Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital
Your favorite Master Note Buyer – Straightforward, Honest, Fair…
“Your discount is too much; can you pay more?” In the highly competitive seller financed note secondary marketplace we hear dreaded phrases like that all the time. The easy thing to do is to offer more money, but that cuts into your profit margins and sets a precedent for the future. You don’t want to become a victim of negotiating gone wrong. So, what do you do when note holder challenges you on your prices? The simplistic answer is: focus on your value. Trite, but true. If it’s worth it to the note holder, they’ll take a bigger discount. But when faced with price push-back, many are at a loss for what to do in the moment. Here are four guidelines to follow the next time a note holder says, “Your price is too low.”
- Don’t backtrack: I was playing golf with a bunch of old friends last summer. One of these guys is an attorney who was speaking about his services with another old friend who runs a hedge fund. Without being asked, he got to price and said, “My fees are $300 per hour, but if you need me to, I’ll work for less.” This is an example of backtracking before even getting push-back. (I’d hate to see this attorney in court, “Members of the jury, he’s innocent! Unless, well, you don’t think so. OK, we’ll plea bargain with opposing counsel.”) The fact is that it can be tempting to respond right away with, “How much were you expecting?” or “Let me see what I can do to pay you more.” Don’t just fold. Only then will you get to the heart of the issue and find your way around it (while also maintaining your desired price).
- Confront competitor pricing head on: Folks are tempted to backtrack when the buyer says, “But I can get much more than you are offering from ABC note buyer.” At this point, many note sellers give the indication that they’re willing to negotiate prices. Instead, acknowledge that other Note Buyers prices are, indeed, all over the map and leave it there – you’re basically saying, “I acknowledge other providers’ prices are higher than mine, but my price is my price.” Then ask the note holder “Is there a reason you haven’t already sold them your note?” Some note holders will then share why they’d prefer to work with you, and you can leverage these reasons to maintain your price. It’s true, note holders might walk-that’s a risk you take. Many times, however, you’ll simply set the foundation for continuing the process at your preferred price level.
- Don’t start talking cost structure: Imagine you have offered a $25k purchase price for the full purchase of a note holders’ note. Some note holders will ask, “Well, how did you come up with that price?” The note buyer/broker then pulls out a calculator and tries to explain the Time Value of Money, the investor’s yield requirement, LTV, ITV and Minimum Discount, so that’s the price. Heading down this path is a slippery slope and leads to nickel-and-diming here, there, and everywhere. In our note business, we have found that Note Buyers/Brokers of various pricing levels use yield based pricing. However, note businesses that achieve the most success do not share the underlying yield structure nearly as often, if at all, as other note business owners. Think of it like this: if you went to buy a car and asked what the exhaust system cost or how much the dashboard set them back, you would probably get laughed at. In the same vein, you should not lift up the hood simply because you’re asked what your costs are.
- Don’t dismiss the note holder when they push back: I often hear this comment: “If they push back on price, we don’t want them! Pushing back on price is an indicator that a client will be high maintenance or worse down the road.” That might or might not be the case. Note holders often challenge price in multiple ways. Just because they challenge you doesn’t mean they are bad people or are destined to be time draining note holders. It also doesn’t mean they’re challenging your value personally. (I’ve seen many note buyers/brokers react viscerally and personally to pricing pressure. Bad form.) It often means they’re trying to figure out how to engage you and your solutions. Some note buyers/brokers offer more; others don’t. They’re just asking. Hold your ground and treat them reasonably in the process, and oftentimes they’ll just come around.
Note holders’ will, in the end; accept bigger discounts on their notes if they see you offer more value than the alternatives. And as much as you might disdain the thoughts, note holders will continue to pressure price and other note buyers/brokers will continue to pay more to win business. But if you follow these four guidelines when you get price pressure, you’ll find yourself winning more deals at your offering price. Remember, success demands action! Keep on marketing (and building that referral business), it’s going to work! TWITA! (That’s What I’m Talking About!) J