Always Ask “Why?” - A Lesson on Principled Negotiations

This time around, we’re going to shift gears a bit and talk about the most annoying thing every real estate deal maker encounters at least once in their lives, either as the aggressor or the victim. That thing is of course the dreaded “re-trade,” which also known as a renegotiation or a re-neg. In the absence of an actual, honest to goodness reason, which I’ll cover, this is the most frustrating and hair-grey, wrinkle inducing concept known to humanity.

Fortunately, I have a very simple solution for you that will relieve stress and ensure that you’re able to handle these encounters with ease and confidence.

The Scenario

Here’s how this usually plays out. Samantha Seller (don’t you love these names?) is ready to dispose of her 10 unit apartment building in Los Angeles which she constructed a few years ago and self managed. Through hard work and sweat, she earned a tidy profit. However, she got excited about a new development opportunity 3 blocks away and wanted to buy it to do another apartment project. Since she’s a client of Advise RE, she was properly advised by her amazing accountants that she could engage in a 1031 exchange and defer the gain on her existing project, thus keeping all of the appreciation she accumulated on her balance sheet, instead of splitting it with the IRS.

She engaged Billy Broker to list her property and after a couple of weeks, received an offer from Ivan Investor, which she accepted for $4,999,999, which was primarily to avoid the frustrating ULA transfer tax that was recently passed in the city. Prior to the offer, Billy sent Ivan all of the financial information relating to the property and conducted a site tour to show him the units.

Ivan performed his due diligence, including engaging a building inspector, a market analysis, and a review of title and zoning. When it came time to release contingencies, Ivan communicated to Samantha that he will release his contingencies in exchange for a purchase price reduction of $250,000. He said he didn’t feel comfortable with the price and needed this reduction to address various risks with the property. Upon receiving this request, a confused and offended Samantha fumed all night, unable to sleep.

The Mistake

Unfortunately, most people let their emotions get the better of them and they make rash or irrational decisions at this point. A typical response to this usually follows one of two patterns. The first is a blatant “NO!” or some variation of this, along with very unprofessional language not used in every day business settings. Let’s call this the “hold your ground strategy.” This sounds like an aggressive, tough stance, but I’d argue this isn’t the right first step. I’ve definitely been on the other end of this and had the other side scream at me and call me all sorts of names. I find it amusing.

The other response is to immediately engage in a high-low strategy. “Tell Ivan I’ll only give him $50,000 off the price.” Ivan then of course will respond with $200,000. Samantha would counter with $100,000. Ivan counters with $150,000, and they both begrudgingly agree, feeling that they both lost. This is a popular business strategy in yard sales, but not appropriate for big ticket items like real estate.

The Question

The problem with what I have above is that neither uncover the real reasons for the re-negotiation. In both instances of holding your ground and high-low, both sides are making assumptions about what the other party wants.

In the case of the Ivan, he is assuming that Samantha won’t give him what he really wants, so he has to make a large ask to meet or compromise somewhere in the middle. Samantha assumed Ivan is trying to steal the property from her and is trying to cede as little ground as possible to save her economics and her pride.

The problem is that acting on assumptions rarely lead to successful outcomes. Instead of being upset, if I was in Samantha’s shoes, I’d ask one simple question to Ivan, “Why?”

The Answer

At this point, Ivan may have a very good reason. For example, he might say that he discovered that the building has major structural defects and would require him to make $200,000 in repairs. This might actually be a reasonable request of which Samantha should deeply consider. Maybe the price chop is warranted after all and actually might seem like a good deal to take.

Another reason I’ve seen is that the appraisal with the buyer’s lender may have fallen short of the offer price, which would require the buyer to inject more equity and they may not have that on hand. To solve this problem, they propose a price reduction. But what if there was another solution? Samantha could always carry back the $250K difference as a deed of trust in second position, thus achieving the buyer’s problem of liquidity with the seller’s problem of keeping the price firm.

Unfortunately, more often than not, the above two examples are usually exaggerated and are really used to disguise the true intention of just getting the property cheaper. Years ago, I was in escrow with a buyer and they told me that their appraisal came in short. When I proposed that we carry back the difference, the buyer stammered and said something like, “Well, we don’t think that will work.” When I asked the magical question of “Why?”, they replied that they just wanted the property just be cheaper. I followed up with a question asking them if they believed that was a reasonable basis for a price reduction. Their reply came the next day with an email reaffirming the original contract terms and we closed the deal without any changes.

Conclusion

Everything I say above is with one caveat, that if you hold all the cards, you have my permission to be lazy and not ask the question. I recall in 2021 that few sellers’ agents would even bother touring prospective buyers around their listings prior to receiving an offer, because sellers literally had the highest negotiation leverage during that historically low interest rate environment. So if any offer came in below ask or even at ask, they had the freedom to toss those offers straight into the bin.

That all being said, the one constant in life is change. Economic conditions changes and the equilibrium between supply and demand continues to evolve. At some point, you will find yourself in the middle of a negotiation, whether its in real estate, business partnerships, or even friendships and personal relationships. No matter the case, I urge you to have the emotional control to pause, take a breath, and when something is being asked of you, ask the question, “Why?”

On this topic or anything we cover, you can always ask us “Why” with just a simple click!