THE ART OF NEGOTIATING

The Tables have Turned
There is no question that the tables have turned in terms of purchasing power of buyers in today's market.

That being said negotiating a successful real estate contract even in a buyers market requires communication and listening skills, as well as the ability to create an environment of cooperation.

When I started my career I was exposed to a lot of successful real estate clients who were longer in the tooth than myself.  I learned early in my career that the goal is to reach a “good agreement” – one in which the underlying interests of both buyer and seller are met.

The results of a poor agreement may and often does come back to haunt the parties after closing.  Here are some thoughts for you to consider as you prepare to negotiate for the purchase of your property in today's market:

What do you want to achieve in the negotiation?
For most people the primary focus is the price they will pay for the property.  Certainly this is an important consideration.  But there are other needs that you should think through, like distinguishing between the “must haves” and “would likes”.

A reasoned market analysis, as you are taught by the REIN principles, will always help you establish an appropriate offering price.  Setting a price range allows you to balance the price with other underlying interests.  Letting the Seller know what you need, in a clear and reasoned way, is the first step toward achieving our goals.

• Buying at the lowest price possible.
• Resolving repair and remediation issues fairly.
• Locking in a preferred loan rate for your mortgage.
• Eliminating title or survey issues.
• Forging a good working relationship with the Seller and the tenants.
• Having no future problems after closing.

Is an adversarial or cooperative approach more effective?
When placed in a negotiating position people tend to take one of two routes:

• The hard style: we’re playing hardball so it’s my way or the highway.  The goal is to win.
• The soft style: the goal is agreement, be flexible and compromise.

Both of these approaches are sub-optimal.  The hard guy wins a few battles, but in the end he loses the war.  He grinds his ­relationships into powder, walks away from good deals, spends lots of time in court, stresses himself out and damages his business.  The soft guy keeps his relationships intact, but often ends up getting taken to the cleaners.

There’s a third way – principled negotiation
Negotiating based on principles and hard established evidence as opposed to staking out positions to be either defended or yielded. 

Overall, the best way to establish the price is by a market analysis. It is usually counter-productive to offer so low that the Seller will reject the offer. This will set a negative tone and will not move you in the direction of establishing trust and integrity with the Seller.

Tie it up
It’s important to tie a property up on market analysis as there is always a sense for the Seller that the deal is firm despite the emotional roller coaster of the due diligence negotiation.
However, depending upon your results with consultants and their fair and reasoned evaluation of the property in due diligence, this may start the process all over again.

Due Diligence
In my estimation, using consultants to their fullest possible extent and their reasoned approach to the best advantage in establishing the haircut is your most significant edge in reducing price. 

Also it is important to note and you need to take this away with you this evening, if nothing else,
the essential requirement for your due diligence clauses is to include wording that any decision is to be in your “SOLE AND UNFETTERED DISCRETION”

The inclusion of these words will to certain degree provide a Buyer with an unfettered right to make the relevant determination.

In the mind of the party benefiting from the discretion clause, there is very good reason for having this unfettered discretion – for example, how can one possibly list in advance every potential problem that might be found with any certainty.  The variety of twists and turns and severity of problems that a building inspector/engineer/environmental consultant/urban planner or any other consultant might identify are myriad.

What this does provide in most circumstances is an unrestrained escape hatch when you identify a problem which is unfavourable to you.

It should be noted however that in the eyes of the Courts the sole unfettered discretion does have its limits.  The thought that you can get up one morning scratch your head and get out of the deal is not always the case, especially if it is challenged.  It’s not always an absolute power to bail in the eyes of the judge.

Ontario courts have on several occasions stated that “sole discretion” provisions must be exercised in a manner which includes:

• an obligation to act honestly,
• an obligation to act in good faith, and
• an obligation to act reasonably, in accordance with either an objective standard or a subjective standard, or both, depending on the facts of the case.

The Haircut
When you're dealing with a haircut, after you’ve completed your due diligence process and found some warts, there is nothing more destructive to the negotiation than a combative style.

Professional negotiators often try to preserve the relationship between the parties despite the fact that a buyer has revealed problems that will hurt the ability to close on the price that was negotiated.   

When this happens the goal is not to reach an impasse in which neither Buyer’s nor Seller’s needs are met.
The contract negotiation process at this stage usually begins with some degree of distrust between Buyer and Seller.  The goal is to move in the direction of trust as quickly as possible.

I often suggest that the Buyer submit a personal letter to the Seller describing why their property in their reasoned view is not worth the asking price, pointing out deficiencies, whether they be structural, zoning or environmental.

Unfortunately, this may backfire and start the negotiation with a defensive Seller.

That is why it's important to firmly anchor pricing, repair requests and other points to outside data and reasoned approaches by consultants in your memo.  Make efforts to show that the proposals have not been made unreasonably.

Folks who have taken pride in their property, will have a negative reaction to a critical Buyer.

Some agents may have an “us against them” strategy.  That is why I like to have personalized cover memos with your responses to the Seller in order to break down the barrier that an agent may create.
How do you work with an adversarial strategy by a Seller or Agent?

