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In any commercial transaction there is always the classic ‘gap’ between a sellers expectations of wanting the highest possible price and a buyers expectations of wanting the lowest possible price. Negotiation skills are essential in closing this ‘gap’ and creating a win-win situation for both parties. Below are 10 golden rules that will help you achieve better best results when negotiating. |
Damien Holliday GOLDEN RULES OF NEGOTIATION
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1. Knowledge is power. |
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2. Use time to your advantage. |
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3. Don’t just focus on price as terms and conditions are equally as important. |
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4. Always make sure that nothing is traded without you receiving something in return. |
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5. Be prepared to walk away, as soon as you think you must have something it may end up costing you far too much. |
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6. Always base your judgments on sound property fundamentals and not your emotions. Whenever a deal looks too good to be true, it probably is. |
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7. Throughout the negotiation process base your negotiation strategy on principles and not positions. Allow yourself flexibility and avoid locking yourself into positions and ultimatums. |
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8. Aim to be a firm, but reasonable negotiator. |
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9. If negotiations become heated for whatever reason, always focus on the problems and not the people. Whenever you make an emotional outburst, you tend to give up some control. |
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10. Always be consistent during a negotiation. |
1. Knowledge is power
It is very important that you invest the time and effort to obtain as much information as possible on the property, the market, the locality, and the other party (the seller and their representative/agent). Every bit of information will help build a strong foundation from which you can base your negotiations.
If you have done the necessary research you will know;
• The market value of the property.
• What is the potential of the property.
• What are the weaknesses of the property.
• What are the other party’s motivations and time frames.
• Are there any specific leverage points you can negotiate on.
In order to obtain the necessary information you need to ask the right people the right questions, even when you think you know the answers. In dealing with the other party the right questions will build rapport and hopefully extract useful information that you can use to your advantage during the negotiation process. The questions you could ask may include;
• How long has the property been on the market?
• Is there any interest in the property, and have any offers been submitted?
• What is the price and how did the owner come up with the asking price?
• Are there any comparable sales that support the asking price?
• Why is the owner selling?
• Are there any issues with the property that I should be aware of?
• What opportunities does the property offer?
You may then use any piece of information you learn as leverage points throughout the negotiation process.
2. Use time to your advantage
Time is sometimes the best negotiator, particularly if the other party initially brings a property to market with high price expectations. Over the course of the sales campaign the vendor will receive market feedback. Depending on this feedback and their motivation to sell they may become more negotiable on their price expectations. The key here is to maintain close contact and a good relationship with the seller throughout the sales campaign. This will put you in the front line position to take advantage, if and when the sellers price expectations change.
Also, often when a seller invests a considerable amount of time and effort in the negotiations with you, they are more likely to modify their position as the negotiations continue.
Beware however, when a property is priced right on or below market and meets your criteria; you may in this case have to move quickly to secure the property.
Again, the key here is to know as much as possible about the other party and their motivations and judge the time scenario according to this information.
3. Don’t just focus on price as terms and conditions can be equally as important.
In many cases the terms and conditions of an offer are just as important, and sometimes more important than the price. The stronger the initial terms the more negotiable the seller may be on price enabling a quicker negotiation process. Strong terms that most sellers like to see are;
• Short settlement periods.
• Short due diligence periods.
• Short finance condition.
• At least 10% deposit.
• The ultimate for a vendor is to have a signed contract with a cheque attached with no conditions.
Often at the end of the initial negotiations there’s still a ‘gap’ between the buyer and seller’s price expectations. Concessions on terms and conditions may be the best way to initiate price movement at this stage. It is important to fully understand the other party’s motivations and needs. If you are aware of their needs you can provide the appropriate solutions / concessions that will benefit them whilst still achieving your objectives enabling a deal to be struck.
4. Always make sure that nothing is traded without you receiving something in return.
By making sure that nothing is traded without receiving something encourages a neutral playing field throughout the negotiation process. By maintaining a neutral playing field it eliminates any party establishing a position of power.
As an example; in a commercial ‘lease back’ purchase negotiation, when a buyer is considering increasing their initial offer, they may make it conditional on a change in terms such as an increase in the bank guarantee from 6 months to 9 months. So trade an increase in price for more secure terms.
5. Be prepared to walk away! As soon as you must have something it will end up costing you far too much.
The process of buying a property can be a long drawn out process and it can be a large physical and emotional investment. Sometimes the physical and emotional investment can cloud a buyer’s judgment and resolve to achieve a certain outcome.
At the start of a negotiation a buyer should set themselves guidelines as to what they are aiming to achieve out of a negotiation, and in particular establish a ‘bottom line’ or ‘walk away position’. During a negotiation a buyer should always be aware of their position during a negotiation in relation to the ‘bottom line’. By being aware of the position in relation to the ‘bottom line’ a buyer can constantly adjust their negotiation strategy to facilitate the best possible outcome.
If the negotiations do reach the ‘bottom line’ the buyer needs to be disciplined by walking away from the deal. Sometimes walking away can be to the advantage of the buyer as it shows that they will not be pushed past their limits. And in some cases walking away may encourage the seller to adjust their expectations so as not to lose the deal.
6. Always base your judgments on sound property fundamentals and not your emotions. Whenever a deal looks too good to be true, it probably is.
