Negotiating Technique: why you should ask questions and never provide ultimatums in a deal

Before we get into why you should ask questions instead of providing ultimatums, let us set the stage. Let us talk about some important aspects of the real estate contract, so we all start at a common place.

Elements of the Contract

Real Estate Agents dabble with the law. Each works for a broker. The broker provides them forms, but most do not understand why a form is important, and even more do not realize that many of the forms are not even required to complete a legal transfer of real estate.

Even though real estate agents do not know the law, they must follow it. Real estate agents are like drivers on a road. A cop may give a driver a ticket even though the driver did not know the law. “Ignorance is no excuse.” Similarly, a court may surprise a real estate agent by imposing the law, even though the agent is unaware of it.

The law that concerns us today is “Contract Law.” A valid contract has several parts. Contrary to popular belief, a valid contract is not the piece of paper that all parties sign. This paper is only evidence of the contract. The contract itself is invisible. It is the legal concept that embodies all the terms and conditions of an agreement, and it can include written terms as well as oral terms.

To form a valid contract, there must be an offer. Most California real estate agents make the offer by having the buyer sign a “Residential Purchase Agreement.” This long form starts with the sentence: “This is an offer from the buyer, [insert your name here], to the seller for the purchase of real property.” The buyer will sign this document, and the signature provides evidence that the buyer intended to enter into an agreement containing all the terms on the pages of that document. The willingness to enter an agreement and a list of the terms become an offer when it is communicated to the other party (the seller).

A valid contract must then have an acceptance of the offer. Most California real estate agents will have the seller sign the “Residential Purchase Agreement.” The signature on the page is written evidence that the seller agrees to all the terms of the offer. It is also evidence that the terms have been communicated to the seller. But, a seller could accept the offer in other ways. For example, it would be just as lawful for a seller to write the buyer a letter that says, “I accept the offer you made on the residential purchase agreement dated August 1, 2019.” This signed letter can be paired with the offer to form a binding contract. The signature does not need to appear on the residential purchase agreement, although most agents and brokers would require that for their own piece of mind.

We will not go through all the elements of a valid contract here, but we will stop here at the element of “acceptance,” because this is where our discussion focuses today. It is at this point that questions become very important.

Rejecting the Offer

When any person makes you an offer, you can reject the offer outright, or you can imply rejection by changing the terms of the offer. When you make a “counter offer,” you imply rejection to the original offer. A counter offer is a suggestion for a deal with a new set of terms that are different from the original offer. Under California law, a counter offer is a new offer. What makes a counter offer special is that it simultaneously rejects the original offer so that the original offer can never be accepted.

Let us consider an example. You have listed a house for $200,000. Mike offers you $100,000. You can reject this offer by saying “No, Mike, I reject your offer.” Or, you can reject the offer by sending Mike a counter offer. Instead of rejecting the offer directly, you send Mike a new offer that sets the price at $175,000.  Mike now has the power to accept or reject this price, but you have lost the ability to accept the original offer of $100,000. That offer is now closed, because you have implied a rejection of it.

In the last example, it is hard to understand why you would ever want to accept Mike’s original offer. What if Mike offered $190,000 instead?  And instead of countering with $175,000, you wanted to counter with $195,000, but you wanted to keep the ability to accept the $190,000 if Mike said “no?” How would you do that?

The Magic of a Question

If you ask Mike questions about his offer instead of sending Mike a counter offer, you can leave the original offer open. This is why you should never state ultimatums in a negotiation. By phrasing your wants as questions, you retain the power to accept the last offer made.

This becomes more important in the middle of the deal than at the beginning. At the beginning, there is no harm. If the parties do not form an agreement, then neither party has lost anything. However, in the middle of a deal, both parties have made expenditures. The seller has purchased certain reports to present to the buyer, and the buyer has paid for inspections and other investigations. Having a deal fall apart because of bad wording can be tragic.

Most often, this issue arises with repair requests. The default language of the California Residential Purchase Agreement states that a seller has no obligation to make repairs or to respond to a request for repairs. When the buyer demands that repairs be made, the buyer is breaching the agreement and opening the possibility for the seller to have cause to break the contract. When this happens, there are no refunds for the buyer’s expenses.

Instead of demanding that sellers make certain repairs, phrase your communications as a question instead. By saying “Would you be willing to replace the dangerous electrical panel?”, you communicate that you might be interested in canceling the contract, but you will only exercise that power if you don’t get an answer you like. And, if you still don’t get an answer that you like, you have the power to cancel, but that is a choice that YOU get to make. It remains your option and not the sellers.

In every contract, try to position yourself so that you hold the options and the choices. Do not give up your chance to decide your own fate. Ask questions about what the other side is willing to do without committing yourself to ultimatums.