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Negotation 201: Dont Just Think about the Best Price

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 so far

  1. Cari McGee February 21st, 2007 5:14 pm

    I love “In real estate relationships are the gatekeepers to deals…” because it’s so absolutely true! I was in my first year as a Realtor when I mentioned to a colleague that I thought my client was going to make an offer on his listing. A smile spread across his face and his entire demeanor changed, “Oh, Cari!” he said, “I’d so much rather work with you than the other agent that said she might bring me an offer. I really hope you do bring one!” In that moment I realized that I wanted to be the Realtor people wanted to get an offer from. I wanted to have the reputation of being great to work with…tough but fair with both my clients and colleagues. I suppose you’ll have to check with the agents who have worked with me to get the real scoop, but I really hope that’s a lesson I’ve learned. Thanks for bringing it up for anyone who hasn’t had a similar situation happen to them.

  2. Jonathan Greene February 21st, 2007 5:37 pm

    Dude, I was trained as an interrogator and hostage negotiator while in the military and sent to Iraq. So, naturally, when I began a career in Real Estate I had to relearn my negotiation techniques. I was crushing people in negotiation, just like I was trained to do.

    I found it ultimately unsuitable for business to destroy people with whom you may have to work again.

  3. Laura Kaan February 21st, 2007 6:02 pm

    It’s often hard to remember that in this business it is more of a marathon and not a sprint. I know of several individuals who have burned bridges which in turn hurt them down the road. You never know where business will come from or who you will end up working with down the road.

  4. Brian Brady February 21st, 2007 10:25 pm

    Michael, you’ve done it again. This should be required reading for ANY property purchaser.

    The problem is that most people are not professional real estate negotiators (they do it 2-4 times in their life)and opt for the bulldog strategy.

  5. Marc Brinitzer February 21st, 2007 10:40 pm

    “One of the most important life lessons I have learned is to pay people what they are worth.”

    Amen. People mouth “win-win” all the time but only feel good about a deal when their victim is bleeding on the floor. I want the people that “have my back” to be paid well for their efforts.

  6. David Saks February 22nd, 2007 7:59 am

    Michael Cook said:”One of the most important life lessons I have learned is to pay people what they are worth.”
    Applause, screams of joy, thunderous hand clapping and whistling, foot stomping, standing ovation, to be followed by a ceremonial prayer invoking divine protection of Michael Cook.
    Thank you, Michael.

  7. Chris February 22nd, 2007 11:20 am

    Very well said, I couldn’t agree more! I have no problem paying for performance. I know investors who want RE agents to bring them the hot deals right away, yet the want to knock the agents commision down to nothing. They think since it was quick and easy for the agent they don’t deserve much. Guess who is the last to get a call when a hot deal shows up? Because they don’t want to pay 1%-2% they lose.

  8. David Williams February 25th, 2007 1:04 pm

    What a good read! While I’m not a trained hostage negotiator like Mr. Greene I am a full time baby sitter of grown men (a Marine Corps Staff Sergeant). I do have learned the art of getting people to do what they do not want. But I also believe in paying people what they are worth and have always looked at possible future relationships instead of only the immediate transaction. Also…

    I think a lot of contractors down here (Biloxi MS) should read this article. Maybe then the would quit trying to bid every deal like it’s their last. People respect fair and professional much more than the cut throat contractor mafia who pray on people’s ignorance. I could say more but I think you see where I’m coming from on this one. Once again, awesome article.

  9. Kaye Thomas February 26th, 2007 4:11 pm

    There is a fine line between negotiating with someone and insulting them. You never know who will own the next piece of property you want to buy and who will represent them. Being firm is vastly different from being obnoxious.