Loose Lips Sink Ships: Information Doesn’t Always Want to be Free
Jotham Sederstrom Jan. 23, 2013, 7:15 a.m.
After the breathtaking whirlwind of record-breaking deals of 2012, it was easy to get caught up in the heady romance of real estate. However, times like these are opportunities to find the kernels of significant lessons in all that transpired.
One noteworthy occurrence that happened frequently was the old “kiss and tell” routine.
It played out something like this: an owner of a prime parcel of real estate would get an unsolicited offer from a potential purchaser. A day later, that same owner would get yet another call from a different purchaser with another variation on the offer. Next, brokers would start calling, and soon the owner was fielding numerous solicitations, all with heady pricing that he may or may not have ever dreamed his property was worth.
As the seller observed, just picking up the phone would keep the value and offers kept rising, even as he continued to take the calls and engage in dialogue and negotiations. Before you could say “close in 30 days with a hard deposit and no due diligence,” someone would inevitably give up valuable information.
Be it the identity of the bidders, the price of the bids, or some other relevant piece of valuable intel that could potentially show weakness or vulnerability, chances are it would be disclosed.
Unfortunately, while this may have brought immediate short-term gratification for some, most participants did not fare so well.
Any active broker will attest to how often she has heard owners respond to her inquiries by revealing the offers they had been given by buyers. In some cases, it is not always factual. Sometimes it is an attempt on the owner’s part to direct the bidding. However, for the most part, sellers tend to reveal information that is close enough to the truth that seasoned brokers can read between the lines and also verify the facts through their own relationships within the industry.
During rising markets, most sellers of prime properties are in disbelief as to the pricing level they are able to achieve on their own. Some also get excited by the thought that a high-profile investor is courting them. Or sometimes it is the buyers who may offer information. Whatever the reason for this divulgence of pertinent intel, the end result is not always in their best interest.
One owner I spoke to told me that he had received an offer from a prominent investor. He told this investor that he had received a higher offer from another buyer, whose name he disclosed. What the owner didn’t know was that the two buyers were partners on other deals. When this buyer learned the identity of the competing bidder, he stopped bidding and joined forces with the other bidder.
Once a competing buyer learns the identity of his nemesis the first thing he will do is try to partner up. Most serious bidders will realize that there is no need to compete for the asset if they reach out and form a truce with the competition.
Bidders share a common goal, which is not to drive the price up. That works great for buyers, because from their point of view, part of a deal is better than none. But for the seller, the bar is set and the price gets stabilized. Competition is squelched and the bidding ceases. Once the bidding ceases and competition is eliminated, the chance of achieving a higher price is gone.
Not all “kiss and tell” is necessarily bad. One active broker shared this story with me. He had just presented a seller with a respectable offer. The seller responded by telling the broker that he had a higher bid from the owner of the neighboring property. Being a sharp strategist, the broker called the neighbor and learned that he was interested in buying the property next to his so he could sell it together with his piece to a developer who had approached him with a significant offer for both. The broker managed to convince this owner to allow him to sell his property, along with the neighbor’s, to his buyer, who had the same idea in mind. The broker was able to get a better price for both owners by introducing a competing buyer. In this case, the kiss was worth telling about, as all parties benefitted.
“Kiss and tell” negotiating is a double-edged sword. It may cut one deal to shreds while serving up another on a silver platter. If you plan to use this strategy, be very careful.
The kernel of this lesson is, as my mother always said, err on the side of caution—and remember, loose lips sink ships.
Adelaide Polsinelli is a senior director at Eastern Consolidated where she heads the retail sales division. She is a seasoned sales professional with over 26 years of experience in the sale of every real estate asset class.