Let’s Compromise…The Art of Negotiation
The following post was written by Dan Stiebel, CCIM of CBC Schmidt in Traverse City, MI
I’ve always enjoyed a good debate, conversation, or negotiation. I started honing my negotiation skills at a very young age, thanks to my mother. She would offer me a cookie and I would counter-offer by asking if I could have four or five. She would say “Why don’t you start with one or two?” In my mind I just got her to double her initial offer! I would often end up with three cookies in exchange for being a happy child, and a promise to eat my dinner. A 300% increase from the initial offer and more than enough to satisfy my desire.
Now, I find myself negotiating in so many aspects of my real estate career. It is not just the price of a property for my client nor the time frame it will take to close—the negotiations include: listing agreements, lease terms, contingencies, repairs, inspections, personal property, tax prorations, build-out costs, rent commencement dates, asking price, personal guarantees, and cost-sharing, just to name a few. Over the years, I have learned many traits of a good negotiator and skills to help my clients reach their goals.
Here are 8 tactics that will help lead to a successful outcome:
• Know their motivation. Find out what is important to the parties involved. If one party is trying to close by the end of the year for tax reasons, or close quickly to purchase another property that is available, timing may be more important to them than the price. Knowing what motivates each party will help you craft a solution that makes both parties happy with the outcome.
• Do not focus on one issue. It is not always about both parties agreeing on each issue. If you are able to give one party the terms that are most important to them, they are more likely to concede on issues that are less important to them. By negotiating multiple areas of a deal at one time, each party can feel they got what they needed to move forward. Consider a landlord that wants their building occupied at market rent. If that is their motivation, they may be willing to offer concessions to a tenant who wants the space built out to their needs and do not want to pay rent until they are ready to open for business. As long as the Landlord has a tenant paying full rent at some point in the future, they may be willing to concede on the short-term expenses to get the space ready for occupancy. By giving each party what they want you can create a win-win situation.
• Leave room to move. Don’t start with your final offer and hold firm. People like to feel they are being listened to and showing movement from your initial terms demonstrates you are hearing the other party’s needs. The initial offer should be less than you are willing to offer so there is room to compromise. Most people like to reciprocate, so when you concede on one term, the other party is more likely to concede on another term.
• Be first to make an offer. There are many debates about whether it is best to let the other party make the first offer, but I have found that whoever makes the first offer tends to get closer to their desired terms. Research has shown the initial offer has an anchoring effect and influences the other party’s response enough that the initial offeror tends to end up closer to where they want to be than the other party. The offer must be in a reasonable range, but it can be at the high end or low end depending on whether you are a buyer or seller. By setting the target, negotiations tend to center around this number.
• The Flinch Test. One of my favorite ways of determining a party’s motivation was explained to me by John Welsh, who was my first mentor in commercial real estate. It cannot be done by email or text and is best done in person, although it will work on the phone or zoom as well. You state the terms you are looking for to the other party and read their reaction. If they seem tolerant of what you say, you know you are close to what they would accept. If they have an adverse reaction (or flinch), you know you are too far off the mark. The flinch test is a great way to see if your starting point is in line with expectations.
• Have alternatives. In order to be successful in the negotiations, you must be willing to walk away from a deal. The best way to do this is to have other options. There may be something you really want, but there is a price that is too dear, and another property you will be happy with if the price were different. Keep the alternative in mind, so you do not concede to terms that are not beneficial.
• Be firm. A Harvard study from 2017 showed that being warm and caring was appreciated by others but tended to lag in the economic outcomes. A firm communication style achieved more favorable counter-offers. By stating “If you’re willing to do this…. we have a deal” ended up 8% closer to their offer price than the group that said, “I would really love it if you would be willing to do this.”
• Become an expert. People are more likely to say yes to experts with authority and knowledge in their field. By knowing the market in which you are operating, you can become the trusted advisor and recommend responses based on what the most likely outcomes will be. By knowing the market, you can craft the terms within an acceptable range that are most advantageous to your situation.