Buying a House
Imagine you are a public administrator who has just been promoted to a higher position but must relocate to another city and purchase a different home. Using the five distributing bargaining skills, present the steps and various aspects you would consider implementing in buying a house. Be sure to address the following:
Analyze the bargaining situation and whether it is distributive. If so, determine the reservation price.
Present the initial offer you would make and apply bracketing to achieve your target price of $310,000.
Indicate and frame the norms you would utilize in presenting your initial offer.
BUYING A HOUSE
This short paper seeks to analyze and discuss distributive bargaining that requires home purchasing through a fictitious scenario. Aspects such as target price, bracketing and initial offer are required to determine the bargaining situation that would determine the reservation price. Presentation of the bargaining sequence is done while considering the role of norms and framing. The negotiation methods, as well as the bargaining situation, are discussed in detail in the paper’s conclusion.
Carrel and Heavrin, 2008, define distributive bargaining as a process in which a fixed pool of resources are negotiated upon to obtain benefits while trying to maximize its share of the distribution. The fundamental rule is that resources are not going to another party have to be allocated to another party and vice versa. The focus of the bargaining method is not on the underlying position that each party values but rather on one’s position (Beenen & Barbuto, 2014).
The five distributive negotiation skills include:
- Recognizing a distributive bargaining situation where in an attempt to maximize their portion, both parties employ three basic components a) self-interest maximization b) adversarial view, and c) focus on current negotiations, with no view to a future relationship (Carrel and Heavrin, 2008).
- Reservation price is the absolute maximum or minimum price that determines what a buyer is willing to pay or accept (Carrel and Heavrin, 2008).
- Bracketing as a skill is the process of moving toward a middle point that involves logical bargaining between the opening offers (Carrel and Heavrin, 2008).
- Norms and accepted practices are the skills that determine reservation price as well as the exchange of initial offers at finalizing the deal (Carrel and Heavrin, 2008).
- Framing involves wording and context related to the offer to determine the perception and response toward the offer (Carrel and Heavrin, 2008).
- In distributive bargaining, the seller and the buyer are both engendered in the buying of a house to maximize value. Bargaining techniques are required in such a scenario to prevent one party from gaining something at the expense of the other. The buyer and seller relationship is competitive and adversarial as they have no past relationship with no possibility of future relationships whatsoever. The focus is on maximizing the gain to achieve the ultimate goal (Thompson, Wang & Gunia, 2010). Arising negative opportunities such as optimistic bias, manipulation of information and information asymmetries influence opponent’s observation thus creating uncertainty that questions the legitimacy of their positions (Bottom & Paese, 1999). An example of cognitive bias is the optimistic bias that includes an irrational escalation of commitment such as saving face bias. Saving face bias involves the buyer’s intention to exceed his reservation price considered an irrational act (Larrick & Wo, 2007). To avoid scenarios that will require saving face bias, the buyer needs to gather useful information not limited to throwaways, developing support arguments, priorities and intangible issues (Carrell & Heavrin 2008). The bargaining process will involve careful but thorough preparation that has to consider the five negotiation skills about a home purchase. The process is a “fixed-sum” scenario with target goal as adversarial and self-interest maximization at the cost of the party without considering future relationships, thus qualifying as distributive bargaining (Carrel and Heavrin, 2008).
According to Carrell and Heavrin, 2008, a reserve price is an absolute minimum or maximum price that the seller and buyer are willing to accept or pay respectively. Several issues need to be considered to determine reservation price, and they include:
- an understanding of the market climate regarding overpricing and underpricing
- determining the seller’s motivation
- the current market information that touches on home prices found in the area
- whether existing taxes and mortgage are paid or not and,
- Any issues with the house such as structural/compliance problems.
Reservation price is determined from existing market data that has information on a range of pricing, for example, within the classic distributive model, a target price of $310,000 is assumed as the desired midpoint (Carrel and Heavrin, 2008). In a scenario where the desired target of $310,000 is to be met, the buyer’s reservation price is $330,000 when the market data of homes in the area is assumed to range from $330,000 to $290,000.
Initial offer and bracket are applied at the beginning of the bargaining process when the buyer makes an initial offer since the targeted price is $310,000 equal to the lower range of the bracket, that is, $290,000 thus avoids creation of an extreme offer. The seller’s counteroffer will assist in gauging the bargaining situation’s flexibility, or rather, the negotiation dance (Carrell & Heavrin, 2008). Although several counteroffers may arise, the objective is to avoid exceeding $310,000, which is the target price. Because the seller is likely to be unconvinced with the initial offer of $290,000, there is a gradual increase in the offer to buy, if need be, to the target price of $310,000. During the bargaining process, the seller should not feel as if he/she is on the losing end but rather as it is the best possible price. Application of skillful negotiation and anchoring is required in the initial offer to adjust bracketing of the values to mid-point (Carrel & Heavrin, 2008).
When the buyer’s maximum price is greater than the seller’s minimum price, it creates a bargaining range known as the Zone of Possible Agreement (ZOPA) (Carrell & Heavrin, 2008). In its application in the scenario, the assumption is based on the seller’s maximum and buyer’s minimum reflected in the market’s price high/low for homes located in the area. ZOPA is likely to exist when the seller commences negotiation regarding the assumption after the buyer’s initial offer as the distance between the two initial prices represents their range of expectations. Therefore, ZOPA is the “distribution of possible negotiated outcomes conditional on various actions” (Sebenius, 1992). Accordingly, an overlap exists between the two ranges based on the preceding assumptions, hence, confirming a ZOPA.
In the purchase of the home, norms utilized include good faith and fairness bargaining. The absence of anticipated future relationships means that there is neither the application of relational norm nor reciprocity norm based on the assumption that there is an absence of proportional price symmetry. Framing usually refers to “the wording and context of the offer” and relationship with the perceptions of the offer (Carrell & Heavrin, 2008).
- Fairness indicates consistency and widely acclaimed qualities of any negotiation. The equality norm applies most appropriately to this scenario as it would be correct to split the difference based on the assumption that the initial offers were fair and respectable, of the four major variations. Because it is of vital importance, each step of the negotiation has to be properly framed. When negotiating to gain something, people are understood to respond quite differently rather than to not lose something (Trotchel, et al., 2015). For instance, based on the assumption that the seller counteroffers at the market high range of $330,000, he would then frame the value of the house as his higher expectation as well as confirming that the house is sound and desirable. The buyer confirms the value of the house and fairness of the negotiations on the assumption that his counteroffer is raised from $290,000 to $300,000.
- Good faith bargaining is appropriate to the transaction because there is the need for honest information about the house and property and any other defects. The buyer and the seller are both required to honor their proposals throughout the negotiation process and on any other issue that may arise. Meetings have to be held at reasonable and appropriate times and places to discuss all issues, and willingness to compromise as part of the negotiation process. Once an agreement is reached, the transaction is legally and jointly consumed. Courtesy, constructive correction, tolerance, and acceptance are exemplified through framing as the manifestation of good faith. In the case where the seller makes a counteroffer, the buyer is bound to ask “why” which preempts an adversarial approach to the counteroffer, in addition to asking “why not” that will assist in uncovering the real interests (Carrell & Heavrin, 2008). Asking “what if” assists in opening doors to other options while maintaining the bargaining process in the spirit of good faith.
In conclusion, distributive bargaining is not a win-lose situation as perceived by many. The bargaining situation concluded with both parties achieving or getting most of what they wanted, though not all then again, that is the sole essence of successful distributive bargaining.
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