Land O Lakes Real Estate News - JLS Investment Realty

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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