Negotiation Phase 3: Agent Discussions
Last count, I have been the principal in 19 residential and commercial real estate transactions. In all but one, I engaged the services of a property agent to negotiate the deal.
The one exception was my first home out of school, which I sourced through a friend whose parents rented their basement apartment. The house was on a steep hill, which meant its four-room, fully furnished basement had a magnificent view of San Francisco Bay. It was a steal at $175 per month so there was nothing more to negotiate.
In most real transactions, there is too much money involved for the principal to risk negotiating oneself. In any negotiation, it is important that the person making the decision and spending the money stay above the fray. The agents representing both parties are in a much better position to close the Negotiation Gap without getting emotionally involved to the detriment of the deal.
This doesn’t mean that you are a bystander to the negotiation. Behind the scenes, you should actively work with your agent to develop a strategy as well as establish (and possibly re-establish) where to draw the line on concessions. However, it is essential that you stay in the background.
Early on, I made the mistake of intervening in a negotiation. We were looking at a farmhouse that would require significant renovation. My agent had successfully negotiated the property below our view of its market price. However, I was nervous about future renovation costs and wanted to get the price further reduced to ensure a better return-on-investment (ROI).
I was standing in the field of the farmhouse with my agent, the seller agent and the latter’s contractor. I was complaining about the cost of fixing the farmhouse and the high maintenance costs that would be required to keep the field mowed. In an effort to justify another reduction in price, I said, “I need to go out and buy a heavy-duty tractor and that will be expensive.”
In response, the contractor said, “No need to worry about buying a tractor. There’s an old one in the barn that I can fix up, good as new.”
The seller agent quickly agreed that the contractor’s idea was a good one and proclaimed my problem solved. My agent and I had no comeback.
As you can probably guess, the first time I took the tractor out to mow the field, it broke down. I ended up having to go out and buy a new tractor at considerable expense.
The mistake I made was trying to do my agent’s job. He knew my financial constraints. What I should have done was let him know I needed a further reduction and let him go work it out with the seller agent.
As I have discussed in the last two columns, the negotiation process is very methodical. The first phase is to analyze the property from both the buyer and seller’s perspective and identify the Negotiation Gap, meaning the difference between the SRX Valuation Price and the Listing Price.
The second phase is the home viewing. Your agent uses the tour of the home to gather information on the other side and to start to lay the groundwork for the negotiation. In laying the groundwork, the seller agent works to justify the listing price and the buyer agent makes the case for another way of valuing the home.
In the third phase, the two agents roll-up their sleeves and work to get the Right Price, which is the price that both a willing buyer and a willing seller agree to accept.
The Right Price is not necessarily the midpoint between the SRX Valuation Price and the Listing Price. Instead it is the price that both sides can justify through the process of two agents having a professional, neutral discussion about the market value of the home. By definition, this requires the agents to discuss the homes that went into the comparable market analysis, the attributes of the home, and the market environment, including trends and comparable listings.
The structure of the agent process serves the principals because no one is forced to make a decision in front of each other or under pressure. Instead, each agent takes the results of the discussion back to each principal. The latter can then make the decision in private and decide whether to accept or return for another round of agent discussions.
I was lucky on that field. It only cost me a tractor to learn the importance of engaging a professional to negotiate real estate transactions. Since then, I have reaped the benefit of staying off the field and letting my agent do the job.
(For a personal account of how a buyer agent helped the chief technology officer of SRX Property save money and buy the right home and right price, read Saturday's Straits Times or wait for the reposting of his article in Ask Home Prof this Monday.)