Key Points on the Art of Negotiating and Predicting the Future (4Q19 Newsletter)
Updated: Sep 27, 2022
October 15, 2019
Chris identifies nine points that can help negotiations achieve a desired outcome. And then he turns his attention to not predicting future events based on current trends with an exploration of the California real estate market.
I recently gave a talk on the subject of negotiation. Negotiation is of interest to most of us because we often find ourselves in some kind of negotiating position (with buyers and sellers, with fellow employees, with employers, with neighbors, with spouses or partners, with parents, with children, with other relatives, with HOA boards, with banks - the list goes on) and don’t always come away feeling that we did our best or that we achieved the desired outcome. Recognizing that there is no substitute for the many books and courses available on the subject, I nevertheless thought it would be useful to pass on the key points made in the talk.
You need to understand the facts and circumstances of your own position. This should go without saying, but I am saying it because in an amazing number of cases, people don’t.
You need to understand, to the greatest extent possible, the position of your opposing party (let’s call him/her/them the “OP”). Empathy based on your understanding of the OP’s issues and interests is a powerful solvent of differences. It is rare that all differences are eliminated but as you decrease them you increase the probability of a successful outcome.
The perfect negotiation is one in which the negotiating parties soon find that they are in agreement as to the desired outcome as well as to the terms and conditions of any steps needed to get there. In this case, it is not really a negotiation but a dialogue. If it is a dialogue, don’t turn it into a negotiation.
Maintain your cool no matter how heated the negotiation may become. The one able to control their anger and absorb the anger of the OP controls the negotiation.
Not every negotiation needs to result in a final resolution. Understand the consequences if, for whatever reason (the OP’s insistence on unacceptable terms, for instance) you choose to end the negotiation without resolution. This means you understand the consequences should you choose to walk. If the consequences of “early termination” are less onerous than agreeing to those unacceptable terms, then walk. In a surprising number of cases, “No Resolution” is not a bad outcome.
The OP is not your enemy.
Don’t hold out for the last dollar or benefit or favorable term. You do not negotiate to “win everything,” you negotiate to achieve a desired outcome. The two are not the same. So...
Go into any negotiation with a clear understanding of what you are willing to accept as distinguished from your best-case outcome. It is perfectly okay to seek your best-case outcome, but remember that once you have achieved the acceptable, all else is gravy. Anyway, my intuition tells me results achieved above the acceptable are almost always subject to the law of diminishing returns.
In some cases, it makes sense to delegate a negotiation. This can save time, emotional wear and tear, and even money. (One example, among many: let your credit union, or Costco, negotiate your car purchase with the dealership.)
I’m pretty sure, based on my own considerable negotiating experience, that if you internalize these points and then let them guide you in any negotiation, your batting average will seriously improve.
And now, for something completely different ...
Predicting future events based on current trends is always problematic. But there is a trend underway in California that seems to me predictable as to its longer-term outcome, so I am going to give it a shot.
Suppose you live in California, own a home that you bought many years ago and so are sitting on a significant unrealized gain. You could be any age but suppose as well that you are older rather than younger and you are near, at or beyond retirement age. (Of the 40 million or so people living in California, 6 million or so are age 65 or older, a number predicted to rise to 9 million in the next ten years.) Suppose, finally, that you are feeling a bit uneasy economically. (Maybe your overhead is higher than your spendable income. Maybe you aren’t sure you can afford those fancy trip expenses or the cost of a college education for children or grandchildren or a big philanthropic commitment. Maybe you’re worried about how to live on a reduced income when you retire and your paycheck goes away, or you are retired and have discovered that your post retirement cash flow isn’t quite what you want it to be.)
Under these circumstances, the following tempting scenario might appeal to you.
Sell your home and free up a ton of equity. Move to another state, probably one with reduced or no state income tax. (California’s top bracket – for those earning over $1,000,000 – was 13.3% in 2018; residents of Wyoming, Washington, Texas, South Dakota, Nevada, Florida and Alaska paid no personal state income tax at all.)
Buy a home in your new state, at a cost per square foot half or less than you realized on your California home. (It could be a lot less if you are selling a home in San Diego, Los Angeles, the Bay Area or anywhere where the property is within short ranges of the coast.)
Voila! A big-time liquidity event, plenty of cash left over after the new home purchase (probably without mortgage debt) – so increased cash flow from investment of new cash and decreased overhead from reduction or elimination of state tax obligation (and maybe elimination of mortgage payment).
That’s one scenario playing in a lot of heads. Fancy calculations pulled together by a major real estate firm in an attempt to determine housing affordability for prospective first-time buyers in the major urban areas of California (Bay Area, Los Angeles, San Diego) suggest another.