The biggest lesson that can be learnt out of the last property downturn is that fear and greed can blind buyers to the true fundamentals of successful property investment. The value of a property is based key fundamentals. Below is a list of questions that a buyer should consider when assessing the fundamental value of a property;
• What is the replacement value of the property, or the cost to buy the land and replacement the improvements on the land?
• Is the current rent being paid a market rent?
• How secure is the tenant’s business and what form of security is there to cover any vacancy period should the tenant leave?
• Is the property in a location that would be desirable to a large range of tenants, i.e. good exposure, good access, centrally located in a main business district?
• Does the design of the improvements allow use by a variety of businesses or is it a specialized configuration?
• What are the current outgoings for the building and how do they compare to similar buildings?
• Has the lease been assessed from a legal and commercial perspective, and are there any clauses in the lease that may result in a loss of income?
• What is the true lettable area of the improvements, and is there a survey to confirm this area?
After considering similar questions to the above a buyer should be able to assess if the deal is too good to be true. If the deal does look too good to be true and any issues that are raised cannot be resolved in the best interest of both parties then a buyer should walk away.
7. Throughout the negotiation process base your negotiation strategy on principles and not positions. Allow yourself flexibility and avoid locking yourself into positions and ultimatums.
The party that has the most power in a negotiation is the one who has the most flexibility. If a buyer is a hard negotiator and digs themselves into a position or ultimatum by saying ‘this is my highest offer’ or ‘this is my final offer’, than they may limit their flexibility in being able to successfully complete a negotiation. The other danger of positions is that if a buyer is forced into making concessions on a position, because it is the only way of moving a negotiation forward, they may lose integrity and ultimately power in the negotiation.
At the start of the negotiations a buyer should establish key principles that they will stick with throughout a negotiation. These principles could include; achieving a specific return such as an 8% yield, obtaining sufficient comparable market evidence to support any offers submitted, or obtaining a certain capital value. It is important that any principles that are adopted are realistic and achievable for a negotiation to be successful. These principles should provide a benchmark for the buyer to aim for and still allow flexibility in exploring other aspects of the deal that may help achieve this outcome.
An example of using a principle rather than a position would be a ‘lease back’ purchase negotiation where the buyer’s main principle is to achieve an 8% yield. To achieve this benchmark a buyer may explore the option of varying the terms of the deal such as the agreed rent to be paid, capital expenditure contributions, or lease securities.
8. Aim to be a firm, but reasonable negotiator
Under the guidelines of the previous points a negotiator needs to remain firm on their guidelines and principles, and maintain flexibility. By maintaining flexibility a negotiator can offer reasonable solutions to the other party to resolve any ’stand offs’ or ‘stalling’ of the negotiation process. An example would be a negotiator who has a principle of achieving an 8% return but is willing to accept a variation in terms such as a delayed settlement.
9. If negotiations become heated for whatever reason, always focus on the problems and not the people. Whenever you make an emotional outburst, you tend to give up some control.
It is easy during a negotiation process that may involve a lot of physical and emotional input to reach a ‘stalling point’, where no resolution seems possible. It is at this point that emotions are tested and the potential for emotional outbursts is high. Both parties may lose sight of the real problem and focus their frustrations on the people in the other party rather than the problem at hand.
Trust and respect slowly build between two parties during a negotiation process and is critical in being able to successfully complete a negotiation. However this trust and respect can be lost quickly with irrational behavior and emotional outbursts. If at any stage a buyer begins to focus on the people rather than the problems they should take some time out from the negotiations. During this time out they should reassess their guidelines and principles and identify what may be the real problems holding back the negotiations. It is also important at this stage to think about the real motivation of the other party and how the negotiations can be fine tuned to meet their needs.
10. Always be consistent during a negotiation.
As mentioned in the previous points trust and respect slowly build between two parties during a negotiation process, and it is very important to maintain and nurture this relationship. As the relationship develops you may gain further insight into the true motivations of the seller. By identifying their true motivations the buyer can tailor their negotiations to provide concessions to the other party that are high value to the other party but low value to the buyer. As with emotional outbursts being inconsistent with what is said and what is done will also damage the relationship and jeopardize the negotiations.
One of the best ways to remove the risk of inconsistency is to keep records of all correspondence with the other party including verbal discussions. This information should be reviewed constantly throughout a negotiation and particularly each time before corresponding with the other party. Another way to avoid inconsistency is to be thoroughly prepared before any discussions with the other party. This means reviewing previous correspondence and also making sure that anything that is said can be done. For example if a buyer says that they can settle in a period of 30 days, they need to check with the relevant third parties such as financiers and solicitors that this is possible.
| If you are looking to buy a commercial investment property and are thinking of using a buyers agent to gain more advantages with your purchase, call Prosper Group now on 1300 664 373 or email us on enquiries@prospergroup.com.au |
Josh Kennedy on 05/13/2010 `at` 06:59 AM:
Very practical guide. Please send me full article.
Nitin on 05/04/2010 `at` 05:39 PM:
Hi, I like the above article can you please send me the full copy. Thanks, Monty
Nitin on 05/04/2010 `at` 05:38 PM:
Hi, I like the above article can you please send me the full copy. Thanks, Monty
