Chapter 9 Negotiation, Ethics and Risk Management in the Contracting Process

1. Chapter 9Negotiation, Ethics and Risk Management in the Contracting Process “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

2. Major Topics • Principles of successful negotiation styles • How ethical perspectives influence negotiating styles • Adversarial versus cooperative negotiation • Aligning Principal and Agent Incentives • Traits of successful negotiations • The process of negotiation • Principal and agent issues in negotiation • Risk management in contracting context “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

3. Negotiation “ The process of contracting for an exchange, a way to achieve cooperation for some type of trade that will meet our objectives” • Methods of negotiation are varied and include: • Manipulation, or guilt • Obligation and loyalty • Incentives • Penalties • Logic and empathy Negotiation used in real estate include: Lease, Contract to buy or sell or rehab, mortgage commitment, etc. “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

4. General Negotiation Philosophy: Extreme Views • The Competitive Approach • Principled Negotiation • Factors influencing Degree of Cooperation Versus Competition in Negotiating Styles “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

5. Ethics are not universal and do influence style • Presenting a misleading picture will be considered unethical by many business people • Most Americans consider predatory pricing unethical, but most Japanese consider gaining market share good business • Historically, the Japanese have considered leveraged buyouts or massive layoffs unethical, but some Americans view these as sound business practice “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

6. Ethics are not universal and do influence style • Musashi’s Book of Five Rings • Sun Tzu • Riklis “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

7. Successful Negotiation Traits Self-Confidence is Critical Patience is Important and Listening is critical Information and Knowledge are Power Stay Objective and Know your True Interests Know your Options at All Times Consider Everything Negotiable “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

8. Negotiation: The Process • Negotiation starts before actual meeting and continues after all meetings • “Posturing” is the presentation of positions that are generally extreme or positional in nature. • “Claiming” behavior is an attempt by one negotiating party to claim contractual agreement or commitment on an individual issue, where the other party has presented an attractive position. • Integrative Negotiation “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

9. Role of Communication Skills in Negotiations • Commonly perceived indicators of confidence and power, that can influence flow of negotiation: • Voice Tone • Framing - Art of Tactful Communication • The Importance of Non-Verbal Communication “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

10. Aligning Principal and Agent Incentives Prior to Negotiation • An agent has a fiduciary obligation to the principal with very specific duties • Agent must be clear about the terms of employment • The objective of the principal (often the owner) is to set up incentives in such a way that an agent will maximize what is best for the principal as well as the agent. “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

11. Ethics, Agency and Appropriate Behavior in the Contracting Process • Ethics – “proper or appropriate behavior” • What is proper or appropriate? • Is Ethics the same as doing the right thing? • Cicero • First: do what is legal • Second: Do what is honest, open and fair • Last: Always keep your word, no matter what the consequences “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

12. Contact Negotiation in a Risk Management Framework Risk Shifting • Risks are shifted from one party to another through contractual arrangements • Parties involved could be the buyer, seller, landlord, property manager, tenant, agent or banker • In exchange of accepting risk the party might receive higher return or be able to accomplish another objective “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

13. Risk Management Examples • Economic risk based on dependency on others • Management risks: the rent paid in cash • Exchange rate risks • Vacancy risk: keeping key tenants • Operating risks: utility expenses • Seller financing: refinancing interest rate risk • Repair risks: several items need to be replaced • Buyer requires an empty building (no tenants) • Other issues: Tie it up then work it out • Moral Dilemma: Tenants are old and on social security; rents are below market Extra Material not covered in Text “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

14. END “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner