Commercial Real Estate Negotiation Tactics
In reality, there is no hard and fast rule for valuating a
commercial property. What this means is that quite a bit can be won
or lost on the negotiating table. Every aspect of the deal,
from pricing to terms of the sale, is flexible and subject to the
prowess of the negotiator representing you. While this
person is often a Commercial Real Estate Broker, it is always a good
idea to be in the room to fully represent your best interests. Here,
we would like to provide some proven tips and tricks for beginning
investors and experienced owners alike, in order to assist you in
getting the best deal on your next purchase.
How to Develop These Skills
First, a few words on how to use these tips before we get started.
As with any skill, it is important to break down the entire process
into a series of actions. Work to master each new action one
at a time. Start by practicing these tactics in
non-essential environments (think: negotiating a vacation
destination with your spouce or persuading an employee to work
late). Once you feel that you have mastered this skill - try using
it in a deal-making environment. If it works - great! You are now
ready to move on to the next skill.
The Mindset of a Great Negotiator
A great negotiator seeks to satisfy everyone in the deal.
Novice negotiators will often be too intimidated to get what they
want, or are too adversarial to close a deal in a timely manner.
Before even talking to the other party, you need to first
understand what it is exactly that you want. Then, after
you make contact, your goal should be to understand what it
is exactly that the other party wants. The rest of the
process of negotiation is to reconcile those two viewpoints towards
a mutually beneficial conclusion.
Many Ways to Win
Traditional negotiation teaches us that there is only one spectrum
in negotiation where the buyer's best case is the seller's worst
case. I do not believe that this holds true for commercial real
estate negotiation. There are often many other factors that come
into play - such as terms, timelines, and payment practices - which
may benefit one party without affecting the other. So, it is
important for you to have two spectrums in mind:
Your Worst Case (no deal) -> Your Best Case
Their Worst Case (no deal) -> Their Best Case
The end goal of the negotiation process is to maximize
benefits for both parties (of course, with your well being
taking priority). The worst case is that there will be no deal, and
that both parties walk away from the transaction. However, the best
cases can vary widely. For example, if the buyer will accept a low
price and the seller wants to close the sale quickly, a lower the
price for the buyer will complete the transaction quickly for the
seller - this scenario maximizes the outcome for both parties.
Before beginning the negotiation process, it is important to
have in mind what price, timeline, and conditions are optimal, and
which ones are deal breakers.
The Rhythm of Commercial Real Estate Negotiation
While the number of meetings for each deal varies widely, based on
its complexity and the personalities of the people involved, in
general, there are at least three stages in the negotiation process:
1 - Fact Finding
Before and during the first meeting, each party tries to learn more
about the other. The buyer will especially have a limited amount of
information, and should use this meeting to convince the seller that
he/she is a credible bidder worthy of more information. The
primary goal at this stage is to ensure that there exists some
overlap between both parties' price ranges. Once this
common ground is established, the seller will be more willing to
provide the buyer with more information about the property
(such as operating statements).
2 - Bargaining
Now that the buyer has all of the essential information needed in
order to formulate a real bid on the property, both parties will
meet to resolve any differences between the asking and
bidding prices. This is the toughest state in the
negotiations as it determines the primary offer amount. Once this
stage is completed, only unforeseen issues unearthed by the
inspection can alter the deal.
3 - Closing
If all goes well through the inspection and financing, there will
usually be at least one final meeting in order to formally
close the deal and sign the Purchase and Sale Agreement.
This is usually nothing more than a formality, and a nice way to
celebrate a great deal and a new business partner.
Before the First Meeting
As a buyer, the key to your first meeting is to obtain as much
information as possible from the seller. At the very least, you will
want to walk away with the operating statements for the last
2-3 years so that you can settle on a bidding price for the
property. As a seller, this is your opportunity to size up
the buyer as a commercial investor- fiscal soundness- and
gauge whether or not he is serious enough to make the due diligence
process worthwhile.
For either buyer or seller, it is best to have the initial
meeting at your office. Cliché as it may seem, this is
where you will be most at home with the fewest surprises. If the
other party insists on a neutral meeting place, a nice restaurant or
coffee shop is also an option. Just be sure to pick a place with
good lighting, clean tables, and ambient noise. Many such locations
also offer free wireless internet access, enabling both parties to
send emails or conduct research online.
