Thursday, May 08, 2008

Be Careful Who You Choose to Negotiate

by Osman Parvez
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I received a good comment in response to my last post, and thought it deserved a post of its own. The commenter wrote:

In a typical real estate transaction there are 4 parties. The buyers and sellers have direct interests and emotional investment in the outcome and their agents not as much.

What is the right role in the negotiating process for the agents?


Unlike the buyer and sellers who most likely will never do business with each other in the future, the two agents are bound to meet and the reputation and track record is key since the news about tactics spread quickly.


Should they leave all negotiations to the principals? Do they?


By the way, good work with the blog.


Absolutely correct. The majority of real estate negotiations involve at least 4 parties. If you're an agent representing the buyer or seller, focusing on perspective rather than empathy should be easier to apply because you'll be less emotionally involved and won't subconsciously seek emotional validation. Skilled agents know how to negotiate well without compromising their client. Unskilled, inexperienced agents, often compromise their client's position unwittingly. If you're the buyer or seller represented by an agent in negotiation, the most important thing you can do is choose your agent carefully.

Negotiation is rarely left to the principals and for good reason. Most principals have a difficult time negotiating on their own behalf. Look outside real estate. Whenever sums are large and emotions run high, third party negotiators are likely to be involved. Even people who are expert negotiators themselves know they should leave direct negotiation of their own deals to another party. CEOs are a classic example. By the time they've earned their position, most have negotiated hundreds even thousands of deals, yet they nearly always have a negotiator or consultant manage the deal for their own compensation.

Let's come back to real estate.

Let's say you are thinking about buying or selling a house. You begin the process by looking for property online and calling the listing agent to schedule a showing. If after seeing it, you're interested in that particular property (unlikely), the agent will push to handle the deal without another agent involved. If you don't like the property (likely), the agent will offer her services to you as a buyer's agent.

Having a buyer's agent is far better than letting the listing agent negotiate on behalf of both parties, but many buyers end up using a randomly chosen agent to represent them. You should choose your agent based on her experience as a negotiator or expertise on real estate matters, not but because she happened to be the listing agent of a house you wanted to see. As the commenter noted, reputation and track record are important. In any given market, a few successful real estate agents conduct the majority of transactions and thus will do business with each other repeatedly.

How do you find a good real estate agent? By carefully doing your research, getting recommendations, and conducting interviews. Look for an agent with strong ethics and values, deep knowledge of local market conditions, and expertise in negotiating real estate transactions. By no coincidence, these areas are our core competence and the the focus of constant improvement. If you get a referral from a friend or colleague, be sure to ask for and understand the basis of their recommendation. If you're beginning the process and don't know many agents, I recommend you interview at least three before making your final decision.

Additional Resources:
12 interview questions to ask an agent

Image: fazen





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4 comments:

  1. Osman
    Thanks for taking the time to write a detailed post. I also think that agents can be real value add in negotiations and you are correct they bring the discussions to a non-emotional plane. These days when the information asymmetry is not an issue, a reator's role can be repurposed to provide this most overlooked aspect.

    But ...

    You also need to see where the incentives lie. I don't want to quote the much maligned (among some realtors) Levitt's book. But the truth is, if the incentives are not aligned agent negotiations may result in a smaller share of the pie to their principals.

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  2. Fair point. While I know that we'd never compromise our ethics, its better to have aligned incentives. In the past, when clients have expressed a concern, I've offered a structured commission to eliminate the issue but maybe we should be more proactive.

    Do you think the issue is that agents steer buyers towards houses they can't afford? Or is it more that you believe agents won't negotiate hard for buyers because it erodes their commission?

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  3. I do not think agents steer buyers to wards houses they latter can't afford. But the incentives are in trying to close the deal sooner than latter. So a certain amount of anchoring to hasten a decision happen.

    I think the negotiations are still poorly conducted in general. Most realtors say to their buyers, "go in with your best offer". The first rule of negotiation is reject the first offer. The buyers and sellers expect a back and forth "dance".


    When buyers and sellers don't do their homeworks, they shoot from the hip and make postures without really understanding the other side. Both principals should know their BATNAs and reservation price. They need to let their agents know the band they can operate in and possibly use the structured incentive scheme you suggest.

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  4. I agree. There is room for improvement. Having advanced negotiation skills is also a competitive advantage. The take home message remains the same. Choose your agent carefully and discuss negotiation strategy well before you write that first offer.

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