Q:My wife and I are friends with another couple who live in our neighborhood. For many years they have told us that they love our home and street and that if we ever wanted to move, they would like to buy our house. From the number of times they have said it, we know they’re serious. Well, we are now moving to another town and would like to sell our house to them. We could use a real estate broker, but I don’t see the point of paying a 5% commission when we already have the ideal buyer. Is there some process you could recommend? We’d like to get to a fair price while also preserving the relationship with our good friends.
A: I agree that it seems unnecessary to work through real estate brokers in the traditional way. One potential strategy would be to use different types of agents on both sides, such as real estate attorneys. Because these representatives generally work for an hourly rate, they should be cheaper in this scenario than brokers, who would divide a 5% commission. Each of you would begin by briefing your attorney on your reservation price (for your friends, their maximum willingness to pay; for you, your minimum willingness to accept), then the attorneys would negotiate on your behalf. Using intermediaries in this way is a common approach when both sides want a fair price but also want to preserve their relationship. For example, investment bankers often play this role in mergers and acquisitions because the two management teams often have to work together after their companies combine.
Another option would be to agree on a process for determining the fair value of the property. For example, you might hire three real estate brokers whom you trust (for the same fixed fee) and ask them each to independently appraise the property. (Alternatively, you might each pick one real estate broker and have those brokers decide on the third—a common approach in selecting three-judge arbitration panels.) Once you both have the three appraisals, you can negotiate a fair price, or you could simply agree in advance to take the average of the three.
A third possibility takes a page out of the private-equity playbook. Sometimes a buyer will offer what is called a “floor bid,” which the seller then has the right to shop around for a higher offer for some period of time, typically 45 to 60 days. In this context, you could ask your friends to make a floor bid with the understanding that you would hire a real estate broker to try to find a higher-value buyer. You would tell the broker the floor bid as well as the time frame the broker has to find a higher bid. You might even propose a different kind of fee arrangement for the broker—for example, 20% of any increment over the floor bid (rather than 5% of the total price) that he or she finds.
In my book Dealmaking: The New Strategy of Negotiauctions, I note that most real estate deals in the United States tend to be “tight”—that is, the seller has no right to pull out of the deal. In contrast, the proposed floor-bid structure would be “loose,” in that you could pull out to take a higher offer. You should make clear to your friends that you might not come back to them for a higher bid if your broker finds a better offer, a nuance that should induce them to put their best foot forward when making their initial offer. But the process would also benefit them by requiring the broker to find a better offer (net of the broker’s fees)—thus giving your friends a leg up against any prospective third-party bidder.
In general, research shows that when people feel good about the negotiation process, they are more likely to be satisfied with the outcome. In this context, a fair process should allow you to achieve a fair outcome and preserve the relationship with your neighbors. If all goes well, they will invite you to your old house for dinner once it’s all over!
Joseph Flom Professor of Law & Business,
Harvard Law School
Douglas Weaver Professor of Business Law,
Harvard Business School
Academic Editor, Negotiation Briefings
Author, Dealmaking: The New Strategy of Negotiauctions (Norton, 2011)
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