Buying Commercial Real Estate for the first time can be a stressful experience and negotiations can be especially intimidating. People often worry about offending a seller by not submitting a full price offer. An experienced investor will tell you to throw feelings out the window and concentrate on what counts, the numbers. Deal making is more about strategy than science. Please consider these tips when considering purchasing an investment property.
Most sellers list their property at a top of the market rate. Besides looking for top dollar for their property they have also been advised by a listing agent to do so. But there are other attributes that can make a purchase offer more desirable than a full price offer. Having your ducks in a row prior to putting in an offer can go a long way in making yourself more attractive as a buyer. Money talks and speed wins. Having cash on hand or having a bank or financial institution ready to move quickly can help tighten up contingency Periods and shorten the process of closing. Sellers are usually looking for the fastest path to cash and are willing to provide a discount in order to close quicker.
Since you’ve done the early work of lining up financing, you can strengthen your position by letting the selling party know that you want to make the deal work but you don’t NEED to purchase the property. Anyone who’s been in the CRE business long enough knows deals fall through more frequently than not. There is also a continuous flow of inventory. If a seller is going to be stringent on a high opinion of value, then saying “thanks but no thanks” will usually soften their position.
Before placing an offer, gather some information. Talk to neighboring tenants and owners. Find out the going rate for empty buildings. Find out the going CAP rates for investments deals in the area. Talk to the city to inquire about your intended use. Find out if there is any environmental damage in the area. All of these factors (and many more) can help you determine the value of the property to YOU, not the seller.
Face to Face meetings can be a great way to get everyone on the same page. It’s a lot easier to say no to a computer screen than a human being who has done their due diligence and is making a sound case for the offer they presented. Showing up and showing your readiness to contribute positively to closing a deal can give you an advantage over a buyer who is hiding behind a computer. If an in person meeting is not feasible, then hammer it out over the phone. But don’t say too much because…
The first one to talk loses. Present your case then sit back and let the information resonate with the seller for a while. If the facts presented make sense, then the seller will usually negotiate against themselves at some point. This can take any where from 5 minutes to many months. Present your position then go dark. Wait for the seller to make the next move and makes sure it's in writing.
There is a reason the seller has listed his property at a sky high price point. They think they have a chance to get it. New investors usually are targeting “the best deal in the world” or the “Diamond in the Rough.” Throwing out a lowball offer just to see if it sticks is most likely a waste of time. Even if the market doesn't support the price the seller is looking