There are a few ways to negotiate a deal. I have developed a style of win win negotiating that gets sellers to say yes to my creative offers. Personally if everyone involved doesn't feel that benefit from the transaction I am not interested in participating.
The most common negotiation technique is the big stick technique. Joe enters the negotiation and asks what the seller is asking. Then Joe get out his big stick and hits the seller over the head with a number that is 30%-40% lower than what they are asking. Joe will continue to hit the seller over the head until the seller accepts the deal or Joe leaves frustrated. Most of the time Joe leaves frustrated. If the seller accepts the offer then the seller feels like he just got out of a fight with a guy with a big stick. Rarely do both parties come away from the deal feeling good about what just happened. This technique can work well with fix up properties as far as getting a deal, but it doesn't do much for the seller emotionally.
This can be the same scenario using owner finance techniques. Joe can walk into the house and and lay out his offer. Joe's offer will be something like this. I will pay you $200,000 (with a $220,000 asking price), take over your payments subject to the existing financing (or feel free to insert on a lease option or land contract here) and pay you your $15,000 equity in 7 years. Joe has no idea if this would be a fit for the seller he is just using his big stick and he keeps hitting the seller over the head with it until he finally is beat down and accepts it or kicks Joe out.
We are going to take a look at how to negotiate great deals without using the big stick. There are 6 steps to negotiating outstanding deals. The techniques that I am going to discuss are going to get you better deals than the big stick method and you are likely to get more sellers saying yes to your ideas.
Step 1. Build rapport with the seller. This step is the most important because people like doing business with people like them. To build rapport remember this simple acronym: HOWARD
- H "How are you today?" This is a great question to start with and will lead you to other areas of HOWARD
- O Occupation: People like to talk about what it is that they do. Ask a few questions about what it is that they do for a living and the seller will have plenty to talk about.
- W Weather, news, sports: This is something that we can all relate to.
- A Activities: People like talking about things that they like doing. If you see a basketball in the corner you can relate how you like to pay too or if there is a picture of the seller rafting you can relate that to your trip down the Royal Gorge.
- R Relationships: Family pictures can often spark conversation. Ask questions about their family and you will build a connection with the seller.
- D Dedicated time commitments: This could be coaching, mission work, volunteering, etc. People like to talk about the activities that they enjoy. These are typically activities that they are passionate about.
When you are building rapport you are connecting with the seller. This has to be sincere. If it isn't the seller will see though you and the deal won't happen. I have closed deals just because people like me.
Step 2. The next step is setting the yes/no agreement. When you are meeting with the seller you are going to agree to give the deal a yes or a no and that there is not going to be a maybe or a think it over from either side. Use this language:
"Mr seller, if what we talk about today isn't a fit are you OK telling me that? On the other hand if we can put our heads together and meet your needs are you OK telling me that? Great, I am going to do the same thing. If we can't make a conservative profit I am going to let you know that. If we can make a profit and meet your needs I am going to let you know it is a fit. I want to respect your time and mine so I am not going to tell you that I need to think it over or that I am going to get back to you in a few weeks. I am going to respect your time and give you a yes or no before I leave today and I just ask for the same courtesy in return. Is that OK."
This eliminates the sellers ability to give you a maybe or I have to think it over. I can say that 100% of the people that give me a "I am going to think about it" no matter how motivated I think they are don't end up selling me their house. If they give you a "I have to think it over" there is something that they are uncertain about. If you can get to that objection you will get the deal closed.
Step 3. Stir up the seller's motivation. This step is a close second in importance to building rapport. If the seller doesn't feel the emotion that is going to be caused by holding on to the property and the pain that it is going to cause or the pleasure that they are going to be missing out on the seller won't sell. So how do you stir up emotion? You are going to ask the seller some questions. These questions are going to be focused around eliminating the seller options and stirring up both the pain of owning the house and the pleasure of what selling it would mean.
This is where the negotiation takes a turn as compared to the typical negotiation. When people enter a negotiation they are going to do what is called mismatching. They have their guard up and are scared of being taken advantage of (this is the sellers greatest fear, not missing out on selling their house at top dollar). So when I say "Your Realtor must have done a terrible job selling your house" which is obvious because it still isn't sold after 6 months, the seller will say, "No, my Realtor did a great job." On the other hand if you say "Your Realtor must have done a great job, I am sure it won't be a problem to list with them for another 6-9 months while you wait to get your house sold." They will quickly counter. "No, my Realtor did a terrible job and I need to sell my house now, I can't wait for 6-9 months for this thing to sell."
With that framework in mind we are going to eliminate the following options using these statements and questions.
- "Well, I guess it wouldn't be a problem if you had to sell it yourself for sale by owner." Or if it they are already selling it themselves, "I am sure it wouldn't be a problem if it takes you another 4-6 months to sell your house for sale by owner, I mean you probably enjoy holding open houses and running over in the middle of the day when buyers want to take a look."
