67 Fishpond Lane

PROGRAM ON NEGOTIATION AT H ARVARD LAW SCHOOL AN INTER-UNIVERSITY CONSORTIUM TO IMPROVE THE THEORY AND PRACTI CE OF CONFLICT RESOLUTION

67 FISHPOND LANE

TEACHER’S PACKAGE

PROGRAM ON NEGOTIATION AT HARVARD LAW SCHOOL AN INTER-UNIVERSITY CONSORTIUM TO IMPROVE THE THEORY AND PRACTICE OF CONFLICT RESOLUTION

67 FISHPOND LANE Teaching Notes

A two-party negotiation over the sale of a house.

Overview 67 Fish Pond Lane, a house in Cambridge, Massachusetts, is for sale. The buyers are two MBA candidates who will both graduate this month and need to vacate their current apartment by June. After five months of hunting, the buyers have fallen in love with #67, are especially excited about the aviary, and would not feel bad if they had to pay a premium for the house. In addition, the buyers need to find a place and be completely moved in by September. The buyers’ maximum purchase price is $425,000, although they would like to save as much as possible for future investing. The sellers, two lawyers, have recently moved to Silicon Valley, California and need to know in one week if they will have $270,000 to pay off their mortgage and to secure what promises to be a lucrative investment—any extra cash would certainly be welcome. The sellers received an early cash bid of $320,000 ($5,000 over a recent estimate of the value of the house), but never replied to it and do not know if the offer is still open. The sellers are in town for a few days and would like to meet the two students and close the deal quickly, if at all possible and desirable.

Teaching Points/Learning Objectives The purpose of this case is to provide the participants with early critical feedback on negotiation style and process. Learning objectives are as follows:

---To practice integrating the use of objective criteria into the negotiation. ---To practice the skills required for working as a team prior to meeting with the other side (and to experience the value of the elements framework in assisting this); ---To practice the skills required for negotiating as a team. ---To explore one’s ability to identify and integrate the interests of the other side into the bargaining process. ---(If videotaped) To step outside of the negotiation and observe oneself, explore how the other side is feeling, and the effect of one’s behavior on the other side. ---To become more aware of non-verbal communication and mis-communication.

Mechanics Time Required:

30 minutes - 1 hour preparation outside of class 45 minutes negotiation 45-60 minutes debriefing

This case was written by Elizabeth T. Gray and revised by Mark N. Gordon and Bruce M. Patton for the Harvard Negotiation Project. Copies are available online at www.pon.org, Telephone: 800-258-4406 (within U.S.) or 781.239.1111 (outside U.S.); or by fax: 617.495.7818. This case may not be reproduced, revised, or translated in whole or in part by any means without the wri tten permission of the Director of Curriculum Development, Program on Negotiation, Harvard Law School, 518 Pound Hall, Cambridge, MA 02138. Please help to preserve the usefulness of this case by keeping it confidential. Copyright © 1983, 1988, 1990, 1995, 1999, 2008, 2009 by the President and Fellows of Harvard College. All rights reserved. (Rev. 1/09)

67 FISH POND LANE: TEACHING NOTES

Materials:

Confidential Instructions for Buyers Confidential Instructions for Sellers

Group Size:

4 persons (2-on-2 quads)

Procedure 1) Before class, divide participants into an even number of two-person teams, distribute the Confidential Instructions, and ask teams to prepare their negotiation strategy in advance of the negotiation. 2) Match buyer and seller teams and allow 45 minutes for them to negotiate. 3) Debrief.

Debriefing In general, the focus of the review should be based on the process that the participants used to reach their outcomes, rather than on the substantive outcomes themselves. The discussion of process might best be focused around the following questions:

1) How did it go? a) What worked well and why did it work? b) For the difficulties you encountered, what might you do differently next time? 2) Did you use any objective criteria during the planning or during the negotiation itself? a) How did the incorporation of objective criteria affect the negotiation? the negotiators? b) When did you decide to use the objective criteria and why? 3) How did you feel you worked as a team? a) How did you prepare as a team? b) What personal style differences influenced the team relationship, strategy, or tactics? c) What would you do differently next time? 4) What do think were the interests of the other side? a) How were you able to identify those interests? b) How did you use that information? c) How did that change the negotiation? 5) What non-verbal communication did you notice from the other side or from your partner? a) What reaction did the non-verbal communication produce in the other side? How was it interpreted? 6) Was there any miscommunication during the negotiation? a) How did the miscommunication occur? b) What effect did the miscommunication have on the negotiation? c) How could you have cleared up the situation?

