Bidding Strategy 101: Reverse Psychology
A: Before you enter the next property for a showing remind yourself to act unimpressed, point out the bad features of the property (such as the lack of sunlight, renovation work needed, or noise level), and not say any sentences that include the words "I Love..." or "...that is gorgeous". The broker that is handling the open house or the specific appointment usually pays very close attention to your remarks (at least I do), and then provides their client with a report as to the success of the showings. Originally Published Nov 15th, 2006
Interesting isn't it. If a seller is told by the hired broker that most of the people that come in to view are not too impressed or complaining about the dungeon-like feel, then what do you think will happen when a lower than expected bid finally comes in?
I do this automatically when I accompany my buyer clients on showings. While I don't usually advise them beforehand to 'act unimpressed' in front of the seller broker, I go out of my way to point out that "...the kitchen needs a lot of work", or "...there really isn't as much light as the listing describes", or "...I wish there were better views".
The reason I do this is because I don't have any contact with the seller; thats the seller broker's job. Obviously the apartment is available because I'm there viewing it with a client, so I point out some of the things that I believe are causing this property not to sell with the hope that the seller broker relays that message to his/her client.
Very rarely is a property perfect and priced right at the same time. Chances are the property you are about to bid in, hasn't had any bids yet and the seller is just ancy to get 'a taste' of what it might sell for on the open market.
Negotiating is an art, not a science and many factors play into getting a seller to come down below their hopefuly price point.
By pointing out the negative features of the property you are in essence reminding the seller that their property really isn't as beautiful as they think it is.Trust me, every seller thinks their apartment is worth top dollar until its on the market for 3-4 months. Your job is to bring the seller down to earth. But how do you do this? Here are a few steps to guide you:
STEP 1: Show Off Your Poker Face At Showings
Don't get excited, don't point out everything you love about the apartment, and for gods sake don't ask the seller broker right then and there if their client would accept a certain bid.
I remember one of my exclusives last year where the buyer (who had a buyer broker by the way) showed off their true feelings about the apartment I was selling on both showings. I relayed this info to my client. When they finally came in with a low bid, I told my client not to respond as I knew they would come up again within a day or two. After a few conversations with the buyer's broker and hearing the aboslute top that the buyer would pay, I advised my client to respond with a one time counter $10K over this #. The end result, I got my client that price! And it was all because I knew how much the buyer loved the property and that a measley $10K wouldn't break the deal.
Am I a scoundrel? No, I dont think so. After all, my fiduciary responsibility is to my client (the seller) to get the HIGHEST and BEST price possible for their apartment. Put yourself in their shoes. Would you be mad if your hired broker was astute enough as to point out to you that he can get a bit more from the buyer? I doubt it. I'm just doing my job the best I can.
My advice to that specific buyer: You should have had a better poker face and not reveal how much you loved the property to begin with so I would have nothing to report to my client during the negotiating process.
STEP 2: Do Your Research To Determine Market Price
Do you know what the last comparable unit sold for per square foot in that building? What are the nearby comps selling for per square foot? How is this unit priced compared to other active units in the building per square foot?
Be sure to give a premium per higher floor ($5,000 - $10,000 per floor is a generally accepted formula), for renovation work, and for natural sunlight and views (find out recently sold's exposures for this info) that the apartment has compared to last solds or other actives.
You must know this information. This is why you should be using a buyer broker whose real service will come to you during the bidding process. Ask your broker for all this information before you place the first bid. Bidding on a property without knowing this information is like driving a car with your feet; Yea it's possible but that doesn't mean it's to be done!
STEP 3: Devise A Bidding Strategy
The hard part yet the most fun part for me because of the challenge. While every situation is unique here is a quick step-by-step guide that I usually follow:
First: After all the research that you did you must determine the price that your are both HOPING to get the apartment for and WILLING to pay for the apartment.
Second: Start out 3-5% below the price you are HOPING to get the apartment for and present your bid in a professional manner. Write out a offer letter which includes your full name, your attorney info, your mortgage broker info, how much you plan on financing, when you would like to close, your job position, company name, salary, total assets, and finally the bid you are starting with. You can also add the phrase "...Please accept this bid in good faith and contact me as soon as possible with any response". Provide a copy of your pre-approval letter from your mortgage lender and a financial analysis form that clearly lists all your assets and liabilities.
Again, your broker should do all of this for you and prepare everything for submission. I usually follow up with a phone call to the broker that a bid was submitted and faxed and point out some of the negative features of the property that resulted in the bid submitted.
STEP 4: Negotiate
After I submit the initial bid and get the seller's first response, I usually know right away what the apartment will sell for. For example:
SELLER ASKING $600,000 ---> BUYER SUBMITS $525,000 BID ---> SELLER RESPONDS $575,000
I pretty much know that the buyer will have to go to around $550,000 to get a deal done for this particular property. I also know that the seller and the seller's broker assume the same thing based on the first counter offer. So, as a buyer broker, my focus shifts to getting $540,000 or lower for my client. Sometimes I can do it, sometimes I can't. But here is how I try.
My client is now at $525,000 and the seller's response was $575,000. My buyer told me they are hoping to get it for $540,000 but willing to pay $550,000 for the property. My next move would be to submit a one-time bid of $540,000 (that is, I mention this is the highest that my client is willing to go) and mention to the seller's broker that if we don't get it for $540,000 that "my client will move on another property that we are interested in". I also mention to the seller broker that we will need to get a response within the next 2 days.
What I am essentially doing is putting the deal in the seller's hands. Are they willing to lose a deal over $10,000? Probably not. By mentioning that there is competition and that my buyer laid out a deadline for a response I put 2 pressures on the seller. I'm hoping they will fold their cards and accept the deal.
STEP 5: It Backfires. Now What?
Ok, so the trick didnt work and the seller didn't budge. The response we got was a 'no response'. Don't panic, the deal is not dead yet. At this point you have to wait 2-3 days at least to let the feelings of a 'lost deal' seap in to the seller.
After some time has passed I would call the seller's broker and ask why their client had no response? I also start my series of questioning, "What is your client looking to get for this property?" "Maybe I can get my client a bit higher, but I need to know whether or not it is worth the effort first.", etc..
My goal is to find out what I need to do to get a deal done. For all I know, the seller wouldn't go lower than $560,000, in which case it didnt matter anyway because my buyer was only willing to go to $550,000. But most of the time the initial assumption was correct and the seller's broker will say to me, "...get your client to $550,000 and my seller would accept; but nothing lower".
That's when my buyer has a decision to make. Sure we didnt get that extra little discount, but it wasn't because we didn't try for it! In the end, both parties got what they wanted for a price that was acceptable.
Hopefully you will NEVER REACH STEP 5 and the deal will be wrapped up at STEP 4! Good Luck and as always, your feedback on enhancing/arguing/expanding this strategy are appreciated.