- "Have you thought about listing it with an agent? I am sure it won't be a problem to pay them the 7% of the purchase price. They will work hard to earn that commission and it will only probably take them 6 or 7 months to find a buyer."
- "This is just a thought. Have you thought about renting it out? I mean, the tenants probably won't trash the property too bad." This is like saying don't think about a purple elephant. You can't but help think about a purple elephant.
- "Oh, you don't want to deal with the management? OK, well I am sure a property management company would do a good job. I had a management company once that left me with a vacant unit for 8 months. I am sure it wouldn't be a problem if you property was vacant for 8 months?"
After every item that you bring up they will say something to the effect of, "I couldn't do ______" you follow up with, "I guess I am a little confused why _______ would even be a problem." This gets to the heart of the matter and when you get an emotional response from a seller you know you are doing a good job getting them to feel the pain that this house is causing them. Keep in mind that you are not doing this to be mean or anything along those lines. You are helping someone realize the burden that this house is on them and you are going to help them release that burden.
Then after you have worked on the motivation for quite a while (this will be at least 50% of your time spent in the negotiation. The longer you spend on motivation the better deal you will get.) you move on to the next step.
Step 4. The financial details. In this step you are going to ease into all of the financial details of the property. The first question that you are going to ask is "How much were you asking for the property?" You are going to use three techniques to get the price reduced.
- What did you realistically expect to get for the house? Many times sellers will drop straight to their bottom line with this question. They will say something along the lines of I owe ________ so I think that is the lowest I will go.
- Then when they give you a price, you can use the spectrum technique. In this gambit you are going to give them a price that is at the far end of the spectrum. So while nodding up and down you will say, "OK, so you really did expect to get $180,000 to $220,000 (the number that they said was what they realistically did expect to get). If they don't throw out the bottom number in the spectrum that is the new number that you use in your negotiation. They might bring you back up to $197,000 and then you can use that number or you can apply the range again but slightly higher to see where they really do stand on their price.
- The final technique is to bring the Realtor back into play. Mr. Seller if a Realtor knocked on your door and had a buyer for you at that full $197,000 price you would probably turn them away. They might say, "Heck no, I would take that in a minute." then you would follow up and say "OK, so $197,000 minus 7% is... (be slow with the math, let them help you)...OK...7% of 100,000 is $7,000 so take that times 2 is about $15,000 or so. So you would really be getting about $182,000, OK, I get it (this is a statement not a question).
Now many times not all of these techniques work at the same time but you can easily knock almost $40,000 of the price of home very quickly without using the big stick.
Then you are going to go on and ask about all of the financial details about the house.
- Payment. Does that include principle, interest, taxes and insurance?
- Loan Balance
- Balloon payment? When?
- ARM? When does that adjust?
Step 5. Make a trial balloon offer. Now we know why the seller needs to sell (step 3) we know the financial details (step 4) so what we are doing here is asking a question in a way that commits them to everything and us as the investor to nothing. Here is how you can make any question a trial balloon questions. Mr. Seller, I don't even know if I can do this but what if I were to _________. (Most commonly you can say, cover your payments and cash you out some time down the road.) If they don't accept your trial balloon, nothing is lost. You didn't commit, heck you even told them that they would hate the idea and that you weren't even sure you could do it. Continue making offers like this until they grab onto something that works for the both of you.
Step 6. Fill out the paperwork. Mr. Seller. I have an agreement in my car (don't call it a contract) should I go and get it?
Here are some keys to remember. People don't want to negotiate with people that are smarter than them. If you think about it would you rather negotiate against a master negotiator with a Stanford MBA or a guy that works a 9-5 at jiffy mart? Obviously the guy at jiffy mart because he isn't going to negotiate you into the ground. So when you are negotiating set your words and actions up to be a little slow in their delivery. Don't be a slick negotiator. Let them have the ego and you take the money.
Don't use technical language. Talk about covering payments, not buying subject to the existing financing, lease options or land contracts. This goes back to being the Stanford MBA negotiator. There is a time and a place to be the expert. It isn't in the negotiation.
Assume nothing. Don't assume why double payments are a problem. Have them tell you why they are a problem.
Always be a reluctant buyer. Use language like "I don't even know if I could do this but what if..." If the seller is pushing you for an offer use language like "Mr. Seller we look at a lot of properties and I don't even know if I would be interested in buying your house. Do you mind if I ask you a few questions?" This puts you in a position to get them to follow along because they want to sell and you don't know if you want to buy.
This is just the tip of the iceberg of our negotiation strategies. This will get you started and away from using the big stick to negotiate with. The more you can practice these language patterns and develop new questions to draw out the sellers emotion and motivation the better negotiator you will be.
