Tips and Traps When Negotiating Real Estate: Don’t Stick to the “Pie” Analogy or “Bottom Line” Reasoning

Walk Away a Winner – Don’t Stick to the “Pie” Analogy or “Bottom Line” Reasoning

Sometime in the distant past there was an unlucky baker who said, “I’ve only got so many pieces of pie to sell and when they’re gone, I’ll close for the day.” Soon after, “pie charts” came into existence for demonstrating how the total amount in a transaction could be distributed, and we were all locked into an unfortunate analogy. When it became common practice to speak of this as the “bottom line,” meaning that this was the last position we would take on a deal, negotiation took a giant step backward.

The Problem with Pie

On the surface, this appears to be a sound analogy. A deal, any deal, only has so much money (or property or conditions or whatever). That means that, like a pie, it can only be cut into so many pieces. Each person in the deal can get a big slice or a small slice. But when all the slices are handed out, the pie is gone.

You want to buy a home, but you’re offering much less than the seller is asking. When you present the deal and begin negotiating, the seller brings up the pie analogy; He says, “You’re offering $200,000 for the property. I have to pay a 6 percent commission or $12,000. I have a $150,000 first mortgage and a $30,000 second mortgage. That leaves me only $8,000, out of which I have to pay closing costs. By the time the deal is done, I won’t have any money left at all! I won’t sign.”

So long as we hold to the pie analogy, he’s perfectly correct and there’s no deal to be made here. However, let’s throw the pie back at the baker and work creatively. What about the furniture? Maybe there’s some nice furniture in the house that originally cost the seller $10,000. But he’s moving to an apartment and doesn’t have room for most of it. Indeed, he’s tired of it and would be happy to sell it. So you offer an additional $5,000 for the furniture. He’s happy to get rid of it and now he’s got some cash. In addition, you up the price to $205,000, and if the lender concurs, you finance the cost so it’s only pennies a month out of your pocket. The pie’s got­ ten bigger.

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Maybe the seller has other assets—an RV vehicle for example. You’ve always wanted one of these, indeed had planned on buying one. So instead of buying just property, you buy the property and the RV. He gets more cash, which is what he wants, and you get something you would have bought anyway. The pie’s growing again.

The real estate agent wants to make the deal. But maybe there’s no deal without some creative concessions. So instead of $12,000 in cash, you ask the agent to take $5,000 in cash and a second mortgage on another property owned by the seller. He pays the agent off a little each month, but gets to keep $7,000 in cash for himself.

The pie’s bigger still.

TRAP

Don’t expect a real estate agent to automatically offer to discount a commission by taking back paper (mort­ gage) instead of cash. Most won’t want to do it. Many simply won’t do it at all. But, creative agents who do a lot of business and see that the deal can’t be made any other way often will. It’s usually a last resort kind of thing. But, when it works, it can make the deal.

There’s really no limit to how big you can grow the pie, once you stop seeing it as a limiting analogy.

Bottom Lining

Now, let’s move from the conceptual image of a pie to a specific application. Many people, particularly those who don’t negotiate regularly, feel it’s important to adopt a “bottom line.” They see this as a safety precaution to keep them from committing too deeply or spending to much. It’s like going to Las Vegas and saying, “We’ve got $300 to blow. When it’s all gone, we quit.” In other words, they are committing to a pie of a certain maximum size in advance.

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There’s really nothing wrong with doing this. Indeed, so long as you understand its limitations, it’s often a good idea. The real trou­ble with setting up a bottom line, however, is that you usually do it before you understand the whole deal. And once the entire deal is presented to you, you may find that the bottom line set is inappro­priate.

For example, Peter and Sheila are selling their home. They’re ask­ing $395,000. However, they know that offers are most likely to come in for less. So before hand, they decide the minimum they’ll accept. They decide it’s $365,000. If they can’t get $365,000, they won’t sell.

There are two things wrong here. First, what if an offer comes in for exactly $365,000? That’s their bottom line. Do they accept the offer? Or do they hold out for more?

They are at a psychological disadvantage if they’ve already decided that $365,000 is their bottom line. They are thinking that here’s an offer they can accept. If they counter, they are giving up this offer in the hope (perhaps vain hope) that they’ll get more.

Maybe it’s better to take one in the hand than two in the bush? Having already set up a bottom line, they are unlikely to counter, or if they do, to counter weakly. In short, their bottom line may get them less than they might otherwise have gotten for their home.

On the other hand, let’s say the offer comes in at $335,000. Now, they know they won’t accept that offer no matter what. In fact, it’s way off the mark and they may feel insulted. They may only make a token counter, which could make the buyer feel it’s hopeless and cause him or her to give up on the deal.

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Or maybe they’ll counter at their bottom line, $365,000. Now, when the buyer counters back at $360,000, what do they do? They’ve got nowhere to go. In this case, their bottom line has restricted their flexibility to deal with a lowball offer.

On the other hand, let’s say that Peter and Sheila did not set up a bottom line. The first offer comes in at $335,000. They might come back with a higher counteroffer. They want the most they can get and are willing to negotiate for it.

What about the $335,000 offer? Maybe they’ll examine the terms the buyer is offering. Perhaps there’s a second mortgage for them with a very high interest rate involved that they like. Maybe, because of the terms, they’ll accept $360,000 or $355,000 or even $350,000.

The point here is that if you set a bottom line in advance, you limit your ability to negotiate. It’s like the pie analogy all over again. You’ve locked yourself in and have nowhere to go.

TRAP

The bottom line is supposed to protect you from losing more than you want or are able to afford. However, just as often, it keeps you from getting a deal or making * more than you anticipated.

The simple truth is that you can’t know what your true best bot­ tom line is in advance. Only when you see the deal, its terms, and its ramifications can you decide what’s in your best interests.

Therefore, my suggestion is that if you feel the need for a bottom line, make it tentative, not rigid.

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TIP

Say to yourself, “This is what I’d like to get without see­ing the deal. However, I’ll rethink it after I see the deal itself.”