Negotiating the Deal
The Anchoring Effect of the first price put on the table in a sale negotiation
How does a buyer (or seller) deal with an asking or offer price that is very aggressive in terms of their expectation in relation to the property under consideration?
One of the most awkward positions we are often confronted with when dealing with a Commercial Property Negotiation is when the seller or purchaser is taking their price way out of the expected value of the property and aggressively holding their position based on an aspect of the property that they are sticking to.
As brokers, we are sometimes confronted with sellers who insist they have a “need” to achieve a particular price on the property. Their asking price may have no relevance to the inherent value of the property itself. Other situations may include a buyer who is making a low offer based on an assumption that conditions in that particular market or country are so poor that they are the only party who will make an offer; or that the seller is in such financial dire straits that they are not in a position to decline any offer they receive.
In our experience, rarely will any of these factors influence the other party to move away from a sensible price range, no matter how intense the need, or serious the the seller’s own financial predicament or the environment. Too often we see buyers walking away from a transaction because of their immediate response to a hefty price, when in fact the property is a good investment for them and the other party has every inherent motive to negotiate. Alternatively, they may end up paying or accepting the distorted price after an initial vehement argument which ultimately swings full course.
To discuss price anchoring the following information is partially taken from various articles on anchoring, appearing on the Harvard Program of Negotiation, which can be sourced here.
A well-known cognitive bias in negotiation, referred to as ‘anchoring’ is the tendency to give too much weight to the first number put on the table and then appropriately move from the anchor price.
When the first party in a negotiation has put their price (asking in the case of seller, or offer price in the case of the buyer) they have effectively dropped an anchor. The first and perhaps most important step is to recognize this fact, since it is difficult to deal with a price, when you don’t see the impact it has on the negotiation. The first party to put a price on the table usually holds the advantage as future discussions are usually going to centre around that price.
When a situation arises where the value put on the table is unreasonable, the recommendation is to first defuse and then counter. In negotiation, it is a mistake is to respond with a counteroffer before defusing the other side’s anchor.
If someone opens with R 20 million, and you want to counter with R 10 million, before presenting your number, you need to make clear that R 20 million is simply unacceptable. If you don’t defuse the anchor first, you are suggesting that R 20 million is in the bargaining zone.
After defusing the anchor, move quickly to your counter proposal, as negotiation experts warn that “protesting too much” might actually validate the anchor. In other words, if you spend an enormous amount talking about the R 20 million you may end up paying that price.
Making a Counteroffer After Anchoring in Negotiations
In making your counteroffer, it is essential to motivate the price; don’t just throw a number at the opposite party.
It’s particularly important to motivate the counteroffer. Also, be aware of the “midpoint rule” which essentially states that the best predictor of the final price is mid-point between the first and counteroffer on a transaction.
An example would be; recently, a buyer and seller were negotiating on the sale of a building in Johannesburg North. The purchaser put an offer on the table, which was way below the property’s value. After discussing a number of aspects of the offer, the following message was clearly conveyed in the seller’s response ‘most importantly the offer price is not feasible’. Then came the counteroffer from the seller, reinforced with a reference to third party opportunities. The purchaser responded by increasing their price, but not by enough, and referenced financing problems at that value. The seller then referenced his walk-away alternative and offered assistance in financing a portion of the transaction. After a number of communications both ways, the parties agreed at almost halfway between the initial offers and first counter.
By defusing the initial offer and its anchoring effect without dwelling on it, justifying the counteroffer in light of the midpoint rule and allowing the negotiation to continue, eventually led to an acceptable outcome between the parties.
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