5 Tips for Negotiating Deals in Commercial Real Estate
Negotiating real estate deals is often glamorized, but it rarely goes down the way you see it in the movies. There are no intense stare-downs or sliding pieces of paper with mysterious numbers across a table.
Negotiating deals in real estate is not the same as negotiating a salary or the price of a new car purchase (or even single-family homes). As such, you won’t see the same advice you often see on those topics, like, “Name your price, then shut up.” Instead, we’ll focus on principles you must master to consistently acquire assets at prices that allow for dependable profits and long-term sustainable growth.
Tip #1 - Have Multiple Options
When negotiating, you want to start from a position of strength. That way, you won’t be tempted to take an undesirable offer because it’s the only deal available to you. And the best way to start from a position of strength is to have multiple options. That means you’ll need to source real estate deals on a consistent basis, so you have a steady flow of opportunities.
Knowing your investment criteria, fostering industry relationships, and looking for off-market deals are all key pillars of a quality sourcing game plan. When you’re looking at multiple deals at once, you have the power to walk away from any negotiation in which the other party is not willing to meet your criteria. Every deal should make sense for your business model and profit strategy, and having a steady flow of possible deals ensures you don’t agree to a deal that compromises that strategy.
Tip #2 – Build a Good Team
You likely won’t be able to sustain a steady flow of possible deals if you haven’t focused on building a good team to support you.
If you’re a Limited Partner, then an invaluable member of your team will be the General Partner that brings you opportunities to invest. (We previously discussed the difference between a GP and an LP.) For General Partners and other investors working on the entire deal lifecycle, you’ll want a mix of strong contributors in the following roles:
- Broker – a well-connected broker can alert you to properties before the rest of the market, find new developments, and introduce you to other investors whose properties could be a good fit for your business model. They know their market better than anyone and will help you make reasonable offers and prevent you from accepting unfavorable ones.
- Lawyer – an easy way to lose money is to overlook a key point in the contract that comes back to bite you. An experienced lawyer in your real estate sector can read through terms with a detailed eye and lay out your options clearly, so you’re not taken by surprise.
- Analyst – we’ll discuss this in the next point, but quality analysis is essential to realizing profit in your real estate deals. You want analysts you can trust to give you accurate data, which is ammunition to negotiate the best possible deal.
- Administrative – when you’re working on a number of deals at once, you want to be able to see the big picture, not get lost in minutiae. A dedicated admin staff will take care of all the details (emails, sending offers, scheduling meetings, arranging showings), so you can stay focused on negotiating the best terms and sales prices.
By combining your real estate knowledge with the skill sets of these team members, you can come to any negotiation with all the data you need to create wins for you and your investors.
Tip #3 - Fully Analyze the Deal
We touched on this in the last section, but deal analysis is what separates losing deals from lucrative ones. And any good deal analysis starts with your business plan to create profit from a property.Will you renovate and raise rents? Will you flip an undervalued asset? Will you market the property better to bring in more revenue?
Whatever your strategy, you must do your homework. That means having your analyst(s) run a full analysis of the property, your market, your expected costs, and your estimated revenue. All your numbers should be based on hard data and realistic expectations, not wishcasting.
Your analysis should give you an accurate picture of where to initiate your offer and how much negotiating leeway you have while still maintaining profitability.
Tip #4 - Don’t Neglect Any of the Terms
In real estate, you can negotiate an almost endless amount of terms. You’ve got sales prices, interest rates, and closing dates, just to name a few. With all of these terms, you shouldn’t be afraid to get a bit creative with the terms you present in your offers.
One thing many successful negotiators do is identify an aspect of the deal that is important to the other party, but not to you, or vice versa. Say the other party needs this deal to close in a hurry because another deal they are working on depends on this deal’s completion.They may be a bit flexible on the sales price if you can expedite closing. If you can identify key points like this, you bake more profits into your deals.
Tip #5 – Don’t Accept the First Offer
Shark Tank’s BarbaraCorcoran, never one to tiptoe around her point, put it this way:
“Negotiation is like dating. There’s got to be some romance. If the guy gets the girl home on the first date, it’s too easy, and the relationship doesn’t last.”
She added, “Nothing poisons a deal faster than when the asking price is immediately accepted or when a buyer’s first bid is accepted. Either the seller feels he underpriced (the deal), or else the buyer feels he offered too much money for it. Rather than work on the relationship a bit, the buyer and seller tend to drift apart.”
So even if the first offer fulfills all your deal qualifications, you should still counter, even if it only changes the deal slightly. It’s counterintuitive, but it should help eliminate buyer’s (or seller’s) remorse and keep you on good terms for future deals with that party.