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Negotiation: The Most Critical Skill in Real Estate

Jul 25, 2010

Posted by

Thomas Hayman

Tom Hayman is the Co-Founder and CEO of the Real Estate Negotiation Institute (www.theRENI.com), a national negotiation training and coaching company serving the real estate industry. Tom was a top ne Read more

A couple of years ago when many cities were experiencing strong seller’s markets, listing agents didn’t need exceptional negotiation skills (or even good negotiation skills!). But even then, listing agents who were skilled negotiators often produced even more spectacular results for their sellers.

In Phoenix, one agent obtained 33 written offers in 3 days for his seller who ultimately sold the property for $23,500 (13%) over an aggressively high list price. (And yes, the listing agent negotiated to have the appraisal contingency waived by the buyer!)

Today, many markets have shifted to a strong buyer’s market which requires negotiations skills on the seller’s side of the table.  Additionally, with the growing number of short sales across the country, many real estate transactions are compounded by negotiations with the seller’s lien holders.  There has never been a time in the housing market where negotiation skills should be more valued. 

A Common Thread

What do the following have in common?

• Your seller’s lender doesn’t want to pay your professional service fee.

• The buyer’s mortgage lender won’t have the loan documents completed by closing.

• A buyer submits a low-ball offer on one of your listings 2 days before your listing contract expires.

• Your sellers want to over-price their listing.

• Another agent has a referral for you but wants a 40% referral fee.

• The buyer’s home inspector has listed 27 items that the buyer now wants your seller to address.

• Your buyer has concerns about signing a buyer-broker agreement.

• Your seller doesn’t want to disclose a previous mold problem.

• Your seller only wants a 60-day listing agreement.

All of the above (and hundreds more you can think of) are examples of situations in real estate where negotiation skills (think of negotiating as the art of persuading or influencing others) are needed.  Daily, real estate agents are faced with a constant parade of negotiation situations that require skill, diplomacy, poise, and patience. Skilled agents have learned (sometimes over many years) how to deal effectively with these situations, while unskilled agents often struggle mightily. For the unskilled agents, results include sub-optimal outcomes, dissatisfied or irate clients, no referrals, and, all too often, agent/broker/client failure.

Five Categories

Many agents and brokers don’t realize how much negotiating there is in real estate. Negotiation is perhaps the most fundamental skill in real estate, and there are five general categories or types of real estate negotiations.

1) Broker/Agent and Rainmaker/Team Member Negotiations

The rainmaker (or team leader) negotiates with team members on the same issues and areas that brokers must negotiate (or dictate!) with solo agents. Service fee/commission splits, expenses, training, standards of practice, responsibilities/expectations, performance reviews, bonuses, severance packages, benefits, profit sharing, and the like are all on the table for negotiation. The power in these negotiations normally rests with the broker and rainmaker (reward/punish power), however “give and take” is often still required to maintain harmony and maximize performance. A win-win approach here normally leads to the best outcome for both parties.

2) Agents Negotiating with Clients

The art of persuasion often starts before you ever meet your client, with effective advertising that incorporates professional persuasion principles. Then, from the initial appointment to the final closing/recording, agents must negotiate numerous issues with their clients, including fees, potential bonuses, time periods, availability, tour schedules, open houses, marketing plans, terms of offers and counter offers, home staging recommendations, inspection issues, appraisal issues, and so forth.

Often times, the best way for an agent to show potential clients how hard he/she will negotiate for them is to demonstrate techniques and approaches in negotiations with them! In fact, many of the approaches used in negotiations with clients carry over to negotiations on behalf of clients.

For example, the market data and additional factors used with sellers to determine an appropriate list price for their property will be used again with the buyers and buyer’s agents in persuading them to make an acceptable offer. Thus, challenging negotiations with a client can actually be beneficial for the ensuing negotiations with the other side.

3) Agents Negotiating with Third Parties

Agents will often negotiate with third party affiliates, especially as their businesses grow. These negotiations normally involve co-marketing arrangements to optimize advertising expenditures for the agent, and/or special rates or services for preferred clients. Negotiations with mortgage lenders, title companies, home inspectors, home warranty companies, carpet installers or cleaners, landscapers, painters, and others represent potential increased value for clients and agents alike. Mega-agents often have third party affiliates advertise in directories or farming newsletters to offset costs or to create an additional revenue stream / profit center.