In addition to location, it is important that you establish
goals and a time-frame for each meeting. This will help
keep the discussions focused, and pressure both parties to reach
closing. Generally, this tactic favors the well prepared - so do
your homework beforehand!
The First Meeting
It is best to be the first one to arrive at the location.
Sit with your back to a window or light fixture.
This makes your face more difficult to read. If you arrive early,
use the extra time to choose a good location and put
everything you plan to use out on the table - from laptops
to pricing documents. The mantra of any good deal is "no surprises".
Most experienced negotiators will react with suspicion to any
unforeseen changes - even if it is taking out an additional set of
papers from your briefcase.
Once the other party arrives, it is critical to build a
personal connection. In an ideal commercial real estate
transaction, both parties will be working together to find common
ground - it should not be an acrimonious engagement. The best way to
do this is to find a personal connection. This can be anything from
educational background, to a shared culture, to a favorite sport.
Mirroring body language is also a good way to build
connection. At its core, mirroring puts the other person at
ease by conducting yourself in a manner that they are familiar with.
Initially, this will help to build comfort and a feeling of
goodwill. If the other party is emotionally invested your success,
he or she will be more willing to find ways to help you. In any
deal, there are a number of aspects which can benefit one party
without affecting the other. You want the other party to be
on the lookout for ways to help you - especially when it is not to
their detriment.
Later on in the negotiation process, if the debate becomes more
heated, this common ground will also provide a soothing respite.
Nothing can diffuse an escalating situation like a casual joke or
reference - such as: this would be a lot more to hash out on the
golf course!
Finally, speak as little as possible. Nothing is
more comforting to humans than the sound of his or her own voice.
Most people are uncomfortable with silence and instinctually seek to
fill in the conversation. Use this to your advantage. Each minute
the other party spends talking is another minute's worth of
information for you to be gathering, and another minute to
watch for facial cues to help you read the other party's
emotional responses.
Especially for the buyer, the focus of your contributions to the
conversation should be to focus the seller's dialogue.
In any situation it is important to leave small pauses after each
sentence. This will provide you with more time to formulate your
thoughts as well as enable the other party to jump in. I can't tell
you how many times I have had a crucial piece of information at the
tip of my tongue only to forget it as the other party rambled on
without pause. Their loss!
Look and Listen
Once you have a good idea of what your needs are, it is time to meet
with the other party to better understand his or her needs. During
this process it critical that you listen to the other party. Be sure
to rephrase and repeat any critical points the other party
brings up while writing it down. This helps the other party
feel heard, as well as reduces the risk of misunderstanding, which
can be disastrous later on down the line.
An astute real estate investor will also carefully watch the
other party as well. People are careful to prepare and
censor their words. What they say - especially at this level - is
well thought out and will not give away many surprises. Where you
can begin to gain an upper hand is to see the emotion
attached to each statement. This will give you insight into
the why - helping you to understand what is important to the
other party. Each time you spot an emotion or facial
expression during the conversation, try and attach it to a statement
or fact - and then take note of both together.
Be diligent and review these notes - both "the what" and "the why"
after each meeting. They can often be surprisingly informative and
help you understand the other party's values and baseline behaviors.
This will be very useful later on to gauge reactions when the other
party is more guarded.
Preparation
At this point, you should have all the information you will need
about the property based on the numbers you have been given by the
seller. You should have run the numbers to create a basic valuation,
and completed revenue model which includes the cost of financing at
a rate confirmed by your mortgage broker.
Do market research to find comparative deals to show the
seller that he must compete for your business (and sellers
will often have other buyers). Sites such as Cimls.com are great
resources to help you easily locate comparative properties. You can
search for free to find competitive commercial real estate
offers on cimls.com that put the other party under pressure as well
as providing a good test for valuations. If the other party
is trying to pass by you some numbers wildly off from other similar
properties listed on the market - you can call them out to convince
the other party to re-consider his or her calculations.
