The Art of Negotiation

August 05

Negotiating the price of our next property purchase is probably the most highly paid piece of work, in terms of pounds per hour, that we ever do as property investors. Where else in day to day life can we spend two to three hours, and obtain a real payback of ten thousand pounds?

Viewed in those terms, it made a lot of sense to really hone my skill as a negotiator, so that I can drive down the last thousand here, and the last thousand there.

The good news is that there are some basic things that we can do to negotiate prices that are very quick to learn. (Remember, just because it is quick to learn, does not make it easy to do, hence a bit of practice is worthwhile.)

The key point to remember about buying property is that you are not particularly interested in the property! What you are looking to buy is a future net income stream - this is very obvious when you are buying for Buy To Let, but equally try for Buy To Sell, although the future income stream there happens all in one go when you sell, rather than monthly over many years when you rent out.

As such, the focus should be NOT on the price of the house you are buying, but on the net cashflow the deal will generate. This means that things like asking buyers to give you a cashback (because up front cashflow is an issue for you), or asking buyers to redecorate to your specification rather than reducing the price (so the cost of the redecoration is mortgageable) can become things to ask for.

Many buyers will, however, only really negotiate on a single variable - the price you will pay on completion day. The comment about buying a future income stream still holds, though. Do your sums - at all times, the choice you should be making is between A: buying at a price which will make you a profit, or B: walking away from the deal. This is why I am not too worried about Market Value issues - either the deal stacks up in cashflow terms, or it does not, and whether this means I buy at 20 per cent below market value, or whether I pay full market value is sort of immaterial. I would rather pay full market value for a property that will put money in my pocket each month than get a 20 per cent saving on something unlettable that will bleed me dry for the next 10 years!

Let us suppose, for the sake of the later examples, that you know from the cashflow projections that you will only make cashflow if you buy at £180,000 or below.

The second key point to remember is that, if you are buying through an estate agent, the estate agent is the paid agent for the VENDOR. They are not there to get YOU a good deal, nor are they even there to get everyone a fair deal - they are there to get the best deal possible for the vendor. That having been said, estate agents are human - towards the end of the month, a flagging negotiator with a sales target may be more motivated to hit that target by making sure the sale goes through, than to actually eke out the last thousand pounds for their client.

The third key point is that your initial offer should always be incredibly low, since it sets up the right expectation in the mind of the vendor. If the vendor is asking £200,000, then by all means offer £160,000. That way, if you settle on £180,000, the vendor feels that they have haggled you up as much as you had haggled them down. If you start by offering £190,000, then you miss the opportunity to settle on £180,000 (and thus, to make a profitable investment in cash flow terms.)

The key strategy you can use in negotiating is getting the vendor to invest what I call emotional time. This plays up to human nature, the more effort a vendor has put into thinking about selling to you, and working with your offers, the more inclined that vendor will be to see the deal go through (assuming that there are no better offers on the table today). The reason for this is that the vendor, having gone through the stress of negotiating with you, wants to avoid you dropping out, and having to go through the stress all over again with the next potential purchaser. As such, you want to make sure that the vendor spends a long period of time haggling with you, not just back and forth in the space of 15 minutes.

This means that, whenever you put a figure to a vendor or an estate agent, you should then keep quiet, and see what the response is. The normal tendancy is to rush on, and blurt out something to justify your figure, but the best thing is to wait and see.

Normally, the vendor will come back with a counter-offer. Suppose that the asking price was £200,000, and you offered £160,000. The vendor may immediately come back and change the asking price to £190,000. [More about what that signals in a moment.]

On the other hand, when the vendor puts a counter-offer in to you, you should never respond immediately except to express surprise at how high the price being asked is, and to say that you need more time. The reasons you give for asking for more time are varied, and are there to sound plausible. The REAL reason you ask for more time is to get the vendor to invest their emotional time. So, say that the counter-offer is not something you can agree to, but give one of the following reasons for needing to go and think:

• The Re-run the Figures technique. A credible reason for needing more time is that you need to revisit the cashflow projection based on paying a bit more for the property. It also gives you a solid reason for coming back with a lower new offer - that the numbers only stack up there.
• The Ask the Wife technique. Obviously, if you are not married, or of the wrong gender and sexual orientation to have a wife, then you can substitute husband, boyfriend, girlfriend, or the catch-all term partner. Partner is not a bad term to use, since it can mean business partner when you want it to.
• The Other Opportunities technique. You say that you are not sure, and would have to compare paying their price to other opportunities you have for your investment funds. Effectively, it is the same as re-run the figures, but with the added advantage that you re-inforce in the mind of the vendor that their property is only one among several you might buy.

You should leave it as long as possible before making your new offer, NOT within 10 minutes, but ideally half a day later (especially if you are claiming to be putting lots of work or discussion into the new price.)

When you come back with a new offer, then it should only be a SMALL increase on your last offer. Otherwise it looks as if you had just made a stupidly low offer to try your luck. (OK - this may be true, but you do not want to be obvious about it!) If the asking price was £200,000, and you offered £160,000, and the vendor revised the asking price to £190,000, it signals to you that they have a LOT of manouvering room. If, on the other hand, they only reduce the asking price to £198,000, it means that either they do not have room to move (in which case, you can stop wasting your time now) or that they are also a skilled negotiator (in which case, you need to be sure of your own skill levels.)

Correspondingly, your new offer should not make big jumps, because you send the same signals. Imagine that the pricing has gone

• asking 200k
• offer 160k (low offer to frame expectations)
• asking 190k (big drop, signalling a lot of room)
• new offer - what???

The ideal is only a few thousand more - perhaps £162,500. Couple this with a show of having put in effort to move this much, and again, see what happens.

You may need to repeat the process a few times. It may be that you end up on an asking price of £185,000 and an offer price of £175,000.

The final technique is to handle splitting the difference. Firstly, you should never offer to do this, since whoever makes the offer normally loses.

Instead, you wait till the other person makes the offer - in this case by reducing the asking price to £180,000 and offering to split the difference. The response is that you can not offer more than £178,000, and ask the vendor whether they are really going to lose the deal for a mere £2,000. Remember, you know that you CAN buy at £180,000, but the extra £2,000 is pure profit.

Now for the sting in the tail. You should expect, if you are doing your investing properly to NOT get to agreement on most of the deals you look at. You are trying to find the few people who value the things you can offer (speed of transaction, security) more than the extra headline price that the non-professional buyer can offer if you give them long enough.

If you end up buying every property you offer on it means one thing - you are offering, and paying, too much! So learn to handle rejection, rejection simply means that you are filtering out the poor deals effectively!

This is just the feature article from the August 05 newsletter. Subscribe for market comment, forthcoming events, and more.

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