Leveraging Your BATNA: How to Use Your Best Alternative to a Negotiated Agreement
Negotiating real estate can be a complex and nuanced process, but with a well-informed and prepared approach, either buyers and sellers can achieve favorable outcomes. One key concept to understand in these negotiations is the idea of the Best Alternative to a Negotiated Agreement (BATNA), which refers to the most favorable course of action that a buyer or seller can take if negotiations fail to produce an agreement. Understanding and utilizing BATNA is an important aspect of successful real estate negotiations. Other important negotiation tactics include active listening, compromise, and clear communication. In this primer, we will cover these tactics in more detail and provide examples to illustrate how these tactics can help buyers and sellers achieve their goals.
BATNA for Buyers
For buyers, a well-informed and well-researched buyer will know what to expect for a certain price in a given neighborhood or district. This knowledge can help a buyer determine if a property is overpriced, and serve as a guide for negotiating a fair price. For example, a buyer who is interested in a property in a desirable area may know that similar properties in the area have sold for a lower price. If a seller’s ask is above the comparable sales, the buyer can reveal this information to the seller, and use the similar sales as evidence that the seller’s asking price may seem unrealistic to any purchaser (thereby casting doubt on the seller’s BATNA). The buyer may also have their eye on a 2nd or 3rd favorite property (also part of their BATNA), and may even decide to offer on their next best option if their first offer is not accepted.
BATNA for Sellers
For sellers, understanding and utilizing their BATNA can be just as important. For example, imagine a seller named John who has a home that has been on the market for several months without much interest. John needed to accept a lower offer than his asking price after lowering the price of the home in order to attract offers—and John has only been able to attract 1 motivated buyer to offer on his home so far. Another seller named Jane may have a home that is in higher demand or was simply priced low enough to attract more interest, received multiple offers and also accepted a backup offer (see our glossary if you are unfamiliar with the term backup offer, or any other jargon referenced here). For simplicity let’s say Jane and John’s homes are identical older homes in popular communities.
How BATNA Can Influence Inspection Negotiations
Example 1: When a buyer named Sampson makes an offer of $450,000 on a property, which is not immediately accepted by the seller named Peter, Peter’s agent may start contacting other buyers who may also have interest in the home to let them know that an offer is on the table for the property—this is something that other buyers may want to know if they are seeing themselves living in a home, since they may want to make an offer also. This scenario is very common in low inventory markets. By making an offer which isn’t immediately ready to accept, the seller’s agent may see generating alternative offers in favor of the seller as part of their duty to their client.
Example 2: John and Jane as home sellers have both accepted offers on their respective homes, and they are both going through separate inspections. Since their homes are older, each of their purchasers discovered defects and are making extensive requests based on inspection findings. Since John couldn’t attract a lot of activity (showings or offers) for his home, he’ll need to work out terms acceptable to the in-contract purchaser or his best alternative is to go back to the market (and John knows from being on the market for months already that this is not a very good alternative), so John is more likely to agree to a reduction in sales price, repairs, or concessions to favor the purchaser. Seller Jane’s BATNA, on the other hand, is much different than John’s—her BATNA would be whatever terms she’d agreed to in the backup offer since if the buyer in contract decides to withdraw from the sale, the backup offer will automatically take over as the in-contract purchaser. This puts Jane in a much stronger negotiating position than John, and Jane may decide to reveal the existence of the backup contract to the buyer whose making extensive inspection requests. Jane’s buyer, upon realizing that another buyer is waiting in the wings to secure the home may lead Jane’s buyer to rethink their requests and to consider buying the home under previously-agreed terms or terms the seller will accept rather than withdrawing and allowing the backup buyer to secure the home instead. And if the scenario has the backup offer at a higher price than the in-contract buyer whose trying to renegotiate based on inspections, this may be something the seller or their agent may additionally share with the purchaser so as to communicate that the backup offer may be superior to the accepted offer being renegotiated (in this example, the seller may not be willing to renegotiate much, if anything, from inspection defects if another buyer values the property more than the in-contract purchaser, despite its flaws.)
Unlocking the key to successful negotiations: The power of Active Listening
Active listening is a vital negotiation tactic. It involves fully understanding the other party’s perspective and concerns before proposing a solution. This allows the negotiator to identify the other party’s key concerns, and tailor their proposal to address those concerns. Active listening also allows agents to better serve their clients by collecting and passing along information which may strengthen their party’s position in negotiations.
Example 1: a buyer named John is interested in purchasing a property on Oak St, priced at $450,000. But during the negotiation process, John finds out that the seller, Michael, is particularly attached to the property because it has been in the family for generations, and is looking for a buyer that will take care of the property. In this case, John, who is also a big believer in preserving historical properties, made a personal connection with Michael and was able to show that he would take care of the property as Michael wants and was able to negotiate a lower price of $435,000.
Example 2: Agent Max is working for a buyer to acquire a condominium listed by Agent Stephanie. During the course of a conversation with Agent Max, Agent Stephanie mentions that the seller for the condominium is having financial difficulties and Agent Stephanie has been paying for the utilities on the condominium up until closing, and Agent Stephanie hopes the sale will close quickly so she won’t have to continue paying for this. Agent Max shares this information his client Donny, the purchaser, who is able to offer with a quick closing timeframe so as to negotiate a great price on the condominium.
Compromise: Finding Mutually Beneficial Solutions
Compromise is another effective negotiation tactic. It is an agreement to accept less than what each party originally wanted in order to reach a mutually beneficial solution. For example, a seller named Lisa has a property that she wants to sell for $500,000, but a buyer named David is only willing to pay $475,000. Through compromise, the parties may agree to a sales price of $490,000, which represents a middle ground that is acceptable to both parties. When dealing with a request to compromise, as you may imagine it can be frustrating for either side of a transaction if the other party seems to continually ask for one compromise after another in their favor, it is important to understand class and etiquette in terms of what is customary for a given area so as to avoid “wearing out your welcome” in the eyes of the other party. Remember that while you may be asking for something now (eg, a discount or a repair or concession from inspections), circumstances may necessitate you to ask for something later on (eg, an extension on your mortgage approval or to a closing date) so treating the other side fairly and reasonably can pay off later on if or when you really need the other side of a transaction to cooperate or do something for you.
Clear Communication: How to Avoid Misunderstandings and Conflicts
Clear communication is essential for ensuring that all parties understand the terms of the agreement and can help prevent misunderstandings and conflicts. This can start as early as calling with initial questions about a property, or scheduling tours to see a property; a little communication and etiquette can go a long way, and it is a pet peeve for many sellers to prepare a home for a showing agent or buyer who shows up late (or not at all). While this might not be the end of the world (and good offer terms may make up for an untimely appt), and may go unnoticed in many scenarios, it’s never ideal to start a transaction from a place of misunderstanding, confusion or hostility from either party. The other common complaint from sellers is when purchasers show up to someone’s home without an appointment to tour it, or even worse, real estate agents accessing a property’s lockbox without an appointment. The need for clear communication also extends to transaction management as well, for example if no attempt at communication is made until the last minute or the 11th hour in a transaction, this can be frustrating to any participant since changes to things like closing dates can require adjustments to many peoples’ schedules. Communicating things like obstacles and delays as early as possible can be very valuable in helping maintain or adjust plans, a metaphor I like is that adjusting a closing can be like changing the course of a very large cruise ship because of how many professionals are involved and how easy it is to overlook potential conflicts or obstacles.
Going the Easy Route
Sometimes the best approach to negotiating may be to not negotiate much at all, and instead a buyer may write offer terms to reflect what the seller is asking. Particularly when offering on properties which are listed below market value (which happens more than you might expect), the buyer’s wisest course of action may be to offer asking price or even more than what the seller is asking, particularly if the buyer is aware of potential uses or improvements that may set the home apart and above others. If the seller’s asking price is truly a bird-in-hand, the buyer may want to strike while the iron is hot rather than letting a good deal slip away, and a buyer in this frame of mind may utilize an early acceptance incentive clause so that the seller is incentivized to sign the contract as received rather than sleeping on it or trying to spin up multiple offers from other interested purchasers.
Example: The buyer’s agent could see in the MLS information that the sellers are requesting 30 days of occupancy after closing. Since their buyer’s current housing situation is that they’re living for free with family and aren’t in a rush, they offered up to 60 days of occupancy after closing at no charge to the sellers
Knowing the Market: How to Make Informed Decisions
Another important consideration is to have a good understanding of the local real estate market trends and conditions. This could mean researching the local area, looking at comparable properties, interviewing local school officials and/or touring campuses, and reviewing local regulations (often searchable online), so that buyers and sellers can make well-informed decisions. Buyers and sellers should lean on their agents for market trends and data. Since their agent will typically have access to detailed market information through their MLS among other tools, they often know or can find the answers to questions such as “In terms of repairs or concessions given as a result of inspections, what is the average that homeowners like this would typically agree to?” or “How much home does $200,000 afford in a given area?” Having an understanding of the current state of the market, such as how fast homes are selling, how long they are staying on the market, and how prices are trending can be a significant boon to both buyers and sellers in helping them make informed, data-driven decisions.