Basic Terms

Dr. Jonathan E. Booth

29 July 2013

Your greatest advantage in any negotiation is

preparation
1. Purpose 2. Interests & Priorities 3. BATNAs 4. Options & Issues 5. Standards 6. Proposals 7. Intentions

Dr. Jonathan Booth 2013 Summer School

Defining your interests: Purpose

Whats the purpose of a home sale negotiation? Negotiations have a surface-level purpose that most everybody can agree on.
It feels comfortable to talk about whats happening at the surface.

Each negotiator has his/her own deep-level purpose, which is why theyre really at the table to begin with.
Finding a mutually attractive resolution often requires fulfilling this level. But revealing this level is hard work (even for ourselves) and requires trust.
Dr. Jonathan Booth 2013 Summer School

Selling a house: Define interests

Interest Profit Minimize stress in closing deal Avoid double mortgage Put down offer on house in Islington
Dr. Jonathan Booth 2013 Summer School

Selling a house: Prioritize interests

Priority - Interest 3 - Profit 4 - Minimize stress in closing deal 1 - Avoid double mortgage 2 - Put down offer on house in Islington
Dr. Jonathan Booth 2013 Summer School

BATNA
Best Alternative to a Negotiated Agreement
Course of action youll take if walk away and all its associated risk NOT a safety net it SHOULD provide you leverage
i.e., you dont have to take the low ball offer there are other options/alternatives out there!

Develop alternatives so you know at what point to stop negotiating Gives you the POWER to walk away
If we cannot receive an offer of X-amount for the house, then what will you do? Can you live without an agreement? Whats at stake? Always try to increase your BATNA Your BATNA could change over course of negotiation

How different from Reservation Point?

Least favourable agreement youre willing to accept
Dr. Jonathan Booth 2013 Summer School

How interests become positions

Interest Profit Target Point 20% over purchase price

Minimize stress in closing No additional repairs or deal improvements Avoid double mortgage Sell house for move in next month Put down offer on house in Islington Deal signed next week so you can move forward with offer

Dr. Jonathan Booth 2013 Summer School

...and what issues are on the table?

Interest Profit Target Point 20% over purchase price

Minimize stress in closing No additional repairs or deal improvements Avoid double mortgage Sell house for move in next month Put down offer on house Deal signed next week so you in Islington can move forward with offer
Dr. Jonathan Booth 2013 Summer School

Issues
What are the different issues you can talk about? Brainstorm various options for meeting each of your issues and their issues Be creative and think about whats not on the table that could help the other person and help yourself What issues can you bring in to expand the pie? If you dont ask, you dont get. Nothing is out of bounds for the brainstorming stage.

Dr. Jonathan Booth 2013 Summer School

Standards
These are criteria you can leverage to provide a more neutral zone for discussing proposals (i.e., bundles of issues)
Published benchmarks Historical figures and precedents Industry averages Accepted practices

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Research the criteria in advance

Fair standards
Should be Legitimate and practical Independent of each sides will Could be based on: Market value Precedent Scientific judgment Professional standards Tradition Reciprocity (each side offers something), etc.

Fair procedures
One person cuts, the other one chooses Each side gets equal opportunity Other options: Taking turns Drawing lots/flipping a coin Letting someone else decide - expert, mediator

(Fisher & Ury, 1991)

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Proposals: Create packages & Bundle issues

Packages that combine multiple issues
This is not a menu. Dont allow cherry-picking! Knowing how much you value each issue allows you to bargain by making trade-offs between equivalent packages

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Equivalent Packages?
300,000 Offer Pool furniture and equipment remain Entertainment system designed for home remain = 290,500 Buyer pays sellers commission to agent Pays off-street parking until end of lease
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Package proposals
Think of trade-offs before negotiation by striking positions on each issue at three levels:
Live with -------- Content with -------- Aspire to
Sellers bargaining range

RP

TP

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Live with: RP
You must figure out your BATNA to know your Reservation Point
BATNA is course of action youll go if do not reach agreement BATNA closely linked to RP b/c RP is lowest youll go before walk away
You should not make a deal worse than your BATNA

