One of your primary tasks as a real estate professional is to advocate for your customers' best interests.
In this post, we'll get down and dirty with one of the most useful skills you can learn to help you at the bargaining table: negotiating.
Let's take a look at six real estate negotiation strategies that will help you close more favorable deals.
#1 Determine What You Want To Gain From The Transaction
Before you enter any negotiation situation, you must first decide what you hope to gain from it. To put it another way, you must define what winning means to you and your client.
Winning isn't always about money (but it frequently is?). Depending on the deal, it could be a variety of things.
Do you, for example, represent a seller who needs to sell his or her home quickly due to a job relocation, divorce, or other life-changing circumstances?
If this is the case, collecting top dollar for the home isn't the seller's top concern. In this scenario, winning means selling the house as soon as possible. So, in order to win, you must price the home to sell from the start.
Are your clients selling because they want to move up to a finer, larger, and more expensive home? Then gaining top dollar is the primary goal. In this instance, it would be prudent to establish a bottom dollar figure and stick to it under any circumstances.
Why Does This Real Estate Negotiating Strategy Work?
You'll have a better notion of what kind of compromises you can make and where you can't afford to be flexible once you've defined what you want to gain out of the agreement.
Drawbacks:
None.
#2 Incorporate An Escalation Clause Into Your Offering
An escalation is a condition added to a standard buyer's offer with the primary goal of defeating competing offers. It accomplishes this by automatically boosting the buyer's bid by a predetermined amount up to a specified limit.
Let's look at an example to see what I mean.
Mike is one of your clients. He fell in love with a house you showed him and wants to make a $200,000 offer. As his real estate agent, you know the house is lovely, it's in a great location, and Mike won't be the only one making an offer.
As a knowledgeable real estate agent, you explain what an escalation clause is and how it might assist Mike in securing the house. Mike is pleased with what he hears and decides to include it in his buyer's bid.
If the house seller receives a higher competing offer than Mike's, Mike will automatically reply in $2,000 increments over the opposing offer, up to a maximum of $230,000.
That means that if the home seller receives no other offers, Mike's offer will remain at $200,000. However, if another buyer, Ben, makes an offer of $210,000, Mike's offer will immediately counter at $212,000.
If Ben or another buyer made an offer of $230,000, Mike would no longer increase his price.
Why Does This Real Estate Negotiating Strategy Work?
Buyers can use this strategy to bid a price range rather than a single sum. This ensures that no other purchasers will outbid them within their price range.
Drawbacks:
An escalation clause adds a layer of complication that can be perplexing for house sellers. Furthermore, drafting an enforceable escalation clause may necessitate the assistance of a real estate attorney.
By including an escalation clause, the buyer quickly displays his or her purchasing limit. This may prompt the seller to exploit that information by quickly countering at or above the buyer's purchase ceiling?
#3 Based On Market Data, Make A Conditional Offer
Assume you are representing Charles and Darcy, a couple who fell in love with a three-bedroom property listed for $500,000. You conduct your research and determine that the house is worth roughly $430,000.
You advise the couple to make an offer at the $430,000 market value. Despite the fact that you supplied excellent market information to back up your offer, the sellers refuse to lower their pricing. "Our house is worth $500,000." "Take it or leave it," the sellers say.
"Wow. "These people are insane!" exclaims Darcy. "It's exactly what we were looking for." But we're not going to spend half a million dollars for it!"
Darcy is completely correct. It goes without saying that only someone with more money than common sense would pay that much for it. However, you were not born yesterday. You already know that these sellers are acting on emotion rather than rationality.
Perhaps the sellers purchased their home during a market peak. Perhaps they were duped into spending a fortune on improvements because a TV show promised them that it would considerably increase the value of their home.
Perhaps they raised their family in that home, and their warm memories of the location have blinded them to the home's true market value.
Whatever their motivation, your experience as a real estate agent tells you that time — and mounting monthly expenditures — has a way of bringing sellers back to earth.
As a result, you persuade your purchasers to make a conditional offer.
You contact the proprietors and inform them, "You're requesting $500,000." But I doubt you'll receive anything more than $445,000. If you don't get a better offer than mine within 60 days, we'll close at $445,000. "Does that sound like a good deal?"
If the seller accepts the conditional offer, you write it up and deliver it to them.
Why Does This Real Estate Negotiating Strategy Work?
Time and costs have a way of pulling "reality-challenged" salespeople back down to Earth. The longer the house sits unsold, the more probable the sellers will reduce the price.
By including a conditional clause in your offer, you ensure that you'll be the first to make a bid when the sellers are ready to face reality.
Drawbacks:
Some sellers are not interested in selling and are merely listing to see what kind of offer they will receive. Even if you present all of the proof in the world, they will not move from their original price.
