One of the ways to get a great deal in real estate is to get really good at negotiating. One way to negotiate effectively is to understand the seller’s psychology. The more you can understand the seller’s perspective, why they’re selling, what drives them, the more effective you’ll be at negotiating a significant discount. In this article, we’ll explain what we mean by seller psychology and share some examples of how you can use the seller’s psychology to your advantage when buying your next investment property.
If you’ve been part of our community or attended our Fast FIRE to Freedom Summit, you might have heard stories about investors in our community getting great deals.
How did they do it?
In large part through effective negotiations.
Our students regularly negotiate several thousand dollar discounts. Some achieve five-figure discounts. And in one case, we had a student negotiate a $200,000 discount!
If you’ve never negotiated an investment purchase before, you might be wondering, how do you negotiate a four, five, or six-figure discount?
There’s a lot more to negotiation than we can cover in this article, but we wanted to share one key piece of negotiation and that is, understanding the seller’s psychology.
What is the seller’s psychology?
Understanding the seller’s psychology is to put yourself in the shoes of the seller and see the deal from their perspective.
You first need to understand the context. Why are they selling? Are they under any time pressure? Are they under financial stress? Is the deal part of a bigger goal?
For example, we purchased a mixed use property from an experienced real estate investor who was trading in their portfolio, so they could buy a large commercial space. They cared more about each transaction going smoothly and closing on time, rather than making the most out of each sale.
Once you understand the context, you then need to understand what drives them.
Some are driven by significance. They want to know that they “won” and got the better end of the deal.
Some really care about what’s right or wrong. For example, if you can convince the seller that they need to fix something that’s broken because it’s “the right thing to do,” they’ll do it.
Some care about relationships. They might care about what their agent thinks about them. They might want to sell to a buyer they like. They’ll prioritize relationships over getting the best deal for themselves, opening up the possibility of negotiating a discount.
And then there are some who prioritize convenience and ease. They won’t put up much resistance to negotiations because they just want to get the deal done and don’t want to lose any sleep over it.
Using the seller’s psychology to negotiate better deals
Now that you’ve learned a bit about seller psychology, below are some ways we used our understanding of a seller’s psychology to negotiate better deals. These are real examples from our years of real estate investing experience.
Seller was in the middle of a 1031 exchange
This is a common scenario for sellers. A 1031 exchange allows you to sell a property and put all of the proceeds into another property tax deferred. In order to defer the taxes, you need to meet strict deadlines. If you miss the deadline, you have to pay capital gains taxes the following April. So for a seller, there’s a lot at stake.
We’ve negotiated four and five-figure discounts from sellers who were in the middle of a 1031 exchange.
We have been in this position ourselves and have given up four-figure discounts
It was helpful to be in the seller’s shoes in these transactions because you realize that the seller is under immense time pressure.
When you are right up against the deadline, all of your other priorities like “winning,” don’t matter as much anymore.
If you’re looking for someone to help you navigate the intricacies of 1031 exchanges, take a look at our preferred vendors here.
Seller refused to negotiate under any circumstances
Some sellers refuse to negotiate. It’s almost as if they’ve created rules in their heads that if they give in an inch, they’ve lost.
When you have a seller like this, you might assume that it’s impossible to get a concession. However, you’d be wrong.
What you don’t want to do is negotiate with them the standard way. They’re not going to negotiate so why upset or frustrate them?
Instead, you’ll have to use another tactic. With sellers like this, you may be able to appeal to their sense of right or wrong.
We had a situation one time where we were able to convince the seller to give us a month’s worth of rent when they hadn’t collected any rent that month because it was in the middle of COVID.
Our agent was able to convince the listing agent that the right thing to do in this situation was to pay us the rent that was due. It was the right thing to do because the seller could still potentially collect the rent from the tenants at some point in the future.
Since this was a larger multifamily property, we got about $30,000 that we weren’t expecting.
Seller didn’t want to be viewed as dishonest
Did you ever like being called a liar?
I don’t know that anyone does.
One way to appeal to someone’s sense of honesty is to spot errors in a listing.
For example, calling a room that isn’t a legal bedroom, a bedroom is wrong.
Another thing we look for is errors in calculating square footage. How many people actually measure the square footage of your property before listing? Very few if any.
But what if you had your inspector or contractor diligently measure the square footage? My guess is that it’s going to be off and in many cases, less than what was written in the listing.
