Preparing For Negotiations

Posted by urbandigs

Mon May 24th, 2010 11:01 AM

A: I just want to give a plug to Ana Maria's blog The Apple Peeled, for becoming a great place to read unbiased and intelligent discussions on the NYC real estate market. Ana has been a contributing writer here on UrbanDigs for a while now, but also maintains her own blog with many more of her thought provoking pieces on the markets. A few months ago she dug into the 'discipline' associated with buy side negotiations. Having been through many situations like this, I wanted to revisit the topic here.

Originally Published March 30th, 2010

From The Apple Peeled, "Maximize your negotiations efforts: what does “discipline” look like?":

How will you know when you’ve achieved your goal if you don’t define it beforehand? What is your goal price and how different is it than the highest price you are willing to pay as a buyer (or the lowest price you are willing to accept as a seller)?

Know this absolute highest price you are willing to pay before you place your offer and enter negotiations. This will give you the power to present your best and final offer with the conviction you need. It will also provide you with the clarity of walking away if necessary and prevent the emotional attachment that often ensues even with the most skilled of negotiators.
The first thing I do before discussing negotiating strategy with a client, is to conduct an analysis on the target property and see how its priced and where it might trade in today's market. You can read this for more on how I Value Manhattan Residential Real Estate.

Now that you have a Fair Market Value range for the target property and where it is likely to trade in today's market (usually spanning 3% or so), you need to see how this compares with both your budget and comfort zone regarding the price you may have to pay to get the desired feature set of the unit. At this point in the buying process you should be a mini-expert on your price point and fully understand what features you should be getting for your desired budget.

How you bid should largely depend on the changing market conditions and the two prices that you have in mind for this property (similar to Ana's goal price and willing price discussed in her article):

1) The HOPE Price - this is the price that you would hope to get the property for
2) The GO TO Price - this is the price that you are willing to go to in order to get the deal done

Since the GO TO price is basically your top offer that you are willing to go to get the deal done, you should plan a 'worst case' scenario out in your head prior to getting to that level.

As the buyer attempts to get the lowest price possible and the seller tries to get the highest price possible, you will probably enter into a negotiation consisting of multiple moves - we call it 'the dance' in the field. How long the buyer and seller tends to dance before reaching a meeting of the minds depends largely on the quality of the buyer, terms of the deal, motivation of the seller, and demand for the property that only the seller and seller broker are privy too; i.e., other offers already submitted or expected to come in.

Because of this, I tend to advise my clients to leave about 0.5% - 1% of the purchase price as a safety net should we have to play tough later on. Generally, you have to play tough when the negotiation loses momentum and it has become clear that the seller has a pre-determined number in their head that happens to be above the highest offer you are willing to submit to get a deal done.

HOW TO PLAY TOUGH - When dealing with a bully seller, or a seller that has a firm number in their head which happens to be above where the comps justify or your willing to go to get the deal done, you have to fight strength with strength. Its the only way. In this situation, the seller needs to two things to happen to persuade them that it might be silly not to take a quality offer that is so close, yet below, that number in their head: a risk of losing the deal + the passage of time. Therefore, knowing that we have that 0.5% - 1% of the purchase price in room left to raise your offer, I would advise the buyer to formally WITHDRAW the offer; usually explained up front via a 24-48 hour deadline to accept our latest bid a day or two prior. Then you wait a week or two before making a casual call to the seller broker to see if the seller has received any higher offers; call, don't email the broker and talk this part out. If no deal has been signed yet, send in the new final offer consisting of your 'go to' price and say this is a last effort out of good faith to get the deal done - usually the strategy works either when you scare the seller and remove the offer or later on when you try one last time. If it fails, then at least you know you have a seller that is simply not ready to do a deal at your price.

Here is a real life example of this situation using different numbers with similar % moves to reflect exactly how the buyer-seller negotiation went and how the strategy on our side worked out:

TARGET APARTMENT ---> Asking Price of $1,795,000
COMPS ANALYSIS ---> Shows Unit Should Trade Between $1,650,000 - $1,690,000
BUYER HOPE/GO TO PRICE ---> Buyer Hopes To Get For $1,670,000, Willing To Go To $1,685,000 to get it

Buyer Initial Offer: $1,625,000
Seller Response: $1,765,000
Buyer Counter: $1,650,000
Seller Response: $1,735,000
Buyer Counter: $1,660,000
Seller Response: $1,720,000; seller broker explains that seller is simply not motivated to sell without a $1.7xx offer in front of them and feels the place is worth $1,700,000. If you get your client to $1.7m, we will have a deal!
Buyer Counter: $1,675,000 with a 48 hour deadline to Accept and leaving an additional $10,000 on the table to bring out later on for one last try should the response not be a desirable one
Seller Response: NO GO, 48 hours passes. Buyer WITHDRAWS offer pushing seller in corner and letting the reality of a lost deal to settle in

WHAT HAPPENED: Four days later the seller broker came back to us asking if the buyers would still do a deal at $1,675,000; I said I will do my best and find out. Later that day the deal was reached and the contract was signed 6 business days later.

Now I left out a few aspects of the brokering element in this situation but the point was that the buyer entered into the negotiations prepared and confident. As usual, the first response by the seller is the most important and every response thereafter gives us a little more information to take in and see how that might affect our future moves. In the end, there is nothing we can do about a higher offer coming in so we maintain our discipline to stick to our strategy and get tough when there is an opening to get tough. If its a real seller, they will WANT to do a deal too and if their preset price is higher than what my client's are willing to do to get a deal done, this is the most effective way to get the desired result.

Sometimes the seller needs to see for themselves that over a period of 7-21 days they cannot get a comparable offer that they just let go of. Only then will that preset number in their head become a 'WISH' price that they are now willing to shy away from to close the deal!


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