Assume you are a prospective buyer with an annual household income of about $100,000, ready to make a 5% down payment and earmark about one third of your income for loan payment, tax and insurance. You could afford a home costing about $508,000. Suppose you are looking to buy in San Jose (which I choose because it represents the most favorable relationship in urban California between family income and housing prices for first-time buyers). There are (virtually) no homes for sale in San Jose for anything like $508,000. (If you don’t believe me, check Redfin.com. As of this writing, the two “homes” listed in San Jose for under $500,000 are both boarded-up tear-downs.)
In fact, somewhere between 5 and 10% of prospective first-time home buyers can actually qualify to purchase a home that is anywhere near the typical lower end price range in California urban markets. Is the urge for home ownership sufficiently strong in a sufficiently large number of people that my assumed out- migration of homeowners will, to some significant extent, be augmented by California non-homeowners whose desire for home ownership moves them to Memphis, Tennessee or Cincinnati, Ohio or Tampa, Florida? I suspect that so long as employment opportunities are readily available throughout the country there will be many would-be first time homeowners who join the California home seller exodus.
And there is a third scenario playing out in the heads of some Californians that may also work to “depopulate” the state. Companies in major industries (tech, finance, entertainment, manufacturing) appear to be deciding that the all-in cost of doing business in California, including state taxes and the cost of employee housing (and how that cost translates into hiring and retention problems) is unnecessarily excessive (the key word is “unnecessarily”). They seem to believe business operations can be established elsewhere at the same level of productivity with materially diminished costs. So long as housing prices stay high in California, housing prices stay low elsewhere, interest rates stay low and employment numbers stay high, the risk of serious California job losses is real.
I think (and this is where prediction comes in) we are just at the front end of a long-term net out-migration of Californians.
Signs of the times? Net California population growth last year was 0.47%, the lowest in the recorded history of the state. And Bozeman, Montana is seeing ten new people a day moving in, most from California.
What might be the consequences to the state and its (remaining) citizens if my prediction is at all accurate?
I am tempted to say that your guess is as good as mine. But with the caveat that no one can say with any certainty how it will all play out, I will make a few guesstimates - based on some (I hope) reasonable assumptions.
I assume that the three out-migration scenarios sketched out above will tempt (or impel) +/- 10% of Californians to sell and move over the next ten years. That would be 10% net, meaning net after births, deaths and people who move in.
I assume that the majority of movers are homeowners (but this could be dead wrong, particularly if there are a large number of non-homeowners out there who are motivated to own a home elsewhere, come what may).
I assume that most home owning movers will represent a relatively high-income cohort, which in turn will result in a net reduction (absent higher tax rates) in state income tax collections, disproportionately larger than the percentage leaving.
So, what might it all mean, at least for the 90% or so who remain?
If, say, the 10% percent who leave pay disproportionately more than 10% of state income taxes, then those remaining, particularly those who are higher earners, will have to pick up the slack. If not offset by other sources, this could be tough as California is already a high-income-tax state.
There will almost certainly be a material increase in California property tax collections as a result of this trend. Under California’s “Prop. 13” tax scheme, residential properties are reassessed for tax purposes only upon sale. So an out-migration should result in a lot of sales (and, therefore, reassessments). Consider the following crude (to put it mildly) calculation. If 4 million home-owning families sell and leave during the next ten years, and there is as a consequence on average, say, $3,330 per year per home property tax increase, then enhanced property tax collections in year ten will total about $43 billion from this source.
And speaking of homes, unless something happens to effect classic supply-demand dynamics, there should be a general and continuing softening of home prices, as sellers seek to sell sooner rather than later and buyers (no doubt aware of price trend lines) come to believe that prices may be lower tomorrow and so slow their purchase decisions. This will be good news for at least some first-time home buyers in California and bad news for apartment landlords as the number of first time buyers increases and the number of apartment tenants decreases. (This does not translate into catastrophe for landlords. What is likely a stabilizing or even a modest decline trend in rents and occupancies is not a problem for owners with low leverage. A suggestion for all investment property owners: pay down debt.)
I’m no trained economist. I know I’m wrong on many of the specifics. I know I’m missing things that will become (but are not now) obvious. But I don’t think I’m wrong as to the factors (home sellers and businesses leaving for economic reasons; would-be first time homebuyers leaving for economic and emotional reasons) and the negative growth they portend. This is a dynamite subject. If you have an opinion, share it with me and let’s start a discussion.
Download the Fourth Quarter 2019 Newsletter here.
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