Copyright © 1983, 1988, 1990, 1995, 1999, 2008, 2009 by the President and Fellows of Harvard College. All rights reserved. (Rev. 1/09)

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67 FISHPOND LANE

Confidential Instructions for Buyers

You and a friend have been living together for two and one-half years, originally in New York City where you worked for a number of years, and throughout your sojourn here at business school in the Boston, Massachusetts area. You will both earn an MBA this June. Although you originally wanted to end up back in New York City, you have fallen in love with Boston, and both of you will be joining a major Boston consulting firm after graduation. You want to set down roots here and make it the base of operations for your careers. For the past year you have been renting a condo on Avon Street in Cambridge, just across the river from Boston. The rent of $1,250/month is not unreasonable, but the owner is returning in June and you will have to move out. In any event, now that it is clear that the two of you will be working in Boston, it makes sense to find a place of your own and have your money go toward a mortgage. Ten days ago, when you and the real estate broker first walked through the vacant stucco house at 67 Fish Pond Lane (in Cambridge), you completely fell in love with it. Built in the late l920s, it is old enough to have a lovely wood-paneled library, but not such an antique as to require massive rehabilitation just to make it functional. It has five bedrooms, a living room, a dining room, a new kitchen, a greenhouse, and an aviary. Even if each of you takes a bedroom for office space, the other rooms and large attic could easily work as rooms or an apartment for guests or another housemate. There is a small one and one-half car garage (which needs to have its stucco patched and a leaking roof repaired), a concrete driveway (which is uneven due to frost heaves), and a gas furnace, which looks fairly new. The house also has a comprehensive security system to protect against fire and theft. The aviary is an added feature that you never expected to find in a house. Just a few days ago the two of you contracted to buy a hyacinth macaw. You are both avid parrot fanciers and have been seriously looking to buy one for a year or two. Hyacinth macaws are the largest of the South American parrots. They are native to the Amazon basin region and may no longer be exported from Brazil because there they are considered to be an endangered species. The one you have located (for just under $13,000) is a rare domestically bred bird that was just hatched by a breeder in San Antonio, Texas, and can be shipped to you within eight to 10 weeks. The bird will require a special environment, and the aviary at 67 Fish Pond Lane has more than everything you need. A small alcove off the living room, the area has a tile floor with a drain, humidity control, a mechanism that continuously supplies drinking water, and special dual-paned polarized glass with internal slatted blinds that automatically regulate the amount of sunlight coming into the area. You were told by the realtor that the current owners had a breeding pair of exotic birds. This case was written by Elizabeth T. Gray and revised by Mark N. Gordon and Bruce M. Patton for the Harvard Negotiation Project. Copies are available online at www.pon.org, Telephone: 800-258-4406 (within U.S.) or 781.239.1111 (outside U.S.); or by fax: 617.495.7818. This case may not be reproduced, revised, or translated in whole or in part by any means without the writt en permission of the Director of Curriculum Development, Program on Negotiation, Harvard Law School, 518 Pound Hall, Cambridge, MA 02138. Please help to preserve the usefulness of this case by keeping it confidential. Copyright © 1983, 1988, 1990, 1995, 1999, 2008, 2009 by the President and Fellows of Harvard College. All rights reserved. (Rev. 1/09)

