November 18, 2011 in Negotiating Tips
Learn how to Negotiate Like a Pro by Changing the Seller's Expectations
I believe one of the toughest skills to master (especially when you are a brand new real estate investor) is negotiating. This is such a critical part of our business yet for most of us, it is a skill we ultimately master through trial and error. Can you learn to negotiate like a pro? Absolutely!
Typically when you have that initial phone contact with what you hope is a motivated seller, what you are likely to find is someone that has a preconceived notion of how much they want for the house. Whether or not this value they have placed on the property has any factual basis or not, rarely matters to the seller.
In most cases, your job as a real estate investor will be changing their expectations. So how do you do this?
Negotiate Like a Pro Tip #1: Changing the Seller's Expectations
The first step when it comes learning how to negotiate like a pro, is learning to change the seller's expectations.
You will need to become skilled at guiding them from point A (which is what they believe they are getting from the sale of the house), to point B (which is the amount you are willing to pay). There is usually a substantial difference between points A and B.
I have found that this is a process. Changing the seller's expectations generally happens over several different conversations. For instance; your first conversation with them on the phone is the time when you usually get a feel for what they are asking for the property. I generally ask them, “what was it you were hoping to get from the house”
It is during this conversation that I get all of the property information as well as detailed information about the condition of the property and the major systems. This is also the time to ask about their motivation. “Why are you selling”?
Negotiate Like a Pro Tip #2: Always ask the Sellers This….
If the sellers tell you an amount they want for the house I always ask them. “How did you come up with this price?” Sometimes they've literally just pulled that price out of a hat.
Or it might be that another house on the block sold for the particular amount that your seller wants. What you will typically learn is the other house was much larger or had other amenities not present in this seller's house.
My next question when it comes to the price is always, “Is that the best you can do”? At this point I will remind them that the house needs a lot of work based on what they have told me. It’s also a good time to tell them that you are a cash buyer, not a Realtor willing to place a higher price on the property while “hoping it will sell”.
If after speaking with the seller I determine that I am interested in the property, I set up an appointment in the next day or two to take a look at it. You want to look at the property pretty quickly before another investor has time to get there and make an offer. I never recommend setting up an appointment very far in advance unless the seller is an absentee owner that has to travel to your location to show the house.
Negotiate Like a Pro Tip #3: The Property Inspection
This is what I know for sure; good negotiation skills definitely help you close deals. But you can't make a smart offer until you know the repairs and updates that are needed. You have to inspect the property.
During the property inspection, this is when you will have another chance begin a conversation about the price and also to change the seller’s expectations again. If you have found additional items that need repair or replacement that weren’t previously mentioned, you will also be able to use these as a negotiating tool.
Negotiate Like a Pro Tip #4: Be Prepared When You Show Up!
You should have already done your homework and have comps for the area for this meeting. It will help rein in their expectations if you know what homes are selling for both to retail buyers and also what investors are paying for houses. You just need to tell them this is the “range” that homes in their area are selling for. The sellers will realize that you are knowledgeable about home prices in their neighborhood.
I go over all of this with the seller. We talk about all of the work needed to get the house into the condition where it will sell quickly. In the winter I will also mention things such as the need to leave the heat on which will result in high utility bills. In the summer we talk about lawn care. I have found times when these costs are the one thing that will change their mind and they will accept a lower price. Reality set's in. This is particularly true if they cannot afford to pay utilities and upkeep for a second house.
Still no agreement on price. What’s next?
At this point I just shake hands with the seller, and I tell them I will go back to the office and look over the numbers once again and give them a call back. Then I wait a few days. I want them to “stew” a little bit; I want them to become more flexible on the price. Remind them once again that you are a cash buyer.
After a few days have passed, I give them a call with my offer. I always leave myself a little bit of “room to move” in my offer, so my offer will be a little below my MAO. The reason I do this is so that if they come close enough to what I want to pay but still want to have the last say in the negotiation, I can let them have this “win”. And a lot of times this is the way it ends. At other times they simply say OK to my offer, and I net a little bit more out of the deal. I’m happy either way.
Always leave the door open
If you just cannot agree on a price that works for both of you, always leave the door open. Wish them luck and say that they can call you back if things don’t work out as planned. You will be genuinely surprised how often you will get a call at a future date if you exit the negotiations gracefully.
Negotiation doesn't come easily for most people. In fact, it's downright hard in the beginning. You've probably hear the old saying that goes something like this: “If you're not embarrassed by your offer, you just paid too much”.
Hang in there and you'll learn how to negotiate like a pro in no time. It just takes practice.
Do you have negotiation tips to share? Let's hear them!
This post has been updated. It first appeared on the blog November 18, 2011.
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