“How can you negotiate the best deals as a buyer in a sellers’ market?” a real estate investor asked me.
“It’s not easy,” I replied. “But using certain negotiation strategies will increase your ability to get the best possible deal.”
Of course, the structural challenge is significant. A sellers’ market means there are more buyers and demand than sellers and supply.
As a result, sellers have a greater likelihood of getting several potential buyers bidding against each other. This puts sellers in a powerful leveraged position and their potential buyers in a relatively weak one.
So what can buyers do?
1. Find potential deals before they hit the open market.
If you hear an owner may want to sell, immediately contact them.
You might even contact a property’s owner even if you don’t hear anything. After all, market values often rise quickly in sellers’ markets and some owners may decide to turn a nice profit if presented with a quick and easy opportunity to do so.
Of course, still critically analyze every potential opportunity. You must keep your finger on the pulse of the market and do your homework on every deal. With market values constantly changing, the key to your best deals still will be dependent on a comprehensive financial and market analysis of the property’s potential and the risk involved.
2. Creatively explore the seller’s interests.
A colleague’s spouse recently helped a couple purchase a home in central Phoenix despite this couple’s offer being lower than two competing offers.
How? My colleague’s spouse insisted on a personal meeting with the seller and found out the seller strongly preferred a buyer who would take care of the house in the same manner she did, and had an interest in an early close with no financial contingencies.
In short, the seller valued a strong, personal connection with the house and a short, certain close as more important than price. Both parties ended up with a great deal.
My advice? Find out what nonprice issues the sellers value. Then fully satisfy them in your offer.
3. Manage the timing.
The passage of time works against most buyers in sellers’ markets.
Why? It gives sellers the opportunity to find other potential buyers and get you bidding against each other.
Avoid this by putting relatively short deadlines on your offers and being prepared to commit and move forward quickly on deals if necessary.
4. Beware of your ego, bidding wars, and the pack mentality.
Auctions almost always favor sellers because they feed competitive buyers’ egos and need to “win.”
So if you end up in an auction or a bidding war, keep your ego in check and maintain your focus on your predetermined goal.
Don’t get carried away by the competitive gamesmanship element of the process.
Winning may carry an unacceptably high cost.
It’s also tempting to bid up when you see another investor, especially a sophisticated one, bidding up the same property. If they are bidding, many think, it must be worthwhile and a good value.
This pack mentality is no substitute for your own due diligence and your own effort to set and stick with your goals.
Others could be bidding with a completely different investment perspective and set of financial expectations than your own. For example, they may intend to commercially develop the property in a unique way, thus justifying for them a relatively high price.
Your interest and business model, on the other hand, may be shorter-term and may not justify nearly that same price. Don’t bid up based on others’ expectations.
Let’s face it, it’s not easy to be a buyer negotiating in a sellers’ market. But you can help level the playing field. And even if you don’t, all may not be lost. You may still end up profiting nicely if the sellers’ market just keeps on going.
That’s a bet many seem to be making these days.
Published October 1, 2004 The Business Journal