We’ve been in properties before where we immediately sensed that the square footage was off. The size of the property just didn’t match what was listed.
If you go back to the seller and spot some of these errors, an honest seller is going to be much more open to negotiating a discount.
Seller is old, sick, or tired
More and more sellers are going to fit this category because of the baby boom generation.
Many of these sellers are going to be focused on convenience or ease. They don’t want to fix anything. They don’t want any complications or headaches. They just want the transaction completed so they can move on.
Some of these sellers are going to prioritize relationships. Even though they don’t know you, these types of sellers often want to sell to someone they like. For them, they’d rather feel good about who they sell the property to. And they’ll often be more open to negotiation because they don’t want to say “no” to someone they like.
Importance of the seller’s psychology in the current market
How does the seller’s psychology change in the current high mortgage rate environment?
As above, put yourself in the seller’s shoes.
Higher rates mean less buying power and probably fewer buyers. So if you have a property under contract, the seller probably feels pretty lucky. They probably don’t want to see the deal fall through.
Add to that the possibility of rising rates. If mortgage rates rise, that shrinks the buyer pool even more. Even more reason to want your deal to go through.
This puts immense pressure on the seller, especially when you start asking for seller concessions.
Many will give in to these requests because of fear. Fear comes in many forms. Fear that they won’t be able to sell. Fear they won’t be able to get a better deal with a new buyer.
Fear is a powerful motivator and the current environment is going to create a lot of fear in seller’s minds.
This is why understanding the seller’s psychology is so important.
Some sellers are focused on winning. They want to feel like they got the better end of the deal. But winning could mean a lot of things. For many sellers, it’s about getting a certain price. They usually have a cut-off in mind and won’t go below that number under any circumstance. However, they may be willing to fix things that are broken because “it’s the right thing to do.”
Others don’t want to do any work at all. They are usually more flexible on price because they’ll trade price for convenience.
Then there are others who refuse to negotiate at all. You might think you can’t get concessions from these types of sellers but you’d be wrong. There’s almost always a way to get something.
By understanding the deal from the seller’s perspective, you can get a leg up on the negotiations. You can use this understanding to make a good deal even better by negotiating a significant discount.
Here are some ways to use the seller’s psychology to negotiate better deals.
Don’t always negotiate on price
Many buyers focus on getting their price. They have a number in their head and draw a line in the sand. If they can’t get there, they drop out.
So they spend all of their time and effort trying to get the seller to lower the price.
But many
If you start with this assumption, then it might keep you from exploring other options.
We’ve been in situations where sellers cared about who they were selling to.
So close to the finish line after a long sales process
It’s been a long sales process. You are close to the finish line. Some of it was design. We pushed the seller to provide information. Some of it was required by the lender. Some of it I said was a must for me.
We had a seller who refused to budge. But after 5 months, he gave in on a final demand. We got a full month’s worth of rent for a fully occupied property even though he had only collected half of that amount.
It was less a negotiation, we appealed to the seller’s sense of right or wrong. The seller probably didn’t know either way but it was so close to the finish line. At that point, he didn’t want to go through another 5 months.
The point is, there may be that final opportunity to get a concession.
Most don’t want to be thought of as dishonest.
Make time your friend
Time is an important factor for many sellers. Sometimes it’s the most important factor. More than the sales price.
What are some situations where time is an important factor?
Time can be important for year-end transactions. There can be many reasons.
One might be taxes. We had a situation where a seller was motivated to sell before the end of the year because the State tax rate for property sales was set to go up in January.
Another might be financial stress and needing the money.
Another might be fear of market changes. For example, interest rates rising. Or a potential market crash. Fear is a big driver
Another reason timing plays a significant role is with 1031 exchanges. A 1031 exchange is when you sell a property and you put the proceeds into another property. 1031 exchanges come with strict rules. They only give you 45 days from the date of sale to identify a replacement property and 180 days from the date of sale to close on at least one of the identified properties. These deadlines are strict and there’s no flexibility so this can create extreme time pressure on the seller.
This time pressure creates many opportunities to negotiate. When we were on the seller side, we left money on the table in order to close on time. I would estimate that the buyers got at least a 10% discount.
If you’re interested in learning more about how to use seller psychology to get great deals, join our upcoming cohort for Zero to Freedom.
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