California real estate: do not give up contorl of the negotiation

California Real Estate: Don't Give Up Control of the Negotiation

Posted by Victoria Pynchon on April 20, 2013

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In the original hit CBS series “Survivor,” 16 participants started out on an island together and, one by one, they voted off their colleagues until only one remained. That “Survivor” won, taking home the $1 million prize.

How did he win? His strategy largely revolved around building a coalition with three other participants.

These four participants initially banded together and agreed to vote as a block. It worked. They all made it to the final four, when the rules of the game broke up the coalition.

Coalitions form a crucial element in almost every multiparty negotiation.

Whether you have countries ganging up on each other in the United Nations, or three people forming a partnership, coalitions make a huge difference.

So how can you effectively negotiate in multiparty contexts?

First, understand that multiparty negotiations, while unique in many ways, do not change the fundamental strategies you should use in all negotiation contexts. In fact, it makes those strategies, and your preparation of them, even more critical.

In every negotiation, and especially in multiparty negotiations, go through my Five Golden Rules. Apply them, though, to all the parties involved. Here’s how this works.

• Golden Rule One: Information is power – so get it. In multiparty negotiations, get as much information as possible about everything and everyone.

Ascertain each party’s goals and interests, and figure out whose goals and interests conflict and whose don’t.

This may be your key to success. How? Your allies – or coalition partners – will be those with whom you share goals and interests. And they will be your allies as long as those interests remain aligned.

The United States wants the United Nations to support its policy against Iraq.

So how does it sign up allies? By emphasizing the risk every country faces from an Iraq armed with weapons of mass destruction. This is a shared interest.

• Golden Rule Two: Maximize your leverage. You maximize your leverage in multiparty negotiations by a) evaluating how much all the parties need a deal relative to each other, b) finding out all the parties’ best alternatives to a deal, and c) taking practical steps to increase the value of your alternatives if the deal falls apart.

Holdouts in multiparty negotiations know this well.

Here’s an example. In real estate, developers often set up dummy corporations to separately buy the parcels of land they need for each project. Why?

If a seller finds out a developer is buying all the land in his area, that seller could hold out until the end, when he would likely get a much greater price.

If you own that last parcel and you know the developer really needs it because he can’t complete his development without it, you have great leverage.

• Golden Rule Three: Employ “fair” objective criteria. Objective criteria in the form of independent standards take on added importance in multiparty negotiations.

Why? Peer pressure and precedent. If you can get just one of your counterparts to accept the validity of your standard (like a market value analysis of the product you’re selling, or your expert’s opinion in a lawsuit), it will be easier to get the rest to fall into line.

At that point, peer pressure will come to bear on the rest based on the precedent just set.

I once advised a plaintiff’s lawyer involved in a negotiation with multiple defendants. There, one of the defendants had settled early for a quite substantial sum.

The plaintiff’s lawyer was able to use this precedent – set by the defendants’ former colleague – to justify his fair and reasonable settlement offers to the other defendants.

• Golden Rule Four: Design an offer and concession strategy. Multiparty offer and concession dynamics are complex.

As such, first find out what offer and concession behavior has characterized similar multiparty negotiations in the past, including who has historically made the first offer, why, and how far the parties have moved from start to finish.

Then brainstorm what might occur when the real negotiation begins.

• Golden Rule Five: Control the agenda.. It’s hard to emphasize enough the importance of controlling the agenda in multiparty negotiations.

As the number of parties increase, so does the importance of controlling the agenda. Of course, this does not necessarily mean you should try to overtly control the agenda. Subtlety and silence can work effectively, too.

Ten years ago, I was involved in a seven-party negotiation in which I said virtually nothing. Why? Another party took control of the agenda, and it was a great agenda for me, too. So I just sat back and enjoyed it.

I’ve only watched “Survivor” a few times. Each time I watch it, though, I see the participants forming or breaking coalitions.

The question thus arises: Will the coalition last? And the answer is – it depends on the parties’ personal interests and trustworthiness.

Often, $1 million also rides on this answer.

The Los Angeles real estate market has gone crazy again and it's a sellers' market.
My own agent tells me she's recently been in bidding wars with 65 offers on the table.
The Los Angeles Times tells me that these bidding wars among buyers often follow a single simple negotiation tactic by the seller.
The seller prices the property below "market" to generate dozens of offers, many of them "above asking." Then the seller pits the buyers against one another, hoping that a low appraisal doesn't scuttle the deal.
Though a predatory practice, if the buyers allow themselves to be manipulated in this manner, well, it's a free country, right? And good for the sellers. They get top dollar.
But as the Times warns, there are dangers for them as well - the "deal" may fall flat on its face because the bank won't loan the buyer enough money to cover the mortgage.
Advice to Sellers: Don't Give Up Control of the Negotiation
Here's a new negotiation tactic for this "bubbly, frothy" market that one pundit characterizes as having moved "directly from Armageddon to speculation."
Price the property, collect offers, tell potential buyers that "some" of them are "above asking" and solicit "last, best and final offers" without countering.
I've recently been asked to do this for a sweet little house in the Wilshire Vista district of Los Angeles.
To my quite negotiation-educated way of thinking, this seller has just given up control of the negotiation on the off-chance that the buyers will behave irrationally. And that's bad for sellers and bad for buyers.
After the jump, I'll tell you why.
Here's How the Deal Is Being Negotiated
First, the seller "anchored" at a price that is reasonable in this market.
"This market" is one in which Inventory is as low as the interest rates. That's pumped up prices, creating a bubble that could easily burst, leaving all buyers with propety that's not worth what they paid for it. That means buyers are - and should be - jumpy about entering this market at all, let alone getting into bidding wars.
Still, the seller's anchor was a good one for buyers willing to bet that we're at the bottom of the bubble, that home prices will increase, and that when the bubble eventually, invevitably bursts, a new price range at least as high as those now in play will be firmly established in Los Angeles, i.e., we're not buying at the top of the new market.
Remember that an anchor of an aggressive first offer like this one will drive the negotiation in the seller's favor throughout the bargaining session unless the buyers are able to re-anchor.
Anchoring has a particularly out-sized effect on the final price as uncertainty in the market increases. That's because anchors tend to focus buyers more on the benefits of the deal than on the detriments.
Second, buyers submit offers.
In this case, I am given to understand that there are two offers at "asking" and three offers above "asking." Instead of countering with a number the seller believes one of the buyers will accept (or counter) the seller has asked the buyers to negotiate blind against themselves and all other buyers by making a "best and final offer."
What????????
The seller is asking the buyers to throw a dart at a dart board in the dark.
Obviously, that's bad for the buyers because they have no idea what number they have to exceed (or match) in order to "win" the bidding game.
But it's also bad for the seller, who loses control of the negotiation and irritates the buyer, particularly this buyer.
Asking a negotiator to bargain against herself in the dark reeks of gamesmanship and short-circuits the way in which people expect to bargain - in a series of offers and counters that permits everyone to feel (yes feel) that they got as good a deal as possible.
It also suggests that the "higher" offers either aren't that great on terms (size of down; time to close) or that they're not that much "higher."
Otherwise, you'd expect to be told someone else offered $25,000 more than you did, thereby effectively re-anchoring the price and reassuring the buyers that the property is worth making a substantially increased offer for.
Don't irritate Your Negotiation Partner
When you irritate a negotiation partner, she is not likely to think about the positive qualities of the item being negotiated but everything negative about the potential deal.
Remember that buyers in an over-heated market are jumpy. You - the seller - have nevertheless managed to interest five people in paying more than would be reasonable in a "normal" market. You've anchored aggressively and we've taken the bait.
Now you, the seller, have squandered your good will and damaged your anchor, causing the buyers - or at least this buyer - to reevaluate the decision to make an offer for this piece of property at all.
Now I'm having these thoughts.
The house is really, really small. If it weren't for the large and quite beautiful back garden, I wouldn't have offered asking in the first place. Now I'm more focused on how small the house is than how much I like the garden.
The converted garage in the back is unpermitted, which I'll have to disclose if I sell the property, lowering its value in a "normal" market (remembering that the market will always return to some kind of normalcy).
There isn't really a dining room in the house even though it was nicely "staged" with a small dining table in the living room.
The Wilshire Vista neighborhood may increase in value because its in transition. Then again, it may not. If it doesn't, I've made a poor investment in Southern California real estate. I bought a condo in a bubble before the '92 recession and my father's exasperation - "you're the only person in the family to lose money on California real estate" - comes painfully back to me as a warning from the grave.
He bought forecloures in the San Fernando Valley in the 1960s. Enough said.
The seller has lost control of the negotiation. This potential buyer is experiencing relief from what she feared might be buyers' remorse. Unless the seller has other strong offers with quick closings and high down payments, he or she may well have just lost the best deal available.
What should the seller have done?
The seller should have made a counter offer that was reasonably related both to the original price and to the actual "above asking" offers received.
What should the other buyers do?
Beware.

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