Market Insights: How fairness impacts negotiations
January 12, 2013
I read about various subjects that make me a better Realtor, and one of my favorites is the research economists conduct. Have you heard of the ultimatum game, a stylized representation of negotiation, first used in experiments in 1982? Since then, this experience has been conducted in at least 12 countries on five continents with people from a wide spectrum of cultures. For the purpose of this article, I will only discuss results from experiments in industrialized, Western countries.
The economists give two people a sum of money to divide between themselves. The first player, the proposer, proposes how to divide the money, and the second player, the responder, can either accept or reject this proposal. If the second player rejects, neither player receives anything. If the second player accepts, the money is split according to the proposal. The game is played only once so that reciprocation is not an issue.
Because this research has such a direct correlation to negotiating residential real estate contracts, I have read several papers on the topic. Here is a simplified overview of the results:1. Proposers tend to offer a 50/50 split, in which case the responder accepts and the money is divided between the players.2. When the proposer offers an unfair spilt, only about 50 percent of the time does the responder accept. 3. Researchers hypothesized that anger is what leads the responders to sacrifice getting any money. The responders would rather punish the proposer for making an unfair deal.Bingo. The ultimatum game is a direct reflection of the real life of negotiating residential transactions in Summit County, at least as I have experienced it. Both buyers and sellers underestimate the influence emotions have on negotiations. In the real world, although the rules are a little bit different, “the proposer” is the buyer and “the responder” is the seller. Here is a simplified summary of my conclusions regarding buyers and sellers:1. Both parties want to feel they have been treated fairly.2. If either party feels they have been taken advantage of, it is highly unlikely the negotiations will conclude in a sale.3. In addition to being professionals in the transfer of real estate, Realtors are also counselors managing emotions to obtain the best result for their client.
The example this week came to mind immediately. This two-bedroom home with an attached two-car garage close to Main Street in Frisco, priced at $363,900, would have been sold rather than being on the market today if not for a lack of the sellers’ feeling they had been treated fairly when an offer was submitted just before Thanksgiving. To make a long story short, we had, as they say in real estate school, a willing buyer and a willing seller. However, in the process of the negotiations, the proposer (a buyer from the Front Range) did not offer anything close to a 50/50 spilt, which upset the responder (a long-term local resident), and the talks terminated. I am confident had the parties felt good about, and trusted each other, the result would have been a sale.I look forward to connecting with you next Saturday. Love life, DWJ For more information contact Daniel Webster Johnson at (970) 393-3300 or drop him a line at Daniel@YourMountainBroker.com. He is a very active, full-time Realtor in Breckenridge, who has earned the national Quality Service Certified Platinum award, recognition of 100 percent client satisfaction. He is one of the team at Resort Brokers Real Estate located at 100 S. Main St., Breckenridge.