Real estate investing is all about relationships and dealing with people. In this column I’ve written about the need for trust in order to build long term symbiotic relationships. I’ve also written about using contracts to build a solid legal safety net.

So...which is it? Back in the ‘60s a management theorist Douglas McGregor originally wrote about two theories about managing relationships: Theory X, which is a negative view that assumes that people are inherently lazy, dislike work, and need (want) to be controlled, and Theory Y which argues the opposite – that people are self-motivated and will choose to seek responsibility and do good work.

So...do you control and corral your relationships with contracts (Theory X) or do seek relationships based on trust and mutual interest (Theory Y).

Well..both. And that answer isn’t as wimpy as it sounds. I’m not sitting on the fence; there’s a role for both trust and clear legal boundaries (contracts) in each relationship. This applies to you and your investment partner, you and your broker, you and your property manager - basically any of the many relationships that you have to develop and nurture as a real estate investor. 

Basically there are four possible combinations, but only one good one:

• No Trust + No (or bad) Contract = This is a train wreck waiting to happen. Expect to see your partner in court sooner rather than later.
• No Trust + Good Contract = You can keep your partner on his toes with an airtight contract, but it’s a litigious, tense way to do business. Expect to grind your relationship (and your nerves) into powder.
• Trust + No (or bad) Contract = George Bernard Shaw said that “the road to hell is paved with good intentions”. Trust is crucial, but we don’t always communicate well. If you don’t deal with the legal details then expect poor alignment, misunderstandings, and friends that turn into enemies.
• Trust + Good Contract = Voila. Finally. Combined trust with a thoughtful legal framework and you have a better chance of achieving a streamlined partnership that can focus on solving problems.

Related posts

• You want to be a hippo, not a whale shark
• How can contracts help me to build solid relationships?

I put a premium on making things happen and getting things done. If I compare a bunch of B+ deal that I can actually get done vs. an A+ deal that doesn’t close guess which one I prefer?

This is a philosophy that I’ve learned over time, and one that doesn’t really jive too well with my background as an Army officer and my academic training as an engineer – two disciplines where finding the right solution is pretty darn important. So this is something that I have to work at.

This extends to the way that I deal with people. Real estate is a people business. Yeah there’s financing, and strategies and technical know-how, but at the end of the day it’s all about you and the person sitting across the table from you – whether she’s a contractor, a Realtor, or a buyer.

So I’m rarely thinking about cutting the best deal I can. I focus on cutting a good deal; one that I’m satisfied with, which gives me a good return and one which builds the relationship. A good relationship today will yield more good deals tomorrow.

Loyalty is important to me, and that is a value I try to communicate through my actions. Case in point - when I have a maintenance issue that I have to deal with here’s what I like to do: I call the contractor and tell him to head over to 123 Elm Street and take care of it, then send me the bill. No bid. Just fix it.

Now I certainly can’t always do this because many contractors are evil and dishonest (sorry if I offend anyone, but this is a statement of fact.) But I can do this with one particular contractor that I work with on a regular basis. I trust him, he trusts me, and we have a symbiotic relationship – this is a relationship that I value like gold. I know he’s not going to rip me off because he knows I’ll be coming back – he values the repeat business. And he knows I will treat him fairly, because he knows that our arrangement helps me manage my life – I value the ease and convenience. We both value the relationship and we both take care of it. Honesty. Trust. Case closed.

Reciprocal, symbiotic relationships don’t grow on trees and they don’t happen overnight. I always think of those hippos on the Discover Channel with the little birds perched in their wide open mouths. A real win-win deal: the hippo gets clean gums and the little bird gets an easy, risk-free meal of leeches and whatever else hippos end up getting stuck between their teeth. Kind of a disgusting analogy, when you really think about it.  Anyway, what you don’t want is to realize that you’re more like one of those whale sharks that has a bunch of blood sucking remoras attached to his underside; the remoras get a free meal and free transportation to boot, but the whale shark gets jack.

So relationships are something you have to keep reevaluating; make sure you're getting what you think you're getting. 

There’s no getting around it; investing in real estate means dealing with people. Building skills as a negotiator is the most important part of being successful as an investor.

Philosophers from Machiavelli to Rousseau have debated human nature, and although I’ve run across more than my fair share of jerks in my time I nonetheless reject the Machiavellian view of human nature as fundamentally dishonest and mean spirited. The guy you’re negotiating a sale with isn’t out to get you. That contractor you’re haggling with isn’t stupid or evil. People might act in ways that are fearful or greedy, but in my view most people aren't bad.  So I see it, a critical key to being a successful negotiator is initiative, backed by fearless, transparent honesty. But it this only works if you have a plan...

Not too long ago I was involved in a major corporate merger and had an interaction with a senior executive who was a direct party to the negotiations. He declared “well we all agree on everything…except for the price.” There’s a lot to that simple statement – that bottom line dollar figure can make people act in strange ways. A dollar figure is hard and concrete – you can get your head around it. But often the price is just the catalyst for conflict and the real concerns lie beneath.

In my experience, the biggest concern that the person on the other side of the table has is that she'll be taken advantage of. She can probably live with a 10% increase or decrease in the price...but she can’t live with looking foolish. Therein lies your challenge.

:: Example

I recently purchased a multi-family property. I made an offer and contentious back-and-forth ensued .  Finally we had an agreement, pending inspections. This was a tough process and it took a lot of work to get to a price that worked for me and which the sellers could accept.