67 FISH POND LANE: CONFIDENTIAL I NSTRUCTIONS FOR BUYERS

Although you certainly wouldn’t have built such an elaborate aviary for your macaw, you estimated it would have cost you $4,000 to 5,000 or more to build one that met your needs, and you would have had to convert one room for that purpose in any house you bought. Conversely, this aviary would not be suitable for many other uses; a buyer without a bird or a green thumb would probably have to dismantle it at some expense. The only drawback about this house is that it is only one house away from Fish Pond Parkway, a major four-lane artery that brings traffic from the southwestern suburbs into Boston. The hum of traffic was very noticeable on your visit, and you can only imagine that with the windows open during a summer rush hour, the noise would be much worse. Noise has apparently been a factor in the price of houses in this neighborhood. Your realtor told you that 71 Fish Pond Lane (the next house farther in from the Parkway) sold two months ago for $435,000, but it is much larger (about 20 percent more square footage than number 67), brick, and has more trees and houses to shield it from Parkway noise. The realtor also told you that 63 Fish Pond Lane, located next door and directly on the Parkway, sold for $225,000 three years ago. It is also stucco, almost identical in size to number 67, and has a driveway, but no garage. The realtor didn’t know how much the current owners of 67 Fish Pond Lane had paid for their house, but a look at the federal tax stamps on the deed down at the Registry of Deeds will give you that information if the sellers won’t divulge it. Regarding the noise, the realtor also told you that the current Boston mass transit system is being extended beyond and to the southwest of the Fish Pond Lane area, and that a new commuter rail station there (to be opened late next year) should decrease commuter traffic on the Parkway; however, no one knows by how much. Although nothing else you have seen in Cambridge in the five months you have been looking can compare with 67 Fish Pond Lane, there is a house in Belmont (just west of Cambridge) that has possibilities. It is larger than the Cambridge house, but its slate roof is seriously in need of repair and you would have to build an aviary. You estimate that this and other required renovations to the kitchen would cost somewhere between $30,000 and $50,000. The other consideration, of course, is that Belmont is farther from the city. The owner of the house in Belmont has received an offer of $360,000 from someone else, and has demanded a response from you within the week. A friend who drove by the house at 67 Fish Pond Lane with you, and who recently sold her house in Cambridge, told you that it might be possible to get the Cambridge house for as little as $380,000. She also cautioned you that although real estate prices have escalated sharply in the last six years, the Cambridge market has always been volatile, and with the current uncertain economy, property has not been turning over rapidly and many owners are not getting the prices they had anticipated. This seems to be borne out by data on the selling prices of Cambridge houses over the past six years, which you obtained from the Cambridge Board of Assessors. (See Appendix A.) You were delighted to hear from your bank that it would be willing to give you up to a $340,000 mortgage (at a variable rate of interest) provided that the mortgage amount is not more than 80 percent of the purchase price. (Thus, for example, if you were to purchase a


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house for $425,000, they would loan you the $340,000 on an 80 percent mortgage.) Any broker’s fee is usually paid by the seller, and you assume that this would be the case here. You calculate that you will need $30,000 to 35,000 (between the two of you) to buy additional furniture and appliances, and to landscape and decorate to your taste any house you buy. While each of you, after paying next semester’s tuition, will have approximately $100,000 remaining in your personal savings accounts, you want to save the bulk of this money to invest in some of the business ventures that you expect might come your way following graduation. (This money, by the way, represents the remaining profits from your New York City business venture, an innovative pilot project the two of you designed which showed that refurbishing low-income housing could be done profitably without displacing tenants.) You have no other significant assets. The real estate broker told you that the owners of 67 Fish Pond Lane have not set a specific asking price, but will simply take the “best offer” that they receive. Brokers in Massachusetts receive from sellers a commission equal to six percent of the purchase price, and it is customary to pay a nominal down payment with the contract of sale, with closing to follow in 30 to 60 days. You love the house, and would not feel too bad about paying a premium for it, if you had to. One thing of which you are certain: you want to find a place and be completely moved in by September, when you start your consulting work. Given the hours you expect to be working, you will have no time to interview contractors and decorate. You have never met the owners of 67 Fish Pond Lane, but you understand that they are both lawyers who have recently moved out to California. The broker has told you that they are in Cambridge for a few days, and has set up the meeting for which you are now preparing.


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Appendix A

Cambridge Board of Tax Assessors

In response to numerous requests from city homeowners, we have collected citywide data in the single-, two-, and three-family house categories for the past six years. Information on the final quarter of last year is not yet available, so we have included (in parentheses) estimates of projected sales for that period. This information does not include data relating to private sales.

Single

2-Family

3-Family

Year -6

Houses Sold Average Price

127 $ 126,638

114 $ 93,526

93 $ 92,225

Year -5


107 $ 149,860

98 $ 118,826

77 $ 131,714

Year -4


148 $ 174,075

105 $ 140,576

61 $ 142,668

Year -3


181 $ 217,691

109 $ 182,138

63 $ 185,462

Year -2


190 $ 262,554

152 $ 212,412

99 $ 217,682

Year -1

Houses Sold (Projection) Average Price

135 (160) $ 281,232

92 (115) $ 226,366

64 (80) $ 233,894

Please note that these are citywide statistics and therefore cannot be used as an accurate barometer for all neighborhoods.

