The Deal Dance

Alec J. Pacella, CCIM

The last eight months have been spent in school, not literally but figuratively. Each month in this very column, we had a “class” or period. Subjects have included some weighty topics such as capital accumulation, discretionary capital expenditures and risk mitigation strategies. We even took time for a lunch period, drawing parallels between current real estate trends and fabled grade school lunch choices. The final bell has rung but we have one more extra-curricular activity: debate club.

Many of us debate and negotiate on a regular basis as a part of our job. And everyone has countless more instances during the course of a normal day. Maybe it’s a discussion with one of our children about driving the car to school or a decision amongst co-workers on where to go for lunch. But make no mistake, debate and negotiation is a big part of our lives. There are all sorts of theories, material and education on the topic and this month, I’m going to talk about three key components. Collectively, these three concepts are the foundation of any debate and negotiation. And having a thorough understanding of each will increase the likelihood of a successful outcome.

Anchoring

The first concept is known as “anchor- ing” and sets the initial expectation. If you are a seller, the anchor will be your asking price. There can be a significant amount of insight drawn from an asking price; how will a buyer react to an asking price that is higher, or lower, than anticipated? Even in instances where the anchor represents a retail price, the anchor sets an initial tone. Think about your reaction to a bottle of wine that has a retail price of $20 as compared to one with a price of $100. And anchoring isn’t just about price. For example, if my wife and I are discussing potential dinner plans and she suggests Pier W, she has clearly established an initial expectation. The concept extends to the other party’s initial expectation. Suppose a seller is asking $500,000 for a property. A buyer’s initial offer of $400,000 sets a very differ- ent expectation as compared to an offer of $480,000. Same goes for my potential response to my wife of Chipotle as an alternative dinner destination. There is significant research and material that has been devoted to this concept, including a wide range of philosophies. Regardless of the approach, a negotiation is a dance and the impact of this initial step should not be underestimated.

Reservation point

The second concept is known as the “reservation point” and represents a bot- tom-line position. It is the minimum set of conditions needed in order to move forward. The reservation point is usually different than the anchor. For example, the seller sets an asking price, or anchor, of $500,000 but the minimum they are willing to accept is $470,000. A reservation point has several interesting aspects. First, it can work in conjunction with the anchor. Using the example above, a seller can use a strategy of a lower anchor but a higher reservation point, establishing an asking price of $475,000 with a reservation point of $470,000. Or they can use a higher anchor of $525,000 with the same reservation price of $470,000. Each of these strategies will have a unique interpretation and the negotiation processes will likely be very different as the dance unfolds. Second, a person can have multiple reservation points. Again, using the previous example, perhaps the seller’s reservation point for a normal deal, with various contingencies that need to be waived, is $470,000. But if a buyer is willing to waive all contingencies and close quickly, perhaps the reservation point would be only $460,000.

There can be a significant amount of insight drawn from an asking price; how will a buyer react to an asking price that is higher, or lower, than anticipated?

BATNA

The third concept is known as BATNA, which stands for “best alternative to a negotiated agreement.” This is arguably the most important part of a negotiation, as it establishes the “fall back” alternative. Ironically, BATNA is typically given very little thought prior and only becomes a focus when the primary negotiation begins to fall apart. However, you will be in a much better position by having a good understanding of BATNA before engaging in the primary negotiation. A quick example, using the classic negotiation of buying a new car. Most of us have done our homework prior to ever stepping foot in a dealership. We know the model and trim level we are interested in, the options we want and probably even a preferred color. We know the dealership’s anchor, which, in normal times, is the sticker price of the car. And we at least have a solid idea of our anchor, the initial offer, as well as our reservation point, which is the most we are willing to pay. But the critical piece that is missing is our BATNA; if we are not able to reach an acceptable agreement, what is the best alternative? Not only will having a solid grasp of our BATNA help to establish our reservation point but it will also be a strong guide in the negotiation process. A few things to keep in mind regarding BATNA. First, it is not the ideal outcome but rather the best alternative. Second, we can, and often will, have multiple BATNAs but there is usually one that stands above the others. And third, we must continually monitor and be confident in our BATNA.

As I said prior, there is a lot of material available on the topic of debate and negotiation. Harvard’s Program on Negotiation (PON) and Cambridge University Press both offer a substantial amount of information, much of it for free. Thousands of books that have been written, with “Never Split the Difference” and “Getting to Yes” standing out. I googled BATNA and received literally 10 million responses. And considering the number of dinners I’ve had at Pier W, you would think I’d practice what I preached!

May Properties Magazine