In 1977 Harrison Ford received $10,000 for his performance in Star Wars - Episode IV A New Hope.
Alec Guinness, the actor who played Obi-Wan Kenobi in the same film, negotiated a deal through his agent to earn 2% of the gross box office receipts for the Star Wars movies he appeared in, earning him over $95 million to date.
What a difference a negotiation can make!
Negotiation is a complex thing and every transaction is different.
Regardless of which side of the bargaining table you’re on, there’s always a balancing point, or a “meeting of the minds”, where both sides feel satisfied with the results. There’s usually a little bluffing, some compromise, and a lot of times neither side gets exactly what they want.
But how do you achieve the leverage you need to get the most from the transaction?
What can you do to position yourself for success in any negotiation?
Well, from my experience there are five key factors that typically determine who wins at the real estate negotiating table.
1. What is the market saying?
Sometimes there’s a glut of properties on the market and buyers can be choosy. Other times, properties are scarce and sellers call the shots. And once in a while, there’s an equal balance between supply and demand for housing.
It may not always be your choice when to buy or sell a property. But for the best negotiating position, try to buy during a buyer’s market, when there are lots of properties to choose from and try to sell during a seller’s market when properties are scarce.
Remember, though, that every transaction is unique. By focusing on details specific to the sale, you can still negotiate in any market.
For example, if you’re a buyer in a hot market, you can stand out from the crowd by being able to close quickly. If you’re a seller when the market is slow, you can talk up the property’s awesome golf course views or top notch schools.
The type of market is important but be sure to examine the details of each sale. To negotiate the best deal, look for ways to outsmart the general market trends.
2. Does one side have any unique leverage?
Sometimes no matter what the market trends or sale details are, the leverage is all on one side.
If a local celebrity is selling a property with a unique history there may be buyers lining up to buy it and you won’t have much clout.
On the other hand, if you’re selling a property where a sensational crime recently occurred in the neighborhood, the buyer can probably dictate the terms.
In situations like these, one side or the other holds the bargaining chips and your only alternative is to play the game their way.
3. Are there any concessions?
People often focus on just the sales price in a real estate transaction. And it’s true that the sales price is important. But a well negotiated deal can also involve concessions.
Buyers can negotiate concessions from sellers. For example, suppose a house is listed for sale at $350,000. The buyer could negotiate for the owner to replace the air conditioning system, purchase a new refrigerator and pay the first $3,000 of the buyer’s closing costs.
To figure out the actual transaction costs, you need to subtract the value of those repairs and closing credits from the $350,000. With concessions, the buyer gets a better deal than the purchase price reflects.
4. How about financing?
In real estate transactions, property is traded for money. Property is tangible--you know it’s there. But unless the buyer is paying cash, the money side is less reliable. Usually the buyer will need to borrow money to finance the transaction. Will they get the loan? Several factors affect the money side of the equation.
A buyer who is pre-qualified is in a stronger negotiating position than a buyer who hasn't met with a lender. Pre-qualifying gives both buyer and seller a ballpark idea about how much the buyer can afford and whether they might be eligible for loan programs.
Even though loan applications can be declined for any number of reasons, a pre-qualified buyer poses less of a risk to sellers than an unqualified buyer. An unqualified buyer is more likely to fail in getting a loan, which means the transaction could fall through.
If a buyer hasn’t met with a lender yet, sellers are less willing to tie up their property in escrow, knowing they could lose out on selling to a different, pre-qualified buyer.
A low interest rate gives sellers a negotiating advantage. The lower the interest rate, the more potential buyers there will be to compete for the property. But when interest rates start to go up, fewer buyers can afford properties. Higher interest rates don’t benefit either buyers or sellers in the marketplace.
Today’s low down payments benefit both buyers and sellers by making it easier for buyers to qualify for loans. Buyers with good credit can easily get loans with 5 percent down or less. And conventional lenders are now offering mortgages with no down payment at all.
5. Which side has the most expertise?
Negotiation is a bit like a chess match. Anyone can learn the basic rules, but knowing the ins and outs of the game gives you a strong advantage.
When you’re a novice player, you’re opponent can surprise you with their moves and counter moves. But after you’ve gotten some games under your belt, you look at the board from a different vantage point.
The same is true in property transactions. The more experience you have, the more likely the outcome will be in your favor. Experience teaches you how to play the market and financial trends to your advantage, how to protect your interests and how to exploit the other side’s weaknesses.
In today’s real estate transactions, many people turn to brokers to gain that additional level of expertise. Sellers have used brokers to represent them for years, and now buyers typically do too.
In a transaction where one side has representation and the other does not, who do you think has the advantage at the bargaining table?
$10,000 for Han Solo or $95 million for Obi-Wan Kenobi? Who are you going to be?
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