, ,

Part 2: Preparation for a real estate negotiation

In a previous post, I noted that people in the real estate industry benefit by being skilled negotiators.  Mostly, that post focused on tactics which are privately profitable but which apply to many situations in addition to real estate, such as buying a new car or starting a new job.  Effective negotiating in a real estate context may be special because it is less about asserting an answer and more about asking the right question.  In other words, a deeper understanding of the situation reveals a bigger picture which can be combined usefully with a narrow focus on tactics.

For example, and despite the fact that phrases such as “market value” or the “market price” are commonly used, real estate markets display a number of features which are much too complicated to discuss in an ordinary undergraduate business or economics classes.  Real estate markets are “illiquid”; transactions are infrequent and costly.  Consequently, there is a difference between what a buyer is willing to pay and what a seller is willing to accept.  And, individual value is not necessarily equal to the transaction price.  This fact confuses some people who try to apply a valuation formula (for the right price, such as net present value) and treat it as the magic key to find the right answer.  They become confused when the other side uses the same formula to find a different answer.  Or, when some members of their team refuse to believe a carefully crafted argument based on the formula.  The formula is a starting point but, in this situation, should not be the end of the discussion.

Buying or selling real estate affects many aspects of a person’s life: for example, it could be their home, place of work, or retirement wealth.  Decisions made now can have long-lasting but uncertain effects.  So, having a formula which reduces everything to a single dimension can seem to simplify the negotiation problem.  Reaching a lasting agreement usually requires more insight: What does the other side want?  What goes into that formula?  How are the different aspects weighted?  What do I want?  Once the answers to these big picture questions are well-understood, it becomes much easier to recognize a good deal and to walk away from a bad deal.

The answer to “Should I wait for somebody else?” depends on trends.  Bargaining room, measured in the many $10,000s for a residential property, adds uncertainty when analysing trends in the market price.  The fact that there are also big properties and small properties means that an easy-to-calculate average price may not be relevant.  This relevancy issue is especially important for media reports which talk about “the average price of a house sold in Canada”: a change in the price or number of sales of single family dwellings in Moose Jaw has little relevance to somebody who might buy a condo in Toronto.

Focusing on “comparable properties” provides some help in establishing the market price but is less useful if the new owner plans to change redevelop the property to its “highest and best use”.  Analysts need to apply insight rather than rely on common formulas.  Negotiating effectively is not just about tactics or reacting to the tactics used by the other side.  One of the most important lessons from this Big Idea is the benefits of preparation.  In real estate, understanding the situation enables a skilled negotiator to exploit it regardless of who is on the other side of the table.