Learn the Art and Science of Commercial Real Estate Deal-Making
Buying commercial real estate for the first time is often a stressful experience, and negotiations can be especially intimidating—people commonly mistake proper negotiating for raking an adversary over the coals. Many billionaires would disagree.
“You must never try to make all the money that’s in a deal. Let the other fellow make some money too […] if you have a reputation for always making all the money, you won’t have many deals.”
-– J Paul Getty, credited to his father
Deal making may be more art than science, but certain tenets of negotiation benefit every commercial real estate investor. Before buying your first property, consider these ten commercial real estate negotiating tips to beat your more seasoned competition.
Walk a Mile in Your Counter-party’s Shoes
Empathy doesn’t usually top the list of requisite skills to succeeding in commercial real estate investment. Nevertheless, negotiating with your counter-party’s goals in mind can be your single biggest deal-making asset.
Push the listing broker for the owner’s motivations, challenges, and reasons for selling. Once you understand the seller’s perspective on the transaction, look to solve his or her problems with creative terms that come at minimal cost to you (short contingencies, long close, lease-back, etc.).
Surety of Close is Gold
Most sellers say they want the highest price for their property, which is a reasonable position—this is a business, after all. But surety of close can be as valuable, if not more, than an eye-popping price.
CRE investors with a track record of high performance can lean on their experience, but first-time buyers often must manufacture surety of close organically. Tightening up terms with shorter contingencies and a more substantial deposit can encourage brokers to recommend less experienced buyers or even an offer with a lower overall price than the competition.
Behind the scenes, line up backup options if your funding doesn’t come through or gets delayed. Reputations take years to build up and mere minutes to destroy. Selecting a first deal that matches your financial capacity shows you can deliver as promised, even on a tight deadline.
Negotiate Like You Don’t Need the Deal
Like the car buyer willing to walk out of the showroom, approach buying commercial properties like you have a dozen great deals lined up behind the one you’re chasing. Negotiate hard, don’t be afraid to say no, and when in doubt think to yourself, “What would I do if I really did have a dozen great deals lined up behind this one?” A confident “no” will be met with a conciliatory “yes” more often than you think.
This is easier said than done. It takes years to learn how to walk the line of the motivated-yet-not-desperate buyer. When you want the deal – especially your first – eagerness oozes through email, phone calls, and undoubtedly in-person meetings.
It looks like that monthly poker game just became a deductible expense.
Know the Competition
One of my first questions on any deal is, “Who am I competing against?” Understanding the competition – their strengths and weaknesses – often dictates what offer terms can position yourself as the best buyer.
Don’t give up if you find out an experienced, well-respected buyer is pursuing the same opportunity. First, congratulate yourself and your finely-honed intuition. Next, win.
Call around the market and find out how your competition structures their offers. Short or long contingencies? Closing time? Find chinks in the armor and exploit them. Many large buyers are reliable but move slowly, so use speed to your advantage. Review my first tip and design your terms to better address the seller’s primary motivations.
Negotiate In-Person on Important Points
Resist the temptation to talk pricing or negotiate via email or text. Electronic communication is ubiquitous and simple, but it’s also easier to be tough through a screen than in-person. Even a rudimentary understanding of facial tics (eye contact, and other subconscious “tells”) can give you an edge over a buyer who won’t spend the time to get out from behind his computer.
If in-person isn’t feasible, talk pricing, competition, and pricing expectations over the phone. And let the other side do most of the talking, because …
The Less You Say, the Better
No one likes an awkward silence. Except for an experienced negotiator.
During a negotiation — or any conversation for that matter — most people interpret a lack of response as disappointment or outright anger. During your face-to-face or over the phone negotiation, use silence to your advantage. If the other side suggests a price, say nothing and wait. It’s hard; it’s awkward – which is why it works.
You’ll be surprised by how often your counter-party will immediately negotiate against herself just to break the silence.
Or as Australian entrepreneur Robert Court put it: “You know who’s going to win a negotiation: it’s he who pauses longest.”
Employ the Soft Low-Ball
In a hot commercial property market, low-ball opportunities may be few and far between. But when a listing lingers and is clearly overpriced, the kinder, gentler low-ball can win over brokers and give you an upper hand against the more antagonistic competition.
In a deal I closed last year, the listing came out just above $10 million. It was a great property in a great location, but way too expensive. We let it sit, and when the broker called me to see if I’d seen it, I was ready with an answer.
“Sure, great deal … at $6 million.” I was friendly with the broker, so the low price didn’t offend him, but I didn’t hear back for almost three months. He came back, promoting a price drop to $8,500,000.
“Getting there, but our bid hasn’t changed.” He told me the seller still had room and that I should submit an offer. I politely refused but gained valuable information: the seller had just dropped the price by 15% and wasn’t yet at their bottom line.
Three more months passed, and the price fell further to $8 million. We wrote at $6 million and settled at $6,800,000. We would have gone to $7,200,000, and beat out other offers at the new, lower asking price because we offered surety of close and had already done our homework on the deal.
By being in the game, albeit casually, I learned about the building owner’s challenges in selling the property and how much value they placed on surety of close. When we finally wrote our offer, we knew exactly how to structure our terms to beat out our higher-priced competition.
Get the Listing Broker on Your Side
In a competitive bid situation, it can be challenging to distinguish yourself, especially as a first-time buyer. If you can unearth a stale listing with a listing broker in danger of losing a commission, spend the time to win him to your side before submitting an offer.
Find comps and other data to back up your price and send anything else that supports your offer. Supply the broker with ammo to convince the seller to listen to the market. Prove you aren’t just trolling stale listings and throwing out offers, but that you legitimately want the deal.
Manage Your “Negotiating Equity” Through Closing
What does negotiating equity mean? Sellers, even the most desperate, have limits as to how much they’re willing to give. Push them to their limit during price negotiations, and you actually lose leverage during escrow. Consider leaving a few cards up your sleeve in case you need more time, a price reduction, or something else during your contingency period.
If you never end up asking for anything and close a bit higher than you initially wanted, consider it a sacrifice to the deal gods and move on.
You Can’t Make Money on Property You Don’t Buy
Price, as it turns out, doesn’t matter. Well, of course, price matters, but not as much as you think. And even though most good commercial real estate investors know this, egos tend to get in the way of otherwise rational thinking.
The time-tested real estate investment axiom “you make money on the buy” is often misinterpreted. Far too many new investors hear this advice and try to grind out every last penny of the purchase price, only to end up losing out on otherwise excellent investment opportunities.
Buying a property for $800,000 instead of $1,000,000 matters. Buying the same property at $980,000 instead of $1,000,000 doesn’t. Ten years from now, you won’t care if you paid $1,000,000 instead of $980,000. But you will care when you see someone else sell the property for $3,000,000. Even seasoned commercial real estate investors miss out on deals by this much, or less, because they let their ego get in the way.
The caveat, of course, is that you have to cut yourself off somewhere: You could keep talking yourself into $20,000 bumps forever.
Approaching any negotiation as a problem to be solved rather than a battle to be won will result in closing more and better deals. Price is important, but smart commercial real estate investors spend more time crafting the non-financial terms of their offer than the bottom line.
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