Two people buy the same car under different circumstances. Buyer one gets a quote from his dealer for $35,000. The dealer is anxious to make his monthly sales quota so he cuts to the chase getting to his bottom line number and tells Buyer One “This is my best price and I can’t go any lower.” Believing no one ever comes out with their best offer in the first attempt, Buyer One vigorously attempts to drive the price down further but can only get the price down to $34,500. Buyer Two walks into a different dealership looking for the exact same car. After getting an initial price from the dealer of $38,000, Buyer Two goes back and forth with the salesperson and eventually drives the price down to $35,750. Assuming Buyer Two does not know the price Buyer One obtained, who feels better about their ultimate deal?
We are programmed in our lives as consumers to seek bargains. Bargains are usually measured in relation to some base price. That’s why department stores run huge sales instead of simply charging low prices as their standard price. Rather than charging $250 for a suit, one large, national retailer charges $750 for a suit but runs a promotion that if you buy one, you get two free. As people typically buy shirts and ties to go with their new suits, this strategy not only makes the customer feel like they’re getting something for nothing, but also the store sells three suits to someone who might have otherwise only purchased one and gets additional sales on accessories. Several years ago, JC Penny, under new management, tried to change their marketing strategy by offering lower prices all the time rather than having large sales periodically. The results were disastrous and they ultimately went back to their prior strategy. Consumers wanted to feel like they were getting a deal and everyday low prices just didn’t feel as good as a demonstrated bargain.
What does all of this have to do with tenants and leasing? Landlords are sophisticated vendors. They too know that their consumers (tenants) want to feel like they are getting a great deal. As a result, in their initial negotiations, landlords often propose rich lease terms. If the tenant agrees to it, they make a nice profit. If the tenant objects, the landlord can come down in price (even to a premium price) and the tenant will feel like they have extracted something. They will feel good about their deal. This is a carefully orchestrated game in some cases. We have actually had experiences with some landlords who have told us in advance how the negotiations will proceed before they get to a certain end rent number. The initial landlord proposal “anchors” the tenant’s expectations in the sense that it establishes the benchmark against which ultimate savings will be measured. Oftentimes the tenant has no idea how the final deal measures up to other alternatives or deals in the market; they simply measure success against the anchor number. Many brokers also rely on this anchoring phenomenon to convince their client what a good deal they are getting.
There are many problems with the foregoing psychology when it comes to acquiring real estate (or, frankly, any other good or service). What happens when a landlord really wants a tenant and, to show its sincere interest and be taken seriously, makes a very aggressive initial offer? This deal may in fact be the best deal available; however, given the aggressive initial terms, there may be little room for movement. We worked on one large deal where a client really wanted to move to Building A. Because Building A was already in serious discussions with another tenant for the same space and wanted to cut to the chase with our client, we told the landlord to give us their bottom line proposal before going with the other tenant. In response, they offered an extremely aggressive deal. While the terms were very attractive, because we were in a “down” market, the client’s expectations were that there would be a lot of room to improve initial terms. Though we counseled the client that these were tremendous terms and that the landlord had another prospect they were far down the road with, the client rejected the deal because of the lack of movement. Had the landlord come out of the gate with a much higher initial rent number before getting to their best and final terms, the outcome might have been different.
We all want to feel good about our purchases. In most cases, consumers are dealing with very sophisticated sellers on the other side of the transaction who spend a lot of time and money learning the psychology of their customers’ buying decisions and finding ways to manipulate that to their advantage. In real estate, this game can be very dangerous for two reasons. First, it can result in a tenant accepting a very bad deal simply because it achieved considerable savings over the initial proposal. Second, the tenant may forego a great opportunity because there was little movement in the initial proposal. The key to a good lease deal is competing the requirement in the open market and then evaluating the options in relation to each other. Putting too much weight on the initial proposal, or using that as the primary benchmark for whether a deal is good or bad can have disastrous consequences.
For more information contact Glenn Blumenfeld https://tactix.com/team.php#Glenn