where you lack any credibility).
There is a good reason for this. With a few rare exceptions, human beings tend to help people that they see as less intelligent or informed, rather than taking advantage of them. Of course there are a few ruthless people out there who will try to take advantage of weak people, but most people want to compete with people they see as brighter and help people they see as less bright. The reason for acting dumb? It diffuses the competitive spirit of the other side.
How can you fight with someone who is asking you to help them negotiate with you? How can you carry on any type of competitive banter with a person who says, “I don’t know, what do you think?”
Most people, when faced with this situation, feel sorry for the other person and go out of their way to help him or her. Do you remember the TV show Columbo? Peter Falk played a detective who walked around in an old raincoat and a mental fog, chewing on an old cigar butt. He constantly wore an expression that suggested he had just misplaced something and couldn’t remember what it was, let alone where he had left it. In fact, his success was directly attributable to how smart he was – by acting dumb. His demeanor was so disarming that the murderers came close to wanting him to solve his cases because he appeared to be so helpless.
The negotiators who let their egos control them and come across as sharp and sophisticated commit to several things that work against them in a negotiation. These include being the following:
- Someone who would not have to check with anyone else before going ahead.
- Someone who doesn’t have to consult with experts before committing.
- Someone who would never stoop to pleading for a concession.
- Someone who would never be overridden by a supervisor.
- Someone who doesn’t have to keep extensive notes about the progress of the negotiation and refer to them frequently.
When you understand the importance of acting dumb, you retain these options:
- Requesting time to think it over so that he or she can thoroughly think through the dangers of accepting or the opportunities that making additional demands might bring.
- Deferring a decision while he or she checks with a committee or board of directors.
- Asking for time to let legal or technical experts review the proposal.
- Pleading for additional concessions.
- Using Good Guy/Bad Guy to put pressure on the other side without confrontation.
- Taking time to think under the guise of reviewing notes about the negotiation.
I act dumb by asking for the definitions of words. If the other side says to me, “Alexis, there are some ambiguities in this contract,” I respond with “Do you mind going over those figures one more time? I know you’ve done it a couple of times already, but for some reason, I’m not getting it. Do you mind?”
This makes them think, and I lay to rest the competitive spirit that could have made a compromise very difficult for me to accomplish. Now the other side stops fighting me and starts trying to help me.
Be careful that you’re not acting dumb in your area of expertise. Win-win negotiating depends on the willingness of each side to be truly empathetic to the other side’s position. That’s not going to happen if both sides continue to compete with each other. Power negotiators know that acting dumb diffuses that competitive spirit and opens the door to win-win solutions.
3. Talk Funny Money, but Think in Real Money Terms
There are all kinds of ways to describe the price of something. If you went to the Boeing Aircraft Company and asked them what it costs to fly a 747 coast to coast, they wouldn’t tell you “Fifty-two thousand dollars.” They would tell you eleven cents per passenger mile. Salespeople call that breaking it down to the ridiculous. Haven’t we all had a real estate salesperson say to us: “Do you realize you’re talking 35¢ a day here? You’re not going to let 35¢ a day stand between you and your dream home are you?” It probably didn’t occur to you that 35¢ a day over the 30-year life of a real estate mortgage is more than $7,000.
When your contractor tells you about a small increase on an item, it may not seem important enough to worry about until you start thinking of how many of those items you buy during a year. Then you find that there’s enough money sitting on the table to make it well worth your time to re-negotiate price. Do not fall prey to common “funny money” tactics. Here’s an example:
- Interest rates expressed as a percentage rather than a dollar amount.
- The amount of the monthly payments being emphasized rather than the true cost of the item.
- Cost per brick, tile, or square foot rather than the total cost of materials.
- An hourly increase in pay per person rather than the annual cost of the increase to the company.
- Insurance premiums as a monthly amount rather than an annual cost.
We all know that if you don’t have to pull real money out of your pocket, you’re inclined to spend more. It’s why casinos the world over have you convert your real money to gaming chips. It’s why restaurants are happy to let you use a credit card although they have to pay a percentage to the credit card company.
So when you’re negotiating, break the investment down to the ridiculous because it does sound like less money, but learn to think in real money terms. Don’t let people use the Funny Money Gambit on you.
You should always concentrate on the issues and not be distracted by the actions of the other negotiators. You must learn to concentrate on the deal, not on the other person. When you’re negotiating, the deal is the movement of the goal concessions across the negotiating table. It’s the only thing that affects the outcome of the game; but it’s so easy to be thrown off by what the other people are doing, isn’t it?
I remember helping a student buy a property owned free and clear by a family which had inherited it, for far below the $400,000 original asking price. A real estate agent had brought it to his attention, so he was obligated to let him present the first offer. I recommended he reserve the right to go back and negotiate directly with the sellers and pay him a reduced commission if he wasn’t able to get my $200,000 offer accepted.
The last thing in the world that agent wanted to do was present that offer $200,000 below the asking price – but finally we convinced him to try it and off he went to present the offer. By doing that, he made a tactical error. He shouldn’t have gone to them; he should have had them come to him.
You always have more control when you’re negotiating in your power base as opposed to going to their power base.
The agent called back and we asked him how it went. He said, “It was awful, just awful. I’m so embarrassed. All of the owners had come in for the reading of the offer. They brought their attorney, their CPA, and their real estate broker. I was planning to do the silent close on them.” (Which is to read the offer and then be quiet. The next person who talks loses in the negotiations.) “The problem was, there wasn’t any silence. I got down to the $200,000 price and they said, ‘Wait a minute. You’re coming in $200,000 low? We’re insulted.’ Then they all got up and stormed out of the room.”
We asked, “Nothing else happened?” He said, “Well, a couple of the owners stopped in the doorway on their way out, and they said: ‘We’re not gonna come down to a penny less than $300,000.’ It was just awful. Please don’t ever ask me to present an offer that low again.”
We said, “Wait a minute. You mean to tell me that, in five minutes, you got them to come down $100,000, and you feel bad about the way the negotiations went?”
See how easy it is to be thrown off by what the other people are doing, rather than concentrating on the issues in a negotiation? It’s inconceivable that a professional negotiator would walk out of negotiations because he doesn’t think the other people are fair. He may walk out, but it’s a specific negotiating tactic, not because he’s upset.
When you are negotiating, you don’t lose control. You concentrate on the issues, not on the personalities. You should always be thinking, “Where are we now, compared to where we were an hour ago or yesterday or last week?” It’s okay to get upset when you’re negotiating, as long as you’re in control, and you’re doing it as a specific negotiating tactic. It’s when you’re upset and out of control that you always lose.
5. Congratulate the Other Side
When you’re through negotiating, you should always congratulate the other side. However poorly you think the other person may have done in the negotiations, congratulate them. Say, “Wow – did you do a fantastic job negotiating. You were brilliant.” You want the other person to feel that he or she won in the negotiations.
However harmless it may seem, be sensitive to how you’re reacting to the deal. Never gloat and always congratulate. Some people may take exception to the idea of always congratulating, saying that it was manipulative to congratulate the other side when you didn’t really think that they had won. I disagree. I look upon it as the ultimate in courtesy for the conqueror to congratulate the vanquished.
Successful negotiators always want the other parties thinking that they won in the negotiations. It starts by asking for more than you expect to get. It continues through all of the other strategies that are designed to service the perception that they’re winning. It ends with congratulating the other side.
If you let these five principles guide your conduct when you’re negotiating, they will serve you well and help you become a successful foreclosure negotiator.