4) Agents Negotiating with Other Agents for Their Own Account

Agents also routinely negotiate with other agents for referral fees, co-brokes, open houses, or even what service fee you’ll charge their out-of-town relative and friend! These can be some of the most difficult negotiations in real estate! The worst experience I’ve had in real estate was with another agent who insisted I take a 2% fee on his future sister-in-law’s home (she was moving away from our area) because I already had a potential buyer for the property and therefore wouldn’t be doing much work to actually sell the property. Skilled negotiators know “you cannot reason with unreasonable people” and the most practical choice in these situations is to run away!

5) Agents Negotiating with Other Agents on Behalf of Clients

Buyers and sellers hire real estate agents to help them get results. While the clients set the goals/limits for the transaction and make all of the final decisions, the agents are the actual negotiators trying to influence and persuade the other side to accept their client’s offer (or counter offer). Clients have a right to expect, and in fact do expect agents to have solid negotiation skills. For example, in the 2009 NAR Profile of Home Buyers and Sellers, 99 percent of buyers say they believe negotiation skills are “very or somewhat important.”Fiduciary responsibility and competency go hand-in-hand. Representing a client with expert negotiation skills is simply a higher level of fiduciary representation. Representing a client with no negotiation skills is misrepresentation.

When negotiating on behalf of clients, the negotiation strategy needs to be addressed with clients in depth, similar to the advertising / marketing strategy, home preparation / staging strategy, list price / initial offer strategy, etc. Skilled negotiators often discuss and share various negotiation options with clients as the transaction progresses, obtaining input and approval along the way on various strategies and tactics.

An Acquired Skill

To no one’s surprise, research conclusively shows skilled negotiators get better results. Virtually all skills are acquired through effective training and practice. It’s safe to say that most, if not all, successful professionals understand the relationship between training, practice, and results.

Given the numerous negotiation situations real estate agents routinely face, professional negotiation training should be at the top of the training list.

Trust and Collaboration

One area that receives intense focus in our negotiation training is the role of trust and collaboration in achieving superior results. During the 1990’s many manufacturing companies developed mutually beneficial strategic relationships with suppliers, as well as with the upstream retailers who sold the finished products. We developed processes and techniques to establish greater trust in these key relationships which led to:

1) More open information sharing;

2) Greater clarification of goals and issues;

3) A greater sense of mutual influence;

4) A more thorough search for alternatives;

5) Higher overall satisfaction with the relationship; and, most importantly,

6) Better results for all involved parties.

Many other negotiation studies also show that trust and collaboration are critical in achieving superior results. Real estate negotiations are no different in this regard.

Systemic Approach

Real estate agents are normally taught to have a methodical, systemic approach in many areas important to real estate success:

• lead generation,

• marketing plans for listings,

• open houses,

• FSBOs,

• expired listings,

• budgeting,

• recruiting and hiring,

• market analysis, and others.

Skilled negotiators also know that a methodical, systemic approach to negotiation planning is critical to success. With a good planning guide, the right information for the negotiation is identified and obtained, options are analyzed and evaluated, and strategies and tactics are selected to effectively persuade and influence the other side. A successful negotiation generates a win-win outcome where both parties are satisfied to varying degrees. (Given the importance of the real estate transaction to each party, a minimum win is required for both parties to ultimately reach agreement. While various factors normally create an unbalanced playing field, negotiation skills usually dictate which side wins the most.) A planning system also facilitates the art of concession making and taking, which is where skilled negotiators really excel.

The Right Stuff

Real estate is a highly competitive industry, no different than the rest of the business world. Success in business depends in large part on having the right product or service. Negotiation is one of the services buyers and sellers expect from their real estate agent. Unfortunately, most real estate agents have never had the opportunity to take professional negotiation training. There’s no question, in today’s market especially, professional negotiation training will create a competitive advantage for real estate agents. Persuading others is the “job” of a real estate practitioner, and the more effective one becomes in the art of persuasion, the better the results – both for the client and the agent.

In his inaugural address in 1961, John F. Kennedy said, “Let us never negotiate out of fear, but let us never fear to negotiate.” Skilled negotiators never negotiate out of fear, and never fear negotiations. This is what clients expect, and should get.