Now it is time to build a complete list of negotiating
points. This includes every aspect of the deal. I like to
split the list into what I consider major and minor points. Each
major point can be a deal breaker, but none of the
minor points are. During negotiations, I like to use the
minor points as concessions to influence the direction of
the major points. Some common negotiation points are listed as
follows:
Major
Price
Purchase timeframe
Minor
Pre-sale repairs
Inspection costs
Broker commissions
Rebranding efforts
Transition commitments
Insurance
Now try and imagine 2-5 potential scenarios where the negotiation
may end, based upon what you know about the interests of the seller.
Each of these end deals should contain a real number for each
negotiation point. Look at each deal and decide if it is an
acceptable investment deal for you. If so, you can keep these sets
in a list to be used as reference during the negotiation. They will
serve as frames of reference for which direction the seller is
taking you during the discussions.
Also, if you feel you know the interests of the seller well, you can
provide him or her with a few deal options with tradeoffs
spelled out (think: property price vs. timeline). This is
dangerous, as it can also provide the seller insight into your
thought processes. However, it can also be an invaluable tool in
positioning a favorable deal to the seller. People have a
natural tendency to buy the option in the middle. If you
provide three deals - people will trend towards the most balanced
one by comparison - even if it is not the best one for them.
Before Negotiating
Develop a calming motion. Final discussions can be
very stressful for both sides. When emotions rise, both parties can
make bad decisions to derail the deal. This is a no-win situation
for everyone. So, it is advisable to build-in an activity that
enables both parties to take a brief, informal pause to collect
their thoughts. My favorite calming motion is running the numbers.
If the other party says something surprising or is taken aback by
one of my comments, we can recalculate the changes together. With
both parties focused on the numbers, everyone gets refocused on the
facts of the deal - not the emotions of the room.
Also, try and prepare a Rude Q&A (so named as it
prepared us to answer the hard questions) before the discussion in
order to anticipate the seller's questions. This is basically a list
of "what-if scenarios". This helps to eliminate surprises from the
meeting and prepares you for contingency plans beforehand. As
mentioned before, being prepared enables you to better guide the
negotiations toward a successful real estate deal.
Setting the Deal - Getting Down to Brass Tacks
Now you have your valuations and potential situations in-hand, and
are ready to reach a final agreement for purchasing the commercial
property. Whether you are the buyer or seller, don't be
afraid to wine and dine the seller a bit. A bit of good
food goes a long way towards sweetening the deal! What is a $100
meal compared to 1% off the cost of closing the commercial
investment of your dreams? When people like you, they will look for
ways to help you (especially if it doesn't hurt them).
Never ask for a change without justification. While
both sides are trying to talk each other out of more money, the base
assumption is that the extra cash is necessary to make the deal
fiscally viable. Be sure to stick to hard numbers rather then pro
forma numbers (a.k.a. estimates) and keep a log of all proposed
changes. Especially with multiple meetings, it is important to trace
the trend of the negotiation process as well as validate any claims
made during the process by the other party. With good recall (or
note taking), it's easy to trap an inexperienced negotiator.
Finally, beware of victor's remorse. Whenever a
commercial real estate deal just seems too easy, one party will feel
as if he/she has been taken advantage of. The expectation in good
negotiations is for each side to have to give a little. It's best to
meet this expectation, so both parties will walk away happy.
Closing and Postmortem
No matter how experienced you are, each deal is a learning
experience. It is important to take time afterwards in order to
analyze your performance. This can happen in two stages:
First, right after the deal, think about how your emotional state
impacted the negotiation. Did you let momentum rather than facts
make your decisions? Did you focus on the points that you initially
set out to focus on? In general, was there anything that you were
especially proud of or worried about?
Second, three to six months after the sale of the property, it is
best to look back on your pre-purchase models and estimates to
re-evaluate your accuracy and see if you missed anything in the
fact-finding process that you should be ware of next time. Did you
find out anything about the property after the sale that you should
have found out before? What questions should you ask next time? How
well did your valuation match with the real property value?)
While this is certainly not a complete primer on negotiations, we
hope that these few nuggets of advice will serve you well in getting
a great deal in your next commercial real estate investment
negotiation!
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