Last year I made (saved) $120 by spending 3 minutes on the telephone. All I did was call Sheraton Hotel in Seattle and say “I’d like to convert my reservation to the internet rate“. A couple of minutes later it was done. No fuss about it. I then paid $30 less per night during our 4 night stay, saving me $120 plus whatever the taxes would have been on the extra $120, so probably more like $150. That paid for all of mine and Sylvia’s dining out.
Why didn’t I make the original reservation with the internet rate? Because the “internet rate” is non-refundable and is charged to the credit card immediately. The “normal” reservation is refundable and you don’t pay until you stay. A lot can happen in the two or three months between a hotel reservation and an arrival, so paying in full months in advance, and having it be non-refundable, just isn’t the best way to manage your travel expenses. The smart-money thing to do is make a fully refundable hotel reservation and convert it just prior to your arrival, thereby receiving the benefits of a refundable reservation at the discounted non-refundable price.
I use this example because so much of our modern money management efforts require knowing stuff and doing something extra as a result of what you know. Prices that seem “cheaper” are often not, especially in the airline and hotel industry when you factor in the risk value of up front non-refundable charges. And they gloss over that small detail that when you make the reservation (and/or you don’t read the fine print). You have to know about it, or learn about it the unfortunate way, when life circumstances force the cancellation of a trip.
I bring up this topic because so many real estate consumers get bogged down in the infinitesimally small cost factors of buying and owning a home, as if the homes we live in are the only source of expenses and savings in life. And, as American consumers, we often remain blissfully unaware of the multitude of simple things that can be done daily to, as Clark Howard puts it, save more, spend less, and avoid being ripped off.
So, let’s say you’re a buyer of a new home and you’ve negotiated the seller down to the steel-cage-death-match bottom-dollar price you wanted. You’re happy. Then on the repair negotiations, you held tough and obtained even more concessions. And you’re happier still. You’re getting a great rate on your mortgage too. You feel like you’ve done well and “saved” a lot.
Yet the typical American home buyer will follow up the purchase of a home with some of the worst purchase decisions they’ll ever make. It starts with a trip to the furniture store where you’ll pay way too much for some very poorly built furniture. And worse, buy it on a payment plan.
Next, a large flat screen TV for the new Media room. I mean, now there are 4 places to watch TV in the home, right? That great new TV deserves the deluxe package on the Cable or Satellite TV service, so you upgrade upon moving. Next, since those purchases feel so good, that 8 year old car starts looking inadequate, especially compared to what you see your new neighbors driving, and suddenly the garage is just begging for something newer, and within a few months you have a new car also.
If you’ve purchased at least one home, you probably remember the emotions that motivate this spending. It’s insidious and powerful. And frugal people are not as immune to it as they might believe themselves to be.
And thus, as all economists will attest, home purchases in America produce a massive amount of secondary retail activity following the home purchase. All manner of household goods and products are on the menu, as you’ll soon be reminded of daily via the massive amount of junk mail showing up in your new mailbox as a result of you being flagged “recent buyer” in all the junk mail lists that advertisers can purchase. This is all very good for our economy but bad for your personal financial situation.
And, getting to my main point, it’s interesting for me to observe the way in which a $500 difference between a buyer and seller can (and sometimes does) kill a deal, yet both buyer and seller, as typical Americans, waste vastly much more than that in their everyday purchase habits and decisions. The average American Consumer might not have had the opportunity to waste all this post-home-purchase money on wasteful consumer spending had they not been able to get past the insult of that final counter-offer from the seller. The final counter-offer that closed a much, much smaller gap in the negotiation than the post-purchase spending ended up being. And an amount which, as part of the purchase price, would represent an investment of $500 in an appreciating asset rather than a depreciating consumer product.
There is something interesting and odd that happens to the value of a dollar in the context of getting to final agreement in a real estate transaction. As the distance between final agreement becomes smaller and closer, the meaning and value of a dollar magically grows by enormous proportions for both parties. The dollars somehow become more precious. Whereas the buyer and seller may have negotiated in $1,000-$5,000 chunks during the initial 1 or 2 offer/counter phases of purchase negotiation, once the gap gets below $1,000, each side often seems to treat the next $500 they’d need to concede to seal the deal as if it was a first-born child.
This is really weird. But experienced Austin Realtors will back me up on this and say “oh yeah, been there, done that .., many times”.
What’s the solution? I haven’t really figured that out, other than to set expectations with clients and set the context within which a client can still feel good about being flexible about that final amount. More on that below. It’s as if all negotiation up to and leading to a final $500-$5,000 gap is pragmatic and sensible, and all negotiation seeking to close a $500 gap is purely emotional, and subject to feelings of insult. Spending $1,500 on an unneeded 4th Flat Screen TV feels good after the purchase, but giving up the last $1,500 in negotiating a final purchase price that would allow the deal to happen, for many, feels bad.
If I could tell buyers and sellers how they should feel and why, I could overcome more of these negotiation gaps. But I can’t tell someone how to feel, and I can’t tell someone that, in proper context, $500 is a virtually meaningless amount of money. Though I guess I’m trying to do that in this blog article, it doesn’t work during negotiations.
I’d need a Therapist or Psychologist to explain this increased importance we, as humans, place on the next last dollar, and I recognize that I myself am subject to it as well, even though I intellectually understand and recognize when it’s happening to me.
Remember when we still rented videos at Blockbuster instead of using Netflix? Remember way back when Blockbuster charged late fees? I do. And I remember wondering why and how a $1 late fee could infuriate and insult me to the degree that it did. One dollar doesn’t mean anything to me, really, until I’m told I owe it as a penalty. Then it’s like a knife going through me. I don’t like it. I want to fight. I, sir, will not stand for such an insult! The dollar becomes emotional, even though it’s only a dollar.
I think buyers and sellers feel a similar emotion when asked to give up the last $500 or so that would close the deal and make it work. Because it’s such a small amount, it means more. Really it does. On a $300,000 purchase, does the $500 really matter? Not in a strictly financial sense, as part of long-term building wealth toward an ultimate financial freedom amount, over a lifetime. But to that part of our brain controlling that part of our emotion, at that moment, it does. And for many, it’s hard to get past that and still feel good about the deal. And for many buyers and sellers, feeling good about the deal is as important as the dollars involved, often more so.
So, whether you’re a buyer or seller, the best way to protect yourself from this deal-killing emotional impediment is to always agree to meet at a point a bit better than you’re ultimately willing to go. For sellers, that means making that “final” counter-offer one that leaves you a little bit of undisclosed wiggle-room, or at least accepting that this may be what it required. Same for buyers. And for both buyers and sellers, leaving still a bit more wiggle room, mentally, for the repair negotiations that follow the contract negotiations will allow you to still “feel good” about where you ultimately end up. As a seller, if your honest-to-god bottom dollar price is $300,000, make the “final” counter $303K or $305K, and be willing to not feel insulted if the buyer comes back at $302K and you accept. And then if the buyer comes back asking for another $1,000 in repairs later, you’ve already provided yourself with the financial buffer needed to still “feel good” and stay above the $300K you wanted. And if the buyer had the same undisclosed ceiling, you both successfully allowed yourselves enough wiggle room to do the deal and still feel good about it.
I’ll close by asking a rhetorical question I like to use in stalled negotiations. Who is dumber, the Seller who let a good buyer walk away over a $1,000 difference in price, or the buyer who walked away from a good house over a $1,000 difference in price? The answer is “neither”. They both simply acted like normal buyers and sellers and the deal just wasn’t meant to be. That’s too bad, because if both had approached with a different mindset, it could have worked and both could have felt good about it.