Negotiation - A Tool to Make a Deal

Negotiation is a tool or technique used in purchasing. It is an art that must be honed.

Some of us are too scared to hurt someone's feelings by countering the price they say they want to sell something for.

Some of us are too scared or embarrassed to reject a seller's price. We don't want to look like a "newbie" or we don't want to appear as if we don't have the money (when actually might not).

But we need to understand that negotiation is an option. It is a method or way to reach a goal. It does not have any direct reflection on our personal ability or status.

Negotiation is simply the hammer or the screwdriver or maybe the wrench that we pull out of the toolbox to complete a job.

Change The Way You Look At It!

The way I have learned to look at negotiation is to change my perspective on whatever I'm thinking about buying. If I really, really want it, then price is no object. However, there are few things I really, really want (that cost in the thousands of dollars, I mean).

When it comes to those high-priced items, such as houses, cars, or things like that, I have yet to walk upon one where I just HAD to have it. This is great because it has improved my negotiation skills.

I look at all big ticket items as if I don't have to have it (because I don't). And moreover, I can afford NOT to get it (because not buying it is always easier on the pocket). So, what does all of this mean:

"I'm going to pay whatever I WANT TO PAY FOR IT!!!"

Or, guess what.... I don't have to get it! If you go in with this mentality as opposed to the fear mentality, then learning key negotiation skills can be easy.

So, first thing first:

1. Decide on how much YOU think it's worth.

2. Decide on how much YOU WANT to pay for it.

For instance, let's take a house that is a potential rental property. First, you need to know how much you can get for rent every month. Then, you need to figure out how much profit - positive cash flow- you want to go into your pocket every month. Next, you calculate how much of a monthly payment would net you that amount. Finally, you get on the internet, search for a mortgage calculator where you can type in amounts and rates to see the corresponding loan amount and monthly payment.

You have just figured out how much WANT to pay for that house.

How much do you want to pay???

Here's a concrete example:

You see a house for sale on Tollridge Road. You find out that the houses in the neighborhood rent for about $1,500 per month. You decide that you want to make a reasonable $500 per month, PCF, positive cash flow. This means that your monthly payment should be no more than $1,000. The mortgage calculator ("simple" loan calculator) tells you that a loan for $143,000 at 7.5% for 30 years will mean a monthly payment of $999.88 a month.

Now, you call to find out how much the seller wants for it. Remember, this is how much he 'wants'. It is not how much you have to pay.

You find out he wants $160,000 for it.

You can either start negotiations or move on to the next house in the area that you can get for around $143,000. If you choose to negotiate, and you know your top price is $143,000, then you start at $130,000. He'll probably reject your offer and possibly offer a counter-offer.

His counter-offer will not magically be $143,000 but it at least opens the door to maybe reach a happy medium. Maybe, through negotiation, you can achieve the middle price of $145,000. This might not be bad either although it cuts into your profit slightly.

Oh and please note, this example only dealt with monthly mortgage amount. It purposefully did not include taxes, insurance, HOA dues, repairs, management fees and other rental property expenses. Please note that in the real world, these expenses MUST be estimated and accounted for whenever you make offers and do your negotiations. I am simply illustrating the value of negotiation.

Back to the negotiation table, the key point is that if the owner does not come down off of his price then you can move on to the next property.

But here's the beauty of negotiation. In addition to asking the owner to come down off his price, you can also ask him other things that might make this a deal.

Remember: 'Deals' are created!

Some are found, but most are created through negotiation.

So, go ahead and ask him:

"Would you accept $143,000 if you did a "For Sale by Owner". (Save 6% in commissions.)

"Would you accept $140,000 if you (Mr. Seller) were the bank and I paid you a higher percentage rate (8.0%)?

"Mr. Seller, I see that your roof is old and worn in a few spots which means I'll have to replace it in a year or two. A new roof might cost me about $10,000. Why don't you credit me $10,000 off your asking price?"

Just start asking "Would you's". You'll know soon enough if this can be a created deal. If it can, then you have practiced negotiating and done well. If not, then you have still practiced negotiating, come up with some new ideas for next time, and are ready for the next property because you are nixing this one.

What's It Worth??

The only other thing you haven't figured out is what the property is worth. This might be a moot point if you have decided that you can't get out of the property what you think is a reasonable PCF.

But let's say that you can get a reasonable PCF. Finding out the property's worth is pretty easy. Just ask the real estate agent to do a comparative market analysis -CMA- on the property. A CMA will let you know what nearby properties have sold for recently as well as what current properties are listed for.

You can also do a check of the area by calling on all the "For Sale" signs and asking how much each house is listed for. Finally, you can get on the internet and punch in the address of the property plus nearby addresses and see how much they last sold for and other information, too.

All of these methods will give you a strong indication of what that house is worth. But I'd suggest you always start with what you WANT to pay for it. Check out other suggestions at REI School

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