Sometimes you have no choice but to work with a combative seller, lawyer or agent or what I call a testadura, which means “hard head” in Italian.  You can bet creative solutions are not likely to be found in this environment.  Working with a combative style negotiator requires good control of your own emotions.
Here are some pointers:

• Do not respond emotionally.  An angry or defensive response to your haircut will escalate the negotiation into a no-win battle.
• Do not argue.  Arguing usually positions the other party more strongly and drags the negotiation process off course.
• Do not ignore their arguments or statements. Listen carefully, but do not accept or reject.
• Acknowledge the fact that certain emotions are present, without responding in kind. Strong emotions arouse emotions in others, including fear and anger. Their anger may have a source outside the contract, or it may be a negotiation tactic.
• Do not allow hazy proposals to stand.  Put everything in writing. An emotional negotiator will usually produce an unclear agreement.
• Offer some “wins” on some of the terms.  Face saving is important. Make your offer as attractive to the Seller as possible.  Look for ways to meet their underlying interests.
• Remember that they may have a beautiful property that satisfies your goals.

Is every point in the contact negotiable?
Yes. However, one of the most effective means of coming to an agreement is to rely on consistent standards through your professional consultants when possible.  Using accepted standards and reasoned evidence of deficiencies prevents Buyer and Seller from haggling over every point.  On the other hand, all the points in an offer can be used to help structure the deal.  They offer trade-offs for both parties to get what they want.

Most people are fair minded and reasonable.  They respond well to respectful treatment and to having their concerns heard.  If the Seller feels that the Buyer and agent are acting with integrity, their attitude will be much more cooperative.

As we all know, contract negotiation brings high anxiety and stress.  Both Buyer and Seller are under pressure, with future plans at stake.  Acting with integrity does not mean that all cards have to be put on the table.  It is not appropriate to discuss your price range, financial details or urgency to move. It is valuable to develop trust because trust raises the level of cooperation between the parties and forwards the negotiation.

Sharing the Pie
Especially in negotiating properties in today’s market place, it is always important to expand the pie from time to time to make a deal happen.  This is the compromise of providing what you need and the best deal for the Seller.  I find recently in every ever-increasing situations, a requirement to negotiate share purchase arrangements which include Vendor take back provisions which allow for a capital gains deferral, while you, as the Purchaser, get a little bit more flexibility on the amount of money to be put down.  Overall based on certain criteria everybody can often win.

I had several situations in the last year where we purchased the shares of a property company and then arranged for a Vendor take back mortgage.  Some of my clients have found this to be a valuable way to acquire a property because they may get the benefit of a 20 year credit rating with a viable company.  As well, the Vendor gets certain tax benefits as it relates to the capital gain.  What I found was that it was a win-win for all where the Vendor still had an interest in the property with the Vendor take back mortgage and may have the opportunity to obtain a significant capital gains deferral or a capital dividend opportunity.  But that calculation is left for the accountants.
On the other hand the Purchaser gets the opportunity of a solid credit history.

War Stories
Over the past number of months with the economic downturn that has been certain types of properties where significant reduction in price can be obtained.  I have certainly found with the acquisition of high-end residential properties a tremendous shift in the balance of power between Buyers and Sellers.

One circumstance was that my client was in the market for high-end home in the GTA and we were able to look at a property that was listed at around 7 million and actually make a well reasoned offer at $4 million.  This goal was not obtained easily but we did our research on the Vendor himself and we did our research on the type of property and the various motivations that the Seller was under.  It also helped that we were involved with a dual agent situation.  The nice thing in a dual agent situation is that once that deal is firm he will be entitled to a tremendous amount of money when the commission cheque is payable.  I joked that he was already mentally buying a dining room set for his wife when we were signing the papers.  I don’t think I was far-off.  When it came to negotiating the deal, this hundred plus thousand dollar commission had a real influence in our hair cut.  Furthermore with our due diligence we spent a considerable amount of time and through the use of various consultants, established a well reasoned appraisal of the home in every aspect.  Structural mechanical/thermal/reports abounded.  In doing so we now had our fortified ammunition for the further haircut of about $100,000.

The same applies with environmental remediation.  A couple of years ago we locked up a property with around 15 acres of industrial land that abutted an important airport.  If you can believe it, the subject property was home to a sporting clay/skeet club for the last 30 years. 

Thankfully no bazookas were allowed on the site as the planes were landing every three minutes.

The price was set and then the haircut began.  Given that lead had plummeted into the ground for over 30 years, our client’s due diligence and environmental remediation due diligence allowed for the removal of meters of fill from the site amounting to hundreds upon hundreds of dump truck loads of fill.  When this was determined, the property was purchased for next to nothing relative to the remediation costs and the dicey circumstances that were required to remediate the land.

We also recently found that abatements can be obtained where simple mistakes in the listing agreements as to square footage, land size or any other matters of inaccuracy on the part of the listing agent.

It appears that haircuts will be in fashion for a little while longer

In the Chinese language the word “crisis” is exactly the same as the word “opportunity”.  As Don had surmised on the show last night, using the doom and gloom to one’s advantage will get you a long way in today’s marketplace.

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