Then: the inspection. I use a guy named Robert Goodspeed . He’s ruthless but fair. Meticulously thorough. If there is a nail out of place he’ll note it. I love working with Robert – if there’s something wrong he’ll find it.  I can negotiate with confidence when I have a Goodspeed inspection report in my hand, and that makes me a repeat customer. 

Now aside from a long laundry list of minor items this particular building was in solid shape. But there were three items of concern that Robert noted:

• Pier and beam foundation had recently been repaired. There wasn’t necessarily an immediate problem, but we needed to ensure that the work had been done correctly.
• There were some electrical problems in one of the units, the breaker tripped while we were inspecting
• The elevated back deck (over the carport) was not up to code with regards to the railing.

I sent the Goodspeed report and the list of three items that I needed to have repaired.  Predictably, the sellers freaked.

:: Getting into the sellers’ heads

At this point it would have been easy enough for the various personalities to take over the negotiation; for us both to cross our arms and let the deal die. What I try to do in these situations is try to put myself in the other guy’s shoes.

Time to take the initiative and take control of the discussion.  The key, in this case, was to give the seller a way to save face and keep the deal moving forward. To do this I emphasized not our respective positions (“fix it!” “no, I won’t fix it!”) but the principle at stake: in this case the purpose and intent of the option period.

I didn’t want money – I wanted assurances that everything was as they had represented it when they offered the property. The sellers cooled down. They brought out some certified, licensed inspectors: a structural engineer and an electrician.

The foundation, as it turns out, was rock solid. The electrician found a couple of problems – nothing major. And since the seller uncovered these problems with their contractor (who I approved) it was not contentious to get them to pay for the repairs. The railing on the back deck I agreed to pay for – this was an item I could have identified by site via my pre-offer casual inspection, and it was only a $1,000 item.

The seller’s initial reaction and refusal to budge was a reaction based in fear. Fear of being treated unfairly. Fear of looking foolish. And that reaction could have easily triggered a fearful reaction in me: these guys are trying to hide something! They’re out to get me! Too risky...no deal!

But by putting myself in the other guy’s shoes I was able to efficiently get to a fair solution and acquire a great property.

I wrote an earlier post on negotiating, stressing the idea that investors should negotiate based on principles instead of trying to defend established positions. What do I mean by this? I mean that if you negotiate based on a position (example: I'll pay $100 thousand and not a penny more) then you'll end up digging your heels in on something that may not be the only path to getting to the principle that's really at the core of your best interests (perhaps the seller could offer seller financing? Or give a package discount on the neighboring plot?)

So here's a couple of case studies. These are actual situations that I have found myself in - slightly stylized for confidentiality purposes.

Situation A: New tenant applicant with shaky credit 

Situation B: Tenant who is unsure about renewing lease 

Next, I'll talk about generating creative options - a key tool that you need to have in your back pocket when going into a negotiation. 

Related posts:

• A critical skill overlooked by many Real Estate Investors
• Go light on the adjectives in written negotiations

• As to the Adjective: When in doubt, strike it out.  Pudd'nhead Wilson, 1894
• God only exhibits his thunder and lightning at intervals, and so they always command attention. These are God's adjectives. You thunder and lightning too much; the reader ceases to get under the bed, by and by.  Letter to Orion Clemens, 1878

• A critical skill overlooked by many Real Estate Investors

Negotiation is a subject that, in my opinion, does not get enough airtime on finance themed websites – particularly those dealing with real estate investing. 

Negotiating is a core skill which real estate investors must master in order to be successful. Negotiating a successful purchase or sale is only the start; other negotiations are just as critical, and many are significantly more complicated. Consider the following:

•  You need to increase the rent on one of your units but want to do so without damaging your long-term relationship with a reliable tenant.
• You need to get a lower rate from a trusted contractor on a rehab job in order to stay under budget.
• A loft that you own belongs to a homeowners association which wants to replace the roofs on all of the units in the complex, requiring all of the owners to pony up. Most of the other owners support the measure, but you've calculated that it's not in your financial best interest.
• Your tenant has just purchased a new home and wants to break his lease, which would create an unexpected vacancy for you.
• Your tenant is pressuring you to make some renovations to the unit that they’re renting, but you feel that it’s already fairly priced for the current condition. 

These aren’t hypothetical situations; they’re a sample of specific issues that I’ve had to deal with over the course of the past several months. 

When placed in these positions people tend to take one of two routes. The hard style: we’re playing hardball so it’s my way or the highway. The goal is to win. And the soft style: the goal is agreement, be flexible and compromise. Like Rodney King said – can’t we all get along?

Well both of these approaches are sub-optimal. The hard guy wins a few battles, but in the end he loses the war.  He grinds his relationships into powder, walks away from good deals, spends lots of time in court, stresses himself out and damages his business. The soft guy keeps his relationships intact, but often ends up getting taken to the cleaners.  

There’s a third way. In their seminal tome Getting To Yes Roger Fisher and William Ury outline an approach which they call principled negotiation - negotiating based on principles as opposed to staking out positions to be either defended or yielded. Getting To Yes is one of those books that I re-read every few years, and it’s guided me through all of the situations I mentioned above in addition to helping me in my day-to-day life. Everything we do, essentially, is a negotiation. Gonna ask your boss for a raise? Or perhaps your employees are going to ask you for a raise. How about setting your kid’s allowance, or deciding where to take the family vacation. In all these cases you want to efficiently get to a wise decision which concludes amicably. 

This is a book that I recommend to real estate investors. In future posts I’ll be referring to some of the principles in this book and how they apply to situations which investors face. 

• Getting to Yes by Fisher and Ury at Amazon.com