Adapted from “To Break an Impasse, Loosen Up,” by Guhan Subramanian (professor, Harvard Business School and Harvard Law School), first published in the Negotiation newsletter.
Imagine that you and your family have moved to a new town. You’re living in a month-to-month rental and have finally found the perfect house to buy. Unfortunately, the seller is being unreasonable. The house is on the market for $600,000, but your research, backed up by your broker’s opinion, tells you it’s overpriced. By your estimate, a fair price would be $500,000, but when you offer that amount, the seller tells you that you are “not even close” and doesn’t counter. You think the seller is in denial about the slump in the housing market, which has affected prices in your town quite a bit.
In the current housing market, this is a commonplace situation. Sellers are looking at the prices paid for their neighbors’ houses a few years ago, while buyers are looking at comparable transactions from the past few months to try to determine the “fair” price. You might consider creative deal structuring to break through the resulting impasse. Start by noting that the typical house purchase is a very “tight” deal: once the seller commits to a particular buyer, the seller can’t (legally) sell the house to someone else, even if offered a substantially higher price.
In your circumstance, a “loose” deal structure might provide a way forward. Imagine that you make a slightly higher offer (it is, after all, your “perfect” house) of, say, $525,000. Then give the seller 60 days to keep shopping the house. If a better offer comes in during that time, the seller has the right to walk away by paying you a “breakup fee”—say, $25,000 or less.
This deal structure creates value based on the different beliefs about the value of the house. In effect, you are saying this to the seller: “You think the house is worth $600,000, but I think you won’t get a better offer than my $525,000. I’m so confident in my belief that I’m willing to give you 60 days to prove me wrong. If you do find a better price, I’ll keep looking for the perfect house. If you don’t find a better deal, we’ll close in 60 days at my price.”
Although this kind of deal structure isn’t very common in the United States, it’s actually the norm in the United Kingdom. There, a homeowner can formally accept an offer from one buyer but remain open to competing offers up until the moment of closing. The British even have a word to describe what happens when a third party jumps a deal: gazumping. The buyer can even buy “gazumping insurance” against getting gazumped.
As you can see, real-estate sales in the United Kingdom are a free-for-all until the moment of closing. The point isn’t that the British system is better—in fact, gazumping can wreak havoc on people’s lives. But in certain situations, creative deal structuring might break through the impasse.
Kees Scholtes /
Please note that your description of a "loose deal structure" is not the same as gazumping practices in the UK. In 30 years of living in London, I have never heard of a single instance where the seller pays a break-up fee for not proceeding with the original sale. Your description of the loose deal structure being the norm in the UK is therefore misleading. That doesn't mean however that the idea is not worth pursuing...
michael webster /
This is an interesting idea in bridging the valuation gap. I suppose the existence of bone fide third party offers is a problem. I wonder if it might not work better for the sale of a small business? But, I don't think that the British market includes the break-up fee, it just keeps the bargaining going. In England, both the buyer and seller can back out during the time between signing the offer and completing the various necessary inspections, financing, etc.