Today’s lesson is on the difference between a nickel and a dime.
Well, not literal nickel and dimes. We know that obviously nickels are 5 cents while dimes are 10 cents. But it’s time to learn to apply this to negotiation strategies.
If we’re negotiating with a seller, then we want them to drop their price for us by a dime for every nickel that we’re moving up in price for them. Let’s put this into a concrete example so we understand each other on this buying tactic.
When we make offers to purchase, let’s say on a real estate investment purchase, a response from the seller may come back quickly. If the property in question has a listing price of $200,000, you might make an initial offer of $170,000. The counter-offer might come back to you for $195,000. The average negotiator may just split the difference. Then they keep splitting, and keep splitting, and keep splitting. They’ll find the middle point between $195,000 and their original offer of $170,000 and come up with $182,500 as the counter-offer. The seller then typically counters with a price that’s in between their original counter ($195,000) and the buyer’s counter ($182,500) which would be $188,750. The negotiation usually ends at this point. The typical seller only does two counter-offers, with the rare third counter-offer, but almost never more than three – the reason is that sellers get sick of this predictable and boring back-and-forth split-down-the-middle negotiating style! This is not an efficient way to do negotiations – so we’ll use a different strategy – a smarter strategy.
Instead of just splitting the price difference, increase your offer each round, but by less dollars each time. For example, you offer $170,000 and they counter with $195,000. Raise your original offer by $4000 and offer that ($174,000). They may counter with $184,500. Your next counter should be $177,000 – this means that instead of raising the offer by $4000 as you originally did, now you’re only raising it by $3000. Each of your offers comes by you giving less each time you make a counter-offer. You’re giving yourself a major psychological advantage over the seller by using the strategy. The seller, by noticing you’re offering less each time, feels like you’re getting near the max amount you’d be willing to pay for the property. This “max amount” never is verbalized – instead this is a subconscious reaction on the part of the seller to feel a twinge of fear. This will help end negotiations quickly in a positive way for you. The sellers get worn down and nervous by this style of negotiating. After a round or two of this they feel like they’ve negotiated hard but this is the best price they can get from you. In our example, the seller may accept that second counter-offer you make of $177,000. If you compare this new counter-offer of $177,000 to the traditional counter-offer of $188,750 this means you’ve saved $11,750 – all from smart negotiation strategies that save you money.
You might be asking: “Well Mike, what if the seller doesn’t counter-offer and they feel like the initial offer I made isn’t worth a counter?” One of the most important concepts to learn in any negotiation is to always be willing to walk away. I’ll say it again because this is so important: Always be willing to walk away. If you aren’t willing to walk away from a deal, no matter how badly you want that item, you will lose. Guaranteed. Want to know another little secret? Being willing to walk away works in any negotiation – in any aspect of life. The one that is willing to walk away almost always wins the negotiation – the other one almost always loses.
If you’re doing real estate investing and you come across a property with a price that’s too high to make a profit on and the seller doesn’t want to budge on the price and terms, then you just have to walk away from it. If the seller is unwilling to negotiate with you and work with you to drop the price or improve the terms significantly, then just walk away from the deal – it’s not your deal, it’s not meant for you. If you really like this property though, you may want to wait 4-5 days and then make another higher offer. Perhaps contact the real estate agent directly and ask the agent if the seller would be willing to do a counter-offer. Sometimes a seller is more willing to make verbal counter-offers and will ignore written ones. I’d always advise written offers but if the opportunity is there then this may be an option for you.
When using the nickels-vs-dimes strategy, timing plays a big role in your strategy. Let’s say the seller makes counter-offers, but you counter immediately upon hearing from the seller. The seller is now in control – this falls in line with never falling in love with a property and always being willing to walk away from a deal. The seller wants to prolong the negotiations as long as possible because all the negotiation stress is being carried by you. The seller feels that you need this property. The seller gets the vibe that you’re desperate to get this deal done for whatever reason. When this happens there’s no incentive for the seller to stop; the only incentive is for the seller to continue to negotiate because of the knowledge that you desperately want this deal so bad that you respond immediately to all counter-offers.
You want the seller to feel anxious about the deal. You want to seller to feel like there’s a possibility that the deal will fall through if there’s too much haggling over the price. If you feel like there’s not tons of interest in this property on the market and it won’t be sold out from underneath you then get back to the seller at your leisure – make sure to wait a minimum of six hours before responding to their counter-offer. When talking to the agent, say you really have to think about this deal – you have to think about it long and hard. Say you also want to start looking at other compatible properties – ask the agent to email you or fax you other properties available in the area. Say that it’s going to be difficult for you or any other real estate investor to go as high as what they’re asking. Say that you’d like to close the deal quickly if the seller could only just bend a little. This will cause the agent and seller to get freaked out that this deal may drop out – likely causing them to bend more easily to your wishes.
The agent, although legally working for the seller, is also worried about their own financial well-being. Subconsciously, agents know that in the end, they work for themselves. If an agent working for a seller feels that the seller will be more likely to acquiesce and cave in to deal pressure than you would, then the agent will likely push on the seller to hopefully take your offer.
The nickels-vs-dimes strategy and the anxiety strategy all work in your favor to get you the best deals possible – whether you’re investing in real estate or purchasing a car second-hand. These are negotiation tactics that will work to your favor – but you have to be willing to use them! Some would-be investors and buyers read about negotiation strategies but when push comes to shove, they bend over backwards to accomodate the other negotiating party and forget everything they learned. If you apply these tools, you will get a negotiating edge. Practice these tools whenever possible and they’ll become second-nature to you – helping you save major money on your investments and negotiations.