Chapter 9
Negotiation, Ethics and Risk Management
in the Contracting Process
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
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:
1. Manipulation, or guilt
2. Obligation and loyalty
3. Incentives
4. Penalties
5. 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
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
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
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
Successful Negotiation Traits
1. Self-Confidence is Critical
2. Patience is Important and Listening is
critical
3. Information and Knowledge are Power
4. Stay Objective and Know your True
Interests
5. Know your Options at All Times
6. Consider Everything Negotiable
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
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
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
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
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
Risk Management
Examples
 Economic risk based on dependency on
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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
Material not covered in Text
social security;Extra
rents
are below market
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
END
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner