As the saying goes, when it comes to real estate investing: you make your money when you buy, not when you sell.
Clearly, then, one of the best ways to increase the profitability of your project is to figure out how to negotiate with the sellers in order to purchase your investment property at the lowest possible price.
To help you do that, we have compiled four tips that will help you improve your negotiating skills and ensure that you get the best price on every deal. Follow this advice and watch the asking price stop to drop.
1. Don’t negotiate against yourself
This is a standard rule of negotiations, regardless of what you are negotiating for. However, it is not as clear cut as it seems: there are two sides to this.
First, the person who speaks first sets the tone for the negotiation. This is called “anchoring” because if the first person to speak values the asset highly, the second person is likely to value the asset similarly. Since you have done your research and know what the property is worth, the anchoring principle is not as important. But, if you’re going into the negotiation less-informed, you don’t want to negotiate against yourself by offering more than the counterparty believes the property is worth.
Second, most negotiations end at the midpoint of the first two offers; no one wants to concede more than the other, so if the first person drops their asking price by $1500, the second will likely increase their offer by $1500. Then, if the first person drops by $1200, the second will likely follow suit. This process continues until the two negotiators settle on the middle value. Both are more satisfied because they feel like they fought for a fair deal. By letting the other person speak first, you define the midpoint, which gives you much more power than the anchoring principle would.
Plus, there’s a chance the other party’s offer will be even lower than what you would have offered: you never want to negotiate against yourself, and by waiting to see what the seller asks for, you eliminate this risk.
For the best results, come in with a goal price; let’s say you are aiming to acquire a property for $80,000. If the seller asks for $100,000, you raise your eyebrows and offer $60,000, setting a midpoint of $80,000. As they make counter-offers, match their concessions and hopefully you will end up at your goal price. The seller will think they have convinced you to pay more than you intended, but you will know that you orchestrated the negotiation effectively.
Keep in mind that this technique is an art, not a science. While negotiations commonly end up at the midpoint of the first two offers, it is not a law of nature: some sellers won’t play by these rules and may either settle for a lower price or refuse to budge altogether. Use this tip as a starting point, but be aware that different people will negotiate differently, and you are not guaranteed a particular price just because you employ this strategy.
2. Be patient
Time is money, but in real estate negotiations, money sometimes requires time.
When the other party makes an offer, don’t say anything right away. By appearing to mull things over for a long time, you’ll make the seller uncomfortable – and convince them you are carefully and cautiously thinking out your plan. Even if you know exactly what your counter-offer will be the minute they speak, let them sweat. It’s more likely they’ll agree to a lower price if you make them silence throws them off balance.
When the turtle wins the race
Sometimes, you can take this to the extreme. If you aren’t at risk of losing right away, take a day to think over each counter-offer.
If you take a day every time they ask for a concession, they will get frustrated with waiting and will eventually just give in to your requests; a few thousand dollars on a $100,000 property may feel like chump change in the moment, but if this strategy saves you a few thousand dollars each time you negotiate, you will end up saving tens of thousands over the course of your investment career.
Think about it like this: you wouldn’t bay $200 for a dishwasher you could get for $100; whether you are saving that money on an appliance or on the purchase of the house, a hundred bucks is a hundred bucks.
Be careful with this strategy since the seller can negotiate with other buyers while you are making them wait… if there are a lot of buyers interested in the property and you implement this strategy, you’ll end up losing the deal. Save this for cases where the time on market is high and the owner is struggling to sell.
Stay in touch
If a seller won’t compromise, keep tabs on them. Many sellers are emotionally attached to their homes and place more value on them than an objective observer would. Often, homeowners have unrealistic expectations for the selling price of their properties and will become more realistic after their property has been on the market for a few months.
Check back in with the seller every few weeks to see if they are ready to come back to the table and make concessions – you can also use this time to refine your strategy and figure out exactly how to get them to lower their asking price.
3. Go in with the right mindset
People don’t typically value saving money as much as they value making money. If you dropped a coupon in a puddle, would you pick it up and use it at the store?
What if it was a dollar?
When you think about the difference between buying a property for $55,000 or buying a property for $54,000, especially if you need to spend two hours haggling for it, the saving may not seem like much. Now imagine that you need to haggle another two hours to get the price down to $53,500. Is it worth it?
In the first case, if you are successful, you just made $500 per hour. In the second, you’re still making a whopping $250 per hour. To put that in perspective, the average lawyer makes less than $70 per hour. No matter how frustrating the negotiation is, those extra four hours just might be worth it.
Think of negotiation as work that you are getting paid for, not as money you are saving. Any accountant will tell you that saving money is the same as earning it, even if it feels different in reality. Take advantage of the pleasure you get from earning money while you’re negotiating, not just when you are working to renovate the house.
4. Do your research
All of these tricks are useful, and if you employ them in multiple negotiations it’s likely each one will save you cash at some point or another, even if they don’t work all the time. However, none of these strategies are a substitute for being sufficiently educated about the value of the property you are trying to acquire.
The only way to know that you’re getting a good deal is to go in with a full arsenal of information. Know your numbers, know what your goal is and how much you are willing to pay. If you don’t know the math inside and out, the seller is going to capitalize on your lack of knowledge and you’re going to end up losing out.
With these simple strategies, you will greatly improve your ability to negotiate property prices. Let the seller offer first, make them wait for your counter-offer, think of negotiating as making money rather than saving it, and know the property value inside and out. Once you’ve figured out how much – or how little – you’re paying for your investment property, call us at Asset Based Lending to get the cash you need in just a few days.