Least favourable agreement youre willing to accept

You likely will have several RPs in a multi-issue negotiation

Think broadly, then quantify each aspect & its probability

Dr. Jonathan Booth 2013 Summer School

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Developing a Reservation Point

Value of each of these risky alternatives = value x probability: Value of reducing price to 265,000 = 265,000 x 0.6 = 159,000 Value of reducing price to 250,000 = 265,000 x 0.35 = 87,500 Value of renting the house = 100,000 x 0.05 = + 5,000 ----------------------------------------------------------------251,500 = OVERALL VALUE = RP
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Aspire to: Target Point

This is an aspiration aim high! Consider the whole universe of outcomes
Think about all of your interests

Be feasible, but beware: Many of us tend to aim low

Think champagne popping! If overshoot, you appear unreasonable

Do not anchor your TP to your RP!

Dr. Jonathan Booth 2013 Summer School

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Make Sure Were Clear on Vocabulary!

Issues: What you negotiate over during the discussion
(e.g. price)

Position: Where you are on that issue (e.g. what price) Interests: Underlying needs, concerns, desires, fears
you truly wish to satisfy with the deal, often lead you to take a certain position

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Focus on interests, not positions

Your position is something youve decided on Your interests are what caused you to decide your position For every interest, there are usually many positions that could satisfy it
Be open to alternatives

What are the obstacles if you focus on your positions?

(Fisher & Ury, 1991)
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Focus on interests, not positions

Position: You want 8000 for your car Interest: You need 4000 to repay a debt to your sister and 2000 to pay your LSE tuition
If we focus on your interests rather than your position, I may be able offer you something else that meets one or more of these
e.g., I have tickets to a concert your sister really wants to go to, so you may be able pay off some of your debt without the full 4000
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Focus on interests, not positions

How to identify interests
Ask why?
i.e., why do they have this position?

Ask why not?

i.e., what is keeping them from agreeing with my position?

Realise that each side has multiple interests

i.e., who are they responsible to?

Make a list of potential interests as they occur to you and try to order them in terms of importance
(Fisher & Ury, 1991)
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Calculating Your RP & Examples

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Developing a Reservation Point

Step 1: Brainstorm Your Alternatives. Imagine that you want to sell your house. Your target point275,000. What will you do in the event that you do not get an offer of 275,000? Consider as many alternatives as possible.

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Developing a Reservation Point

Step 2: Evaluate Each Alternative.
Can you do without an agreement and what are the costs? Can you make the product yourself? Can you find a substitute? Can you dispose of excess?

Order the various alternatives by their relative attractiveness, or value. If an alternative has an uncertain outcome, such as reducing the list price, you should determine the probability that a buyer will make an offer at that price. Suppose that you reduce the list price to 265,000. Based on research, you assess the probability of an offer to be 60%. The best alternative should be selected to represent your BATNA.

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Developing a Reservation Point

Step 3: Attempt to Improve Your BATNA. In this case, you might contact a rental company and develop your rental options, or you may make some improvements that have high return on investment (e.g., new paint). Of course, whats most attractive to you is to have an offer in hand on your house.

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Developing a Reservation Point

Step 4: Determine Your Reservation Price. The least amount of money you would accept for your home at the present time. You assess the probability of an offer of 250,000 or higher to be 95%. You think there is a 5% chance that you will not get such offer and will rent it. The probabilities always sum to exactly 100%. We have considered all possible events occurring. No alternative is left to chance.
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Developing a Reservation Point

Assess the expected probabilities of selling: Reduce the price of your home to 265,000 Psale = 60% Reduce the price of your home to 250,000 Psale = 35% Rent the house Prent = 5%

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Developing a Reservation Point

Value of each of these risky alternatives = value x probability: Value of reducing price to 265,000 = 265,000 x 0.6 = 159,000 Value of reducing price to 250,000 = 265,000 x 0.35 = 87,500 Value of renting the house = 100,000 x 0.05 = + 5,000 ----------------------------------------------------------------251,500 = OVERALL VALUE = RP
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