July 20, 2017
Working with a Representative: Principal-Agent Negotiation Strategies
By Chuck Doran and Vincent Lowney
Imagine you are selling a house. One of the first steps for many prospective house sellers is to find a realtor who will use their expertise to match your listing with the appropriate buyers. In this example, the realtor acts as an agent for you, the principal.
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As you prepare for negotiations, considering whether to hire an agent to represent your interests is an important decision. While there are many benefits to utilizing an agent’s expertise and skill during your negotiation, there are also challenges and costs to weigh as well. We’ve put together some advice from the book Beyond Winning: Negotiating to Create Value in Deals and Disputes to help you get the most out of your principal-agent relationship in negotiation.
The Benefits of Using an Agent in Negotiation
Why would you use an agent in the first place? Here are four reasons:
- The agent may have unique knowledge that you do not possess. In the realtor example, familiarity with the local real estate market, laws surrounding buying and selling property, and the ratings of the local schools may be some information that the realtor could bring to the table.
- The agent may have access to resources, such as exclusive listings or foreknowledge of what properties will be coming onto the market.
- The agent may have unique skills, such as the ability to write and validate contracts.
- There may be a strategic advantage to using an agent. For instance, the seller may have a strained personal relationship with the prospective buyer, or the seller may have limited time of her own to spend looking for a buyer.
The Challenges of Using an Agent in Negotiation
Once you have found an agent, there are some barriers to effectively utilizing their abilities. These are some of the potential challenges to using an agent:
- Agency costs: An agent will usually work for a fee or a commission.
- Preferences: An agent who works in a specific industry, such as a sports agent, may not want to drive a hard bargain with a buyer if they know they will be working with that buyer again in the future. This preference may be at odds with the principal’s interests.
- Incentives: The agent may have incentives that encourage them to act against the principal’s wishes. A seller of a house may be interested in getting the highest price possible, but the realtor may be more interested in getting the highest price possible – for the least amount of effort! So, while the seller may want to spend days negotiating over the price, the realtor may concede early in order to get to the next listing.
- Information: The agent may have information that the principal does not, and the agent may not share that information. For example, if an agent hears rumors that a local school might close and and does not share this information because it is unverified and might hurt the likelihood of a sale.
Working Effectively with an Agent in Negotiation
How can you overcome these challenges and maximize the benefits of working with an agent in negotiation? Before working with an agent in your upcoming negotiation, have a negotiation with your agent. Consider implementing some of the following options:
- Incentive contracts: There are a variety of potential contract types, all of which incentivize different behaviors from the agent. Finding the right incentives is key to encouraging the right behavior. For example, an hourly fee may seem straightforward, and it could result in the agent potentially taking longer to accomplish the task without a cap. Negotiating the incentive structure of a contract with your agent is critical, as is really understanding what you are encouraging your agent to do given the structure.
- Monitoring systems: Similar to how companies track their employees’ actions, some form of check in and supervision of your agent may be required. The challenge here is understanding what is appropriate behavior when we lack the expertise to do it ourselves. Consulting with other professionals in the field may be required to set up an effective monitoring plan.
- Bonding: The principal may require the agent to post some form of bond that would be forfeit if the agent worked at odds with the principal’s goals. While this bond may be financial, as is common in the construction industry, it may take other forms. Real estate agents often find their business through word of mouth so the harmful impact from a negative review may serve the same role as a bond.
All of these negotiation strategies serve the purpose of aligning the goals and interests of both principal and agent. When done effectively, you should be able to discover and create more value for both of you!
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For more information about working with a principal or agent in negotiation, or for general information about improving your negotiation skills, contact Chuck Doran at 617-895-4026 or cdoran@mwi.org
