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Part 1: Tactics: Strong vs. Weak

Real estate is a very special class of asset because it is big and heterogeneous.  Each property is at least a little different and occasionally very different.  Those differences cause all sorts of complications for appraisers and market analysts.  Like all of the other big ideas, recognizing this idea affects behaviour and your understanding of context.

At a simple level, many people will look at these differences and sense a profitable bargaining opportunity: they say “Great.  I am a skilled negotiator.”  There are lots of exciting jobs in the real estate business waiting for skilled negotiators.

In the real estate business, some may be inspired by Donald Trump and copy his intimidating tactics.  While it is often successful, I think that this strategy is “weak” (in the sense of Axelrod): it succeeds by intimidating somebody weaker.  Donald Trump’s companies have gone bankrupt multiple times and, at those times, I imagine that Trump was the one feeling intimidated.  In the real world, there is always somebody more intimidating.  Or, to put it another way, you might think that you are a skilled negotiator because you have yet to meet somebody who has real skill.

Lots of people offer different kinds of advice on the tactics but I have never heard of a tactic that always works.  Therefore, I think that a more useful bit of advice focuses on strategy: rather than focus on tactics, make sure that you do not forget the goal.  After everybody agrees that an agreement would create value then the goal of negotiating is to make your “share of the pie” bigger.  Especially in an environment where a long term perspective matters, intimidating somebody now to make an agreement can raise costs later.  In other words, a “strong” strategy can succeed even when other people are using strong strategies.

Especially in real estate, using intimidation to negotiate a deal is a weak tactic for a second reason: there may be more than two sides.  For example, consider a new development.  A developer may need to negotiate with the city politicians and with neighbours who worry about the proposed land use.  Acting tough because you think that you are negotiating in a zero-sum game can create enemies unnecessarily; i.e. you may create NIMBYists whose tactics  increase your cost of business.  Acting tough may also overlook some natural allies.

So, the real estate business is interesting because of negotiations.  They can be exciting and there is much to learn.  And these can be high stakes negotiations: the recent sale of the Scotia Plaza building in downtown Toronto involved the high bidder and many other bidders who decided to drop out after the price went past CAD$1.2 billion.  It is interesting to note that only time will tell whether the high bidder was the “winner”.