Real estate deal negotiation: a how-to guide
31. July 2019 | Drooms Global
Engaging in real estate deal-making can be somewhat exhilarating. That being said, there are many pieces to the puzzle, especially during the negotiation phase, where adequate preparation is critical to success.
In order to manage the negotiation process well, acknowledging and understanding the simple truth that buyers ‘always want to buy cheap’ and sellers, ‘to sell high’ is important. This doesn’t mean that there always needs to be a winner and a loser but rather that collaboration and compromise are required from both parties involved. While it’s possible to steer the negotiation process in one’s favour, a successful negotiator’s primary objective is to secure a good deal without bleeding the other party dry, especially if they plan to work with them again.
There are three key aspects to effectively negotiating a real estate deal. You will need to:
- Prepare for the negotiations
- Strategise effectively
- Close strong and in a timely manner
In this short guide we’ll examine all three, providing tips that’ll help during the discussions. This guide will mainly focus on the sell-side, but buyers may also find it valuable.
How to prepare for negotiations
It’s not unheard of for real estate deals to fall through before negotiations even kick-off. Adequate groundwork and research will strengthen your position and increase the chances of success.
So what does good preparation look like?
Set your goals
You should be clear on your goals before entering a negotiation, so you’re not left scrambling for your position as the talks progress. It may seem obvious but surprisingly, the majority of people don’t think about what they actually want to walk away with. What’s your bottom line and the lowest offer acceptable if you’re the seller? How much would you be willing to pay if you’re the buyer?
It’s also imperative to think beyond the price point. What other deal terms are important to you which might, incidentally, make you accept a lower offer? The buyer may waive less-essential contingencies or agree to a faster closing for example.
Have your documentation ready
The buyer will have lots of questions which as a seller you will be expected to provide answers to, pronto. Having information at the ready and quickly accessible during the negotiation phase is important as it adds legitimacy, enables you to better defend your position and convinces the other side that your position is the right one. This can be extremely difficult to achieve using verbal reasoning alone. Setting up a virtual data room in parallel, with an effective Q&A, allows for continued discussions in real-time. The faster you can answer queries, the more impressed the buyer will be – building trust and leading to better outcomes for you.
The best way to start negotiating real estate deals
What key strategies are implemented by top negotiators to ensure a fruitful outcome? What aspects need to be considered?
Understand the buyer’s story
Successful negotiation requires you to pay attention to what the buyer is looking for, and from, the deal. Taking the time to listen right from the offset will reveal a lot more than discussing your needs. The dialogue makes it easier for you to get what you want and reach an agreement.
Instead of simply noting your own preferences, focus on asking questions and getting to the bottom of why their interested and what their motivations are. It’s always favourable to have them make the first offer. This helps you understand where they are coming from, how to value your real estate and whether your starting positions are too far away.
Take advantage of the principles of persuasion
There are six principles of persuasion worth applying when negotiating a real estate deal. These include notions of:
- Reciprocity – where you give something to the buyer, so they feel more obliged to give you something in turn
- Scarcity – where you point out what is unique about your proposition to make it more appealing
- Authority – where you show expertise and share knowledge to demonstrate credibility
- Consistency – where you focus on being reliable to establish loyalty
- Liking – where you mirror the buyer in their style and find areas of similarity to build rapport
- Consensus – where you point to your reputation as a good seller and to what others are already doing
Be clear on your timeline
As a seller, you want to set a clear timeline to avoid discussions dragging on in favour of the buyer.
Start the negotiations with a concrete schedule and remind the buyer of it when required. A sense of slight urgency can give you leverage because it shows you understand the value of your asset and are prepared to move on to the next buyer if not enough interest is shown.
How to close the negotiations
Towards the end of the process don’t be shy to:
Use the power of ‘no’
‘No’ can seem like a dirty word but it’s actually one of the most transformative words in the negotiating toolbox. You may not have a choice if there comes a time when you’re not getting what you want out of the deal. It’s important to identify when you’re at an impasse and move on. Sometimes you do just have to cut your losses and walk. Time, after all, is money.
It’s worth stressing however that ‘no’ doesn’t always imply the deal is off the table. In fact, sometimes becoming more assertive can help the buyer understand their need to change tactics and fastens the pace at which both parties reach an agreement.
Make the buyer feel in control
No one enjoys feeling as if things are out of their control. Studies have shown that we are actually more likely to say ‘yes’ to things if we think we’re doing it out of free will. Making the buyer feel as if saying ‘yes’ is their idea can further facilitate talks.
Get things on paper quickly
There are instances were parties have come to an agreement but because nothing was put on paper, the deal fell through. Real estate deals are often time-consuming and costly so creating binding agreements as soon as possible to protect your interests is advised.
While you should always negotiate in person at least for the most part, it’s important to create a document trail. VDR’s, given their range of functionalities, are often used to allow both the buy and sell-side to view and manage documentation efficiently.