Sellers and Buyers are Out of Sync
3 min read
Negotiation Power Distortion
I asked you about your challenges, and this is what I heard.
- Sellers want more than their properties are worth.
- Buyers want to wait until the market bottoms out.
This is challenging because buyers and sellers aren’t getting any closer together. Many sellers are willing to wait because they believe the market will improve, and many buyers are waiting because they believe the market will deteriorate. They can’t both be right, so how do we help them make good decisions in the current environment?
There is much uncertainty in the market right now. No one knows where it will go. Economists predict a significant drop from the peak, but some of that is already baked into the market. Many agents expect a quick recovery, but that might be biased. Buyers and sellers may also predict the market based on their preferences.
These biases are natural, but how do we move beyond them?
Principled Negotiation Theory recognizes power as a significant influencer in any negotiation.
It will help determine both the process and the outcome.
Let me demonstrate this through an example that was shared with me by one of my coaching clients.
They represent the seller.
A buyer made an offer significantly below the asking price. They bargained back and forth a bit, and the seller decided to break off negotiations and wait it out. The buyer was disappointed but moved forward and bought a different property. A week later, the seller had no other offers and only one showing. They asked the agent if they could get the offer back and were surprised and disappointed to learn that the buyers had purchased something else. They wished that they had accepted the last offer from that buyer.
At this point, the seller realizes they have less negotiation power than they thought. The market power favours the buyer. Also, the buyer’s BATNA was strong as another property was available and was a better option at the price the sellers were holding out for. The seller’s BATNA is lower because they don’t have any other potential buyers, and they need to sell their property for financial reasons.
This power distortion has caused them to make a decision they regret. They lost the offer and have nothing else to fall back on.
What if the agent helped them understand the power balance before the negotiations rather than after? Would that have led to a better outcome for the seller?
I believe it would have.
So how do we help sellers understand their negotiation power? Talking about power during the client intake and strategy planning stages is critical. Suppose you can help them understand what influences power and how to help them gain as much power as possible in their unique circumstances. In that case, they will be better positioned to make decisions during an offer negotiation.
They may feel more coerced and defensive if you wait to discuss power until an offer is on the table.
A similar situation rolls out for buyers. Many buyers feel they have all the power right now, but in most markets across Canada, we have a fundamentally balanced market. If it were a buyer’s market, there would be tons of houses for sale – which isn’t the case. It comes down to what the buyer’s BATNA is. If there are several homes that the buyer would be happy with, their BATNA is strong, and you should share this with the listing agent in a negotiation. On the other hand, if this is a property that the buyer is emotionally connected to, their BATNA may be lower, and you’ll want to tread carefully in the negotiations. Your buyer will be in a better situation to make decisions if they understand power and how to use it to their benefit.
Determining Market Power
It might help your buyers and sellers if you put some factual information about market conditions in front of them. CREA defines the market balance as follows:
Seller’s Market: Months of Inventory (MOI) or Absorption rate of 4 months or less
Balanced Market: MOI or Absorption rate of 4-6 months and
Buyer’s Market: MOI or Absorption rate of more than six months.
To calculate, determine the area that you are analyzing and take the number of active listings and divide it by the number of sales per month.