The Truth About Negotiating Commercial Real Estate

Many people feel insecure about negotiating commercial real estate deals. They feel that there’s some type of magical formula, or some super-human skill set that others possess. Well, forget those books by Donald Trump and others on the art of negotiating. There is no art to negotiating – other than how to approach it and the liberal use of common sense. Anybody can negotiate a commercial real estate deal, if they follow these easy steps.

Think win/win

The phrase “win/win” is horribly overused these days, but the meaning is still good. The concept is that both parties should come out of a real estate closing happy, having made a good deal. If you approach any commercial real estate deal from the perspective of mutual respect and understanding, then negotiating is much easier. You tell the seller what you honestly need out of the deal, and the seller tells you their goals. You then mutually work to reach each other’s goals. This “team” spirit makes the inevitable bumps in the road more survivable (due diligence items, missed appraisal targets, etc.) as the “team” will try to fix the problems as they come up. Many people think that negotiation is all about posturing and bluffing, and those false formalities all go out the window when you lay your cards out on the table.

Never think win/lose

This type of negotiating is defined by one party being “ripped off” to the betterment of the other party. For example, the buyer knows that the seller is racing to get the property sold before the expiration of their loan. So, at the last minute, the buyer suddenly offers 50% of the price in a “take it or leave it” format, knowing that the seller has no time to replace their loan and may have to take the reduction or lose the property to foreclosure. The problem with this type of negotiation – so fondly referred to in many negotiation books – is that it does not work well in the real world. Those who engage in this type of negotiation normally end up with a “dog show” portfolio of properties. Why? Because the only sellers who will play along with it are desperate because they have low-grade properties. In the above example, the reason the property cannot be refinanced is that it has insufficient occupancy, an expired operating permit, or a toxic sewer leak. That suddenly changes the desirability, right? I know of an individual who has made it his business model to try to take advantage of sellers by offering last minute, gigantic reductions in price. The owners of the good quality properties all tell him to go screw himself. The ones with poor quality properties take the offer. His portfolio barely breaks even, and probably loses value every year. But he loves to tell his stories about how he screwed the sellers…

Have a firm “walk away” price

One of the key elements of negotiation is a price in which you will not buy the property. If you have run the numbers, and the deal does not make sense at $740,000 or above, then $740,000 is your “walk away” price. As long as you stick to that price as your upper ceiling, you cannot screw up your negotiating. And the fact that you will not pay that price or higher will be transmitted to the seller through your body language and (if over the phone) demeanor. Many sellers, when confronted with the fact that you will walk away, suddenly lower their price to meet your upper limit. If you do not have a firm “walk-away” price when you negotiate, you will inevitable pay too much.

But don’t be an angel

With all the talk of win/win, don’t become confused that we are suggesting that you become a non-profit with a mission to get every seller the maximum price. If the seller offers a price far less than market value, then don’t enlighten them as to that fact. Win/win means that you help hit the seller’s goals, but if the seller has a low goal, that’s his business and not yours. Giving someone what they ask for is great if they ask too little, but it is never your job to inform them.

Conclusion

You don’t need to hire someone to negotiate for you. And you don’t need to buy and read every book at the bookstore on negotiating. You simply need to know exactly what your goals are, and get the seller on board with a win/win negotiating strategy.

Frank Rolfe has been a commercial real estate investor for almost three decades, and currently holds over $300 million of properties in 20 states. His books and courses on commercial property acquisitions and management are the top-selling ones in the industry.