City of Cambridge This month, Year 0


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FISHPOND LANE MAP

# 67 Garage

#71 # 67

#63

FISHPOND LANE

Fishpond Park Way North


67 FISHPOND LANE Confidential Instructions for Sellers

You and a friend have been living together for ten years, having first met in law school in the Boston, Massachusetts area. Following graduation you both worked, and subsequently made partner, at small specialty law firms in Boston. One of you specialized in patent and copyright law, while the other’s practice focused on the legal needs of small, high-tech companies and venture capital firms. While you originally planned to make your careers in Boston, last year you received an unbeatable offer from a firm in Silicon Valley, California. Six months ago you moved out to Palo Alto, into a house paid for by a consortium of Japanese and American venture capitalists, and you find your situation better than you imagined possible. You will never come back to Boston. Five years ago, after paying off most of your student loan debts, you and your friend purchased the now-vacant house at 67 Fish Pond Lane (in Cambridge, Massachusetts, just across the river from Boston) for $190,000. You feel it is unique. Although not of colonial vintage, it is elderly (built, as were all the surrounding houses, in the late l920s or early l930s), and has a great deal of charm. It has stucco walls, five bedrooms, a wood-paneled library, a living room, a dining room, a modern kitchen, a greenhouse, and an aviary. The aviary housed your breeding pair of Moluccan cockatoos. These birds, which are native to the Moluccan Islands, are the largest and most beautiful of the cockatoos: chalk white feathers tinged with rose, and a salmon-colored crest. You have always been bird fanciers and were offered the pair of domestically bred birds two years ago. At the time it was unclear as to whether they would become a breeding pair. Singly, each bird would now be worth about $4,000. As a breeding pair they are worth $15,000 to16,000; domestically bred baby Moluccans fetch $5,000 to 7,000 each. To house these birds and encourage them to breed, you converted a small alcove off the living room into an aviary at 67 Fish Pond Lane. You installed a tile floor with a drain, humidity control, a mechanism that continuously supplies drinking water, and special dual-paned polarized glass with internal slatted blinds that automatically regulate the amount of sunlight entering the area. Because you did a lot of the work yourselves, the aviary cost you a total of only $4,000. (You saved $2,000.) The house (including the aviary) has a comprehensive burglar and fire alarm system, which you installed five years ago at a cost of $6,000. It also has all new electrical and plumbing systems (which are two years old and cost you $33,000). The house is heated with gas (the heater was in place and looked very new when you bought the house), but due to the fact that its stucco walls were apparently not insulated during construction, it is expensive to heat. Last winter it cost you roughly $1,900 to keep warm (68° F). There is a small, one and onehalf car garage (which needs its stucco patched and its leaking roof repaired), and a concrete driveway that has been rendered somewhat uneven by years of frost and thaw. The only drawback is that the house is only one house in from Fish Pond Parkway, a major four-lane artery that brings traffic from the southwestern suburbs into Boston. Although you have long This case was written by Elizabeth T. Gray and revised by Mark N. Gordon and Bruce M. Patton for the Harvard Negotiation Project. Copies are available online at www.pon.org, Telephone: 800-258-4406, Fax: 617-495-7818. This case may not be reproduced, revised, or translated in whole or in part by any means without the written permission of the Director of Curriculum Development, Program on Negotiation, Harvard Law School, 518 Pound Hall, Cambridge, MA 02138. Please help to preserve the usefulness of this case by keeping it confidential. Copyright © 1983, 1988, 1990, 1995, 1999, 2008, 2009 by the President and Fellows of Harvard College. All rights reserved. (Rev. 1/09)

