Learn the Art, and Science, of Deal-Making
Buying commercial real estate for the first time is often a stressful experience, and negotiations can be especially intimidating. Good negotiating is often misunderstood as the means by which you rake 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, because if you have a reputation for always making all the money, you won’t have many deals.
-– J Paul Getty, credited to this father
Deal making may be more art than science, but there are tenets of negotiation that can benefit every commercial real estate investor. Before buying your first property, consider these ten commercial real estate negotiating tips to beat out 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. But 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 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 long track record of performing can lean on this experience, but first-time buyers often must manufacture surety of close organically. Tightening up terms with shorter contingencies and a larger deposit can encourage brokers to recommend less experienced buyers, or even an offer with a lower 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 but just minutes to destroy. And as noted in [link to Five things to Know piece], selecting a first deal that matches your financial capacity helps ensure 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, to say the least, easier said than done. It takes years to learn how to walk that line of motivated-yet-not-desperate buyer. When you want the deal – especially your first – eagerness oozes through email, phone calls and certainly in-person meetings.
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, beat ‘em.
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 easy, but it’s also easier to be tough through a screen than in-person. Even a rudimentary understanding of facial ticks, 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. Again, that $100 you left behind at the local card room will be money well spent.
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 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. Great property, great location, a little hair 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 that 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 differentiate yourself as a first-time buyer. But if you can unearth a stale listing with a listing broker in danger of losing a commission, spend the time to bring him over 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 for the broker to use as ammo in convincing 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’s negotiating equity? 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 little left in the tank 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 purchase price, only to end up losing out on otherwise good 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. 10 years from now you won’t care if you paid $1,000,000 instead of $980,000. But you will care when you see the property sell for $3,000,000 and someone else reaps the benefit. But 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 more and better deals getting done. Price is impossible to ignore, but smart commercial real estate investors spend more time crafting the non-financial terms of their offer than the bottom line.