Have you ever negotiated your way out of a good business relationship? I certainly have and I have often regretted it. Novice investors typically fall into two camps: the pushover or the bulldog. While there are certainly times to be both, the context of the situation should remain paramount. Some times the biggest winner in a negotiation can really be the biggest loser in the long run because of relationships that get crushed over a few dollars.
I will start by sharing a personal story. First, let me say that I fall squarely in the bulldog category. I have been getting my way since I was knee high by just about any means necessary (all ethical of course). Add to this all of seedy things I have heard about contractors and real estate agents and I became a real pain to negotiate with. In my first rehab, my wife and I were able to secure two workers, who happen to be down on their luck. They did great work, but really needed to be micromanaged. We really had all the power in this situation because they needed the work and didn’t really have any other leads. Long story short, they did a lot of work very cheaply, but as soon as they began getting other jobs we got the shaft (deservedly so). I squandered an opportunity to build a great relationship with two good contractors to save myself a few thousand dollars.
One of the most important life lessons I have learned is to pay people what they are worth. There will always be times when you have the power to under pay someone. I suggest you steer clear of that apple, no matter how good it may look. The hidden cost of putting the screws to someone when you can is evident in the form of decreased loyalty and a deteriorating relationship. Reflect back on the personal story I just shared. At the rate my wife and I were buying houses, we could have keep them in work for years. We would have enjoyed the benefits of getting honest reasonably priced labor, willing to work for us at anytime. “Anytime” would be more important than I realized as we took on more and more properties with more and more needy tenants.
Here are some simple questions to think about as you are negotiating. First, will you need to negotiate with this person again? If the answer to this question is yes, be careful about how you negotiate. If you come off as stubborn or unreasonable, it will be returned in kind at your next meeting. If the answer is no, you should still be careful. Local real estate markets are surprisingly small; therefore, your reputation is literally another form of business currency. When you get a reputation of being tough to work with you will always be quoted higher prices and people will be less likely to want to work with or for you.
Second, what is the quality of goods or services you are receiving from this person? Don’t expect to pay bargain basement prices for the best. Negotiate, but be reasonable. Even if you are negotiating with the cheapest labor you can find, be civil. Treating people like human beings, goes along way in the quality of work they do for you. It is always ok to walk away from a negotiation if you do not feel like you can come to an agreement, but steer clear of personal attacks or threats. Keep everything professional.
Third, how important is your relationship with this individual and their peers? Again, think of reputation as another form of currency. If you have to pay several thousand dollars more now to keep a good crew or to keep a good agent, do it. If this idea of giving up money for a relationship really pains you, think of the alternative. Any time you negotiate with someone that does not know you personally, they have no incentive to give you the best deal possible. If you continually burn people, you will have to continually negotiate with new business partners. I can guarantee you will be paying more than someone who has developed a strong relationship with key vendors.
All of this is not to say that there are not times when you need to push people. More accurately, the purpose is to open your eyes to other possible gains besides price. You want to have a reputation of being tough, but fair rather than just being tough. People respect professionalism and well thought out positions. If you feel like you are being overcharged, get concrete numbers and offer a comparison. You can say things like, “I noticed you want me to pay X, when company B has the same service for Y. Help me understand the difference in price.” Never suggest a low number without having a good reason why you should pay that price. This builds credibility and trust.
In the end, negotiation is a must in real estate. Always trying to get the most out of every situation, will leave you bankrupt from a relationship standpoint. In real estate relationships are the gatekeepers to deals, lower cost labor, and important market information. Before you go into your next negotiation, think about more than just can I get the best price, but also think about what this negotiation will mean to the price I pay in the future.9 comments