67 FISH POND LANE: CONFIDENTIAL I NSTRUCTIONS FOR SELLERS

ceased to notice the hum of traffic, the noise factor has always influenced the price of houses in the neighborhood. You have consulted a friend who is a private realtor in Cambridge (much of the high-quality real estate in Cambridge changes hands without ever coming onto the public real estate market), and she feels you could well get as much as $450,000 for the house. The house at 71 Fish Pond Lane (one house farther in from the Parkway) sold two months ago for $435,000. Although it is slightly larger (about 20 percent more square feet than your house), made of brick, and is shielded from Parkway noise by trees and the other two houses, like many older houses in Cambridge its electrical and heating systems need a complete overhaul. The previous owner, Mr. Miller (a former law professor who now works primarily as a game show host on “Hollywood Cubes”), decided to move into a condominium on the Boston waterfront rather than suffer through the necessary renovations. The person who purchased 71 Fish Pond Lane, oddly enough, has never moved in. You heard from a neighbor (when you stopped by to check on your house yesterday) that the new owner is rumored to be a member of the Unification Church who may turn the house over to the Church. Three years ago, 63 Fish Pond Lane, located next door and directly on the Parkway, sold for $225,000. It is stucco, almost identical in size to number 67 (one fewer bedroom), and has a driveway but no garage. Since the house sold, real estate prices have risen 40 percent on the average, but in the current economy the real estate market, always somewhat volatile in Cambridge, has softened considerably, and trading is slow. When you first moved to Palo Alto, you planned to keep the house at 67 Fish Pond Lane as an investment. You bought it five years ago, and there is a $120,000 mortgage. In addition to the consistent pattern of real estate appreciation in this part of Cambridge (see the attached letter from your broker containing selling prices of Cambridge homes during the past six years, Appendix A), you also felt that the completion next year of the new Mystic Valley commuter rail station (two miles farther out, to the southwest) would, to some unknown degree, reduce the commuter traffic into Boston on the Parkway, making the area quieter and more attractive. Several weeks ago you were invited to participate in a deal in California which appeals to you greatly: two engineers at Rudnick Computers are breaking off to start a new hardware manufacturing company. Two of the venture capitalists involved have offered you a piece of the new enterprise in exchange for the legal work and a capital contribution of $150,000. Given what you know of the firm’s potential, it is a good bet to make a great deal of money quickly. You would now like to move your money out of the Cambridge house and into the new venture. As the principals involved in putting the deal together have demanded that you decide within a week whether you will be able to participate or not, you are under a deadline. You have had the house on the market with your real estate broker for three and one-half weeks, with no specific asking price, stating simply that you would take the “best offer.” In Massachusetts, a broker receives from the seller a commission equal six percent of the purchase price, and usually a nominal down payment accompanies a contract for sale, followed by a closing within 30 to 60 days. You had two tentative inquiries (through your broker) within the first week, but neither one generated a bid. A different broker called you in California two weeks ago and offered you $320,000 cash on the spot for an immediate sale,


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but you never followed up. Although you feel that $320,000 was perhaps just the broker’s “opening bid,” you aren’t certain that that broker would still be interested in the house. You have looked into the possibility of an additional first mortgage, but it might not generate the $270,000 you need to make the investment and cover the existing mortgage. A second mortgage might be possible, but not very attractive economically. In general, keeping the house is no longer desirable, because there is only so much you could get in rent, and you dread the hassles of being an absentee landlord for Cambridge property. You never know what will happen with rent control, for example. Last week your broker called you in Palo Alto and told you about two young MBA students who appear to be seriously interested in buying the house. You don’t know if they are familiar with the Cambridge residential real estate market, or whether they have been down to the Registry of Deeds to confirm the price of recent house sales or the price you paid for the property five years ago. You figure that to buy into the new venture in California, you must clear enough from selling your Cambridge house to make the investment and to cover the existing mortgage, the broker’s fee, and the 28 percent capital gains tax on any gain over your basis in the house. Of course, you could certainly use extra cash as well. A financial cushion would be good to have in case other investment opportunities arise. As you are only here in the Boston area for a few days, you would like to meet with the two students and would like to close a deal quickly, if at all possible and desirable. Return trips to Cambridge are costly in terms of time and money, and you would like not to have to make another one. You asked your broker to set up a meeting.


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Appendix A

This Month, Year 0 Dear 67 Fish Pond Lane Owner, Thank you for engaging us to help you with the sale of your Cambridge home. As background for our upcoming negotiations with prospective buyers, I thought you might be interested in the following information concerning home values in Cambridge. We have collected citywide data in the single-, two-, and three-family house categories for the past six years. Information on the final quarter of last year is not yet available, so we have included (in parentheses) estimates of projected sales for that period. Our figures for Cambridge come from the city’s Board of Tax Assessors. We have included only arm’slength transactions.

Single

2-Family

3-Family

Year -6


127 $ 126,638

114 $ 93,526

93 $ 92,225

Year -5


107 $ 149,860

98 $ 118,826

77 $ 131,714

Year -4


148 $ 174,075

105 $ 140,576

61 $ 142,668

Year -3


181 $ 217,691

109 $ 182,138

63 $ 185,462

Year -2


190 $ 262,554

152 $ 212,412

99 $ 217,682

Year -1

Houses Sold (Projection) Average Price

135 (160) $ 281,232

92 (115) $ 226,366

64 (80) $ 233,894

These are citywide statistics, and therefore cannot be used as an accurate barometer for all neighborhoods. We trust, however, you will find this information useful and we look forward to working with you. Best Regards, Your Broker P. S. Your “basis” in the house is equal to the purchase price plus the cost of all improvements you have made.


4

FISHPOND LANE MAP

# 67 Garage

#71 # 67

#63

FISHPOND LANE

Fishpond Park Way North

67 Fishpond Lane

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