Tips for better understanding leverage
Roy Koppelmann is a North Carolina real estate investor and developer. His area of ââexpertise: understanding and using the levers to succeed in real estate negotiations. For this article, he expands on his biggest negotiating lessons and offers tips for using leverage effectively, while maintaining positive relationships.
What is leverage?
Depending on the context or industry, the concept of leverage can be explained in different ways. When it comes to negotiation, even in real estate, leverage is basically the degree to which you can get a concession from another party without getting a proportional concession in return. Basically, it’s the power to influence your counterpart to get the result in your favor, without having to give up too much.
According to Koppelmann, in real estate, leverage often oscillates between buyer and seller. For example, at the start of a transaction, the buyer usually has more leverage than the seller because they can foreclose a property with little money or with due diligence. On the other hand, at some point in the transaction (usually the deposit period), the seller’s money is committed. If the deal isn’t done, the buyer can walk away with their money and the original property – the buyer now has all the leverage.
The importance of knowing who has the leverage
According to Koppelmann, this is essential for the successful completion of real estate negotiations. Two things to pay attention to: the psychological profile of your interlocutor and his level of investment.
The first step in understanding your opponent’s leverage is to measure their sophistication: Does he seem to know his power and manifest an intention to use it? For example, a primary owner with extensive experience selling an upscale property in a downtown metropolitan area will likely understand the weight of his negotiation value. If the deal starts to take longer than expected, that seller understands that by asking for more money to stay in the deal, he carries the most leverage. The buyer would probably rather spend a little more money than lose the entire deal, including their initial investment.
“If they’re sophisticated and seem to have more experience, it’s probably best not to call their bluff,” Koppelmann shares. “They probably know what they can get out of you.”
On the other hand, it is just as important to understand the level of investment of your counterparty. A primary owner will likely have invested more and may therefore be more inclined to exercise their leverage. An agent, on the other hand, receives a percentage of the commission and will likely be more focused on closing the deal. In the example above, where the transaction starts to take longer than expected, it could mean that the seller has more leverage as the agent may be inclined to do whatever it takes to close the sale.
“If you interact with the agent in any capacity, he’ll get a percentage of the set,” Koppelmann explains. “They are incentivized to close the deal, but less and less incentive to ask for more – if that means risking the deal failure.”
Balancing leverage with relationship management
While it is important to understand and exert your influence, Koppelmann also stresses the importance of relationship management in these negotiations.
For Koppelmann, it’s all about fairness. He understands that a “scorched earth strategy” will only hurt his reputation and that of his business. Reputation plays a huge role in all future trading opportunities, as peers can automatically take an inflexible approach to explaining what they have heard about your strategy. This is the best-case scenario, as a bad reputation could also mean no business at all.
“We are trying to find advantages [in our negotiations] but also try to make fair and realistic offers for attractive plots that will allow us to build profitable projects of which everyone is proud.
To learn more about Roy Koppelmann and his Charleston-based firm, visit www.accorddevelopmentgroup.net.