How do you currently negotiate a real estate deal? Studies have shown that less than 40% of signed real estate agreements consummate with a successful closing. Why so few? Many buyers and sellers are negotiating their real estate deals all wrong. Many assume that if you get the best of the other party and the deal is heavily one sided to your direction, that you have won. That may work with other businesses, but in real estate, the opposite is true. If a deal is too lop-sided, it may never get to closing (which explains why the success rate is less than 40%). To successfully negotiate a real estate transaction, you should create the best outcome for all parties in the deal. Here’s how to do that, step by step:
Step 1: Posture
To successfully negotiate a real estate deal, you must be willing to walk away. Too often, I see investors act like a “dog in heat” when talking to sellers. They are so anxious to make a deal happen that they try to convince the seller to sell their property to the investor. This is a huge mistake. Instead, you want to play the role of the reluctant buyer (or seller if you are selling a property). You want the other party to try to convince you why you should do a deal with them. This is what I call “posture”. You want to have the posture, or position yourself, as the reluctant party in the deal. That way, whether you are buying or selling, the other party is doing the convincing and you are sitting back and doing the evaluating. From the very beginning, you must have the mindset that you don't need the deal to happen and that you can walk away. Don't be a “dog in heat”, have the right “posture” from the onset.
Step 2: Decision Maker
A real estate deal can be very confusing when there are multiple parties involved, such as agents, managers, representatives, siblings or spouses. In order to successfully negotiate a real estate deal, you must have direct communication with the decision maker(s). My philosophy on profitable real estate investing involves connecting directly with property owners, as opposed to having a real estate agent represent you as the buyer (who in turn submits your offer to another real estate agent representing the seller). Too often, real estate transactions are negotiated by agents who aren't the final decision makers. Instead, when buying real estate, I preach the concept of working directly with sellers who are not represented by an agent. When selling, even if an agent is representing the buyer, I still request the buyer's direct contact information.
I can already hear the real estate agents reading this, strongly disagreeing with the idea of having the buyers and sellers communicate directly in a deal. My response to that is that I am an agent myself and have been a part of more than a 1,000 real estate transactions in the past decade and the bottom line is that having people in the middle of a negotiation usually creates miscommunication. If a buyer’s agent is involved in a deal, I will keep the agent up-to-date on what is going on so that the buyer’s agent can advise their client wisely, but I don't want my only communication with the buyer to be through a buyer’s agent. Direct communication with the decision maker(s) is essential.
In addition, make sure you connect with all decision makers, as in the case of a husband-wife situation or an inheritance property that includes several heirs. Not connecting with the decision maker, or all decision makers, is a surefire way to fail at negotiating a real estate deal.
Step 3: Discovery
Ready, aim, fire should be your approach to negotiate a real estate deal. Most people “fire” first and hope for the best. Discovery is all about figuring out the other party's situation so that you both can put together a deal that works for everyone. The main question you want to get the answer to is, “Why”? Why is the person selling? Or why is the person looking to buy your property? Take special notice that I didn't bring up “how much” as the most important piece of discovery. The reason is because why someone wants to do something will tell you far more than how much they want. For example, if you are trying to sell your property and a very low ball offer comes in, if you don't know why that prospective buyer is making an offer on your property, you have no way of knowing how to counter. What if the buyer is an investor trying to steal your property for a song? What if the buyer is making ten offers on homes in your subdivision and is going to move into the best deal they get? Or what if they love your home, want to move in, but simply want to throw out a super low offer to see if you are stupid enough to take it? Discovery is mandatory to negotiate a solid real estate deal.
For real estate investors, one of the biggest mistakes I see made over and over and over again is trying to do deals with unmotivated sellers. The fact is, successful real estate investors target highly motivated sellers, which encompass a very small percentage of the overall selling population. Perhaps 5-10% of all real estate sellers in a given market can be categorized as a motivated seller. It is only through discovery that you can determine if the seller is truly motivated.
Further, you also want to determine all the details of the deal and the seller's situation so that you can determine the other party's options. If the other party is unwilling to share important items, such as how much they owe against the property (which is public record, by the way), this may indicate that you're dealing with an unmotivated seller.
Step 4: Options
Real estate transactions usually take a minimum of 30 days to close, sometimes longer, and involve very large amounts of money. Plus, for many, it is among the biggest decisions they'll make in their lifetime. Therefore, the best way to approach a real estate negotiation is to explore all the options. If you're dealing with a seller, explore the options of the seller renting the property out themselves, or if it doesn't sell in 6 months, what then? The beauty of this approach is that by exploring all options, the seller will be able to make the most informed decision on what to do with their property.
Step 5: Presenting Your Offer
When you have completed the first 4 steps, presenting the offer is usually a matter of simply clarifying the best option that fits for both you and the other party. Most importantly, when you negotiate real estate in this fashion, the seller is part of the creation of the offer terms. And people support the ideas they create. Rather than a straight line price based negotiation, the deal could be structured so that the seller gets the price they wanted but you get the terms you wanted. In order to get to the point of a deal that wins for all parties, you must complete these 5 steps. Otherwise, you're left with less than a 40% success rate of getting the deal to closing.
When you apply this 5 step formula, you will successfully negotiate each real estate deal you do and most importantly, you give yourself the highest probability of getting the transaction to closing.
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