In the real estate world, permeated with high-stakes and complex transactions, negotiation is a crucial skill to achieve and sustain success. Tried and tested adversarial negotiation tactics are falling into obsolescence and giving way to a new approach.
In our practice briefing* for real estate professionals, recently published in the Journal of Property Investment & Finance, my co-author Thomas Wiegelmann and I examine the forces driving this shift and propose a switch from entrenched win-lose tactics to more ethical and collaborative negotiation practices.
Win-lose tactics
Real estate professionals have traditionally relied on win-lose or power-based negotiation strategies, leveraging information asymmetries or other aggressive and unethical tactics as weapons in negotiation to secure superior deals. These may range from threats to coercion, deliberate misinformation and lies.
Such “winner-takes-all” tactics are rarely successful but occasionally yield highly visible big wins that can boost a negotiator’s reputation. Consequently, real estate professionals are misled into admiring and emulating these adversarial negotiators in search of big wins for themselves, when the reality is that they produce lower returns on average (e.g. low-value sales, impasses or failed deals). In addition, such an approach works against building sustainable, long-term relationships and trust.
Any market involving millions of professionals worldwide – like real estate – faces accountability challenges. Reputational information is scarce, and providing negative reputational information about another party is risky, lest one becomes the target of a defamation lawsuit. These challenges enable unethical behaviours to blossom without legal repercussions, which cements win-lose tactics as the default in an industry increasingly at odds with ethical and sustainable negotiation practices.
Times are changing
The real estate industry is undergoing significant transformation due to rapidly changing market dynamics, evolving regulations, technological advancements and new business models. Information asymmetries, arbitrages and simpler transactions are being substituted by VUCA (volatile, uncertain, complex and ambiguous) or BANI (brittle, anxious, non-linear and incomprehensible) environments.
This shift, coupled with the ease of finding and spreading information and the presence of skilled international real estate players, makes traditional win-lose negotiation tactics riskier and less effective. To remain successful, real estate professionals must actively pursue continuous learning and embrace evidence-based negotiation strategies.
A common misconception is that negotiation is a talent rather than a skill. This fixed mindset not only hampers personal development but also fails to prepare negotiators for the increased complexities and pressures of modern real estate dealings. In this new era, a lack of skills coupled with poor decision-making can lead to the ignorant usage of aggressive, risk-prone behaviours that compromise efficiency, outcomes and relationships. As the industry evolves, real estate professionals must invest in developing their negotiation skills to enhance their personal success and that of society overall.
Obstacles to transformation
Despite the critical role of negotiations in securing superior and sustainable deals, many professionals still choose oversimplified, high-risk, one-size-fits-all strategies, instead of modern negotiation strategies that maximise value while minimising risks.
The real estate industry advertises its emphasis on relationships, trust and reputation, while silently adopting win-lose tactics. This dissonance allows seasoned, powerful negotiators to exploit newcomers who naively adopt relationship-friendly approaches. Instead, a collaborative, non-naïve approach can guard against such exploitation attempts.
Power differences exist in real estate transactions, such as when one party misunderstands or is ill-informed about the asset value. The more powerful or well-informed party may secure a big win and mistake win-lose strategies as superior choices in the future. This success bias deludes negotiators, who fail to see how win-lose strategies result in fewer and lower-value deals on average, as counterparties resist or avoid them whenever possible.
Power-based tactics inherent to win-lose strategies may eventually secure short-term gains, but are driven by fear or overconfidence. More frequently, however, they are unsustainable and volatile. They can raise resistance, escalate conflict, produce suboptimal deals, damage relationships and are fragile to future power shifts.
In a typical power-based negotiation, each side pushes for their aspiration price (the best that they hope to achieve) while resisting the other’s push in the opposite direction towards their reservation price (the minimum acceptable offer). The parties may eventually realise the aspiration price is unattainable or outside the Zone of Possible Agreement (ZOPA) and threaten to move on to their Best Alternative to a Negotiated Agreement (BATNA), making concessions towards a compromise or no deal.
This simplistic and rigid approach driven by emotional responses, ignorance and power moves is the bargaining process. It often benefits the more powerful party at the expense of weaker ones. Besides being inefficient, it stifles creativity, damages relationships and destroys value through resistance and fighting.
“INSEAD, a contraction of “Institut Européen d’Administration des Affaires” is a non-profit graduate-only business school that maintains campuses in Europe, Asia, the Middle East, and North America.”
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