Selling a house is an extremely emotional experience. Some merchants may refuse to sell to you out of spite or to avoid having to say, "I told you so."
#4 Make An Offer At The Market Value Of The Home
Instead of the usual back and forth between the buyer making a low offer, the seller counter-offering, the buyer making a counter-counter-offer, and so on...
...why not simply get to the point?
Perform a similar property analysis to determine the home's market worth. Take that sum and make it your first offer.
Why Does This Real Estate Negotiating Strategy Work?
First and foremost, before making ANY offer on a house, you should understand how much the market is ready to pay for it. This data can assist you in convincing your buyer to make a more educated and competitive offer.
If the seller has a qualified real estate agent, the agent's initial step would be to determine the home's value using comparable property analysis. The agent would then advise pricing the home a specific percentage more (usually 12-17% higher).
So, by bidding at the home's market value, you'll make a solid bid that demonstrates you're not wasting your time and that you KNOW how much the home is worth. This would deter the seller from making aggressive counter-offers for fear of scaring off a prospective buyer.
Drawbacks:
In a hot market with many purchasers, an offer at market value is likely to be outbid by others.
In a cold market, on the other hand, a buyer in a haste to sell may be willing to accept an offer below market value. While this would result in an offer that is extremely likely to be accepted, it would also result in lost savings.
#5 Use Anchoring To Determine The Buyer's Bottom Line
Playing games is sometimes the best tactic.
But be warned: this method is not for the faint of heart or the frail of skin. It takes advantage of a powerful cognitive bias known as "anchoring," and if you don't utilize it carefully, you risk offending or even insulting the other party.
Check out Wireless Philosophy's video for an excellent explanation of anchoring.
To begin, investigate the home's true market value before making a very lowball offer (20-35% below market value). Then relax and await the seller's reaction.
You'll most likely get a comment along the lines of "You are the most unprofessional, disrespectful real estate agent I've ever met!" My client will NEVER settle for less than $XXX, XXX! Make a genuine offer or get out!"
When you receive this response, you will know that the seller's bottom line is close to the amount they offered you. You can accept the amount the seller gave you, apologize for your "rudeness," and make a counter-bid that falls somewhere between your initial bid and the amount the seller gave you.
Why Does This Real Estate Negotiating Strategy Work?
The main purpose of this strategy isn't to acquire an accepted bid right away (though if you do, you'll become your buyer's idol for life). Instead, this strategy accomplishes three goals:
It displays the bottom line of the opposing side.
It makes use of the power of anchoring. People have a tendency to make future decisions based on an initial piece of information (such as your lowball offer). As a result, any subsequent counter-offers, debates, and estimates will be based on the anchor YOU provide.
Any "concession" you make when countering over your anchor price will appear FAR fairer. This allows you to negotiate a final price that is considerably closer to the bottom line of the opposing party.
Drawbacks:
An expert real estate agent would recognize this strategy and may simply counter at the original price.
Your lowball offer risks insulting the buyer (or an inexperienced rookie real estate agent) and stopping the discussions.
#6 Determine Why The Other Side Wishes To Sell
When you know what motivates the other side to sell, it's like peeking at their cards in real estate talks. However, unlike poker, this is not cheating. It's for research purposes.
Of course, you can (and should) inquire as to why the seller's real estate agent is selling the home. Although the agent will almost certainly offer you a reason, it will almost certainly be a sanitized one designed to placate buyers. But if you really want to know why they're selling the house, you might have to delve a little deeper.
The best time to find out is during the open house for that property. If the proprietors are present, you will have an excellent opportunity to obtain such information.
It takes some skill to ask them. Don't just walk up to the purchasers and start asking questions like you're the Terminator. Instead, take advantage of the open house first. Take a tour of the house and make a list of actually commendable features.
After that, you can approach the sellers and start a dialogue. You don't even have to start a real estate conversation. Simply strike up a conversation and create some rapport.
Once you've started a conversation, bring up the subject lightly. Ask open-ended inquiries about their home, such as how long they've lived there, what prompted them to sell, and where they're relocating to. You'd be shocked how much information the merchant will provide outright if the conversation is pleasant enough.
Why Does This Real Estate Negotiating Strategy Work?
Knowing why the homeowners want to sell might provide valuable insight into what they hope to gain from the transaction (as demonstrated in approach 1).
It can inform you whether they need to move out immediately if they already have a place to live and much more.
You can then utilize that information to your advantage to negotiate the best possible offer for your customer.
Drawbacks:
None! Isn't it true that knowledge is power?
Conclusion
While your marketing and data analysis skills will offer you prospects, they are insufficient for a successful real estate profession. Your real estate negotiation abilities will be the ones that finally clinch deals and pay your expenses.
Don't be discouraged if some of these approaches take you out of your comfort zone. Any time spent honing your real estate negotiation abilities will be well spent and will more than pay for itself in the long run.