Imagine yourself in a dilemma that only a privileged few experience: You’ve fallen in love with a dazzling, one-of-a-kind home that’s on the market without a list price. Instead, the seller’s broker encourages you to name your price. You’re unsure how much to offer—yet desperate to win the prize.
Leaving the sale price off of a property is an unusual but not unheard-of practice in luxury real estate, writes Katherine Clarke in the Wall Street Journal. Beyond such current negotiations in the news, price negotiation raises interesting questions about when sellers should name their price—and when buyers should make the opening move.
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Abundant research on the anchoring effect, documented by psychologists Amos Tversky and Daniel Kahneman, shows that the first offer made in a negotiation serves as an anchor that has a strong effect on the final price. For this reason, negotiators are often advised to try to engage in price anchoring by making the first offer.
In real estate, some brokers caution that leaving a home unpriced limits the pool of buyers, as it cannot be listed on online real-estate websites, such as Zillow, Trulia, and Realtor.com, without a price. Sotheby’s International Realty senior marketing VP Bradley Nelson told the Journal that not naming a price is “like being half pregnant” and can reflect owners’ ambivalence about whether they want to sell.
In fact, the decision of whether to make the first offer in a price negotiation requires in-depth analysis. First, in preparation for negotiation, assess your best alternative to a negotiated agreement, or BATNA; your target; and your reservation price—your point of indifference between accepting a deal and pursuing your BATNA. Next, estimate your counterpart’s BATNA, target, and reservation price. That will help you identify the zone of possible agreement, or ZOPA—the range of options that both sides would find acceptable.
When you believe you know more about the ZOPA than the other party, you generally should feel comfortable dropping an aggressive anchor near the top of the ZOPA. This is typically the case for sellers who know a great deal about what they’re selling—and more than the buyer does. The longtime owner of a house generally should feel comfortable advertising an ambitious list price, for example.
By contrast, when your counterpart knows more about the ZOPA, you’ll have trouble dropping an effective anchor. A job candidate, for instance, may be less knowledgeable than the recruiter about the possible salary range for a given job—and may be wise to let the recruiter make the first offer during salary negotiation.
Uniqueness and Scarcity
When a commodity is unique or offers special value to certain bidders, sellers may also see an advantage in allowing buyers to bid first.
In auction lingo, an item that offers different value to different bidders is known as a private-value asset. One bidder might want to procure the painting you’re selling as an investment piece, while another bidder may covet it because his great-grandmother was the artist. By contrast, common-value assets, such as an oil lease or a condo in a large new building, have more or less equal value to all bidders—it’s worth the same amount to all potential buyers.
When a private-value asset is for sale, one or more bidders may be willing to pay much more than others would. If that’s a possibility, you might leave the price unspecified and hope you can find at least one, and preferably several, of these bidders.
Advice for Buyers
Turning to price negotiation tactics on the buyer side, when a seller asks you to bid first or is cagey about disclosing the price, she may be hoping that emotion will drive your decision making. You could end up overpaying and regretting your purchase.
To make more rational decisions in a price negotiation, try to fall in love with several properties (or whatever commodity you’re shopping for) rather than just one, advises Harvard Business School professor Max H. Bazerman. When you have one or two appealing BATNAs, you’ll be less tempted to overbid. Moreover, if you believe the seller is less certain than you are about an item’s market value, try to persuade him to drop the first anchor, as it could be in your favor.
What other factors do you consider when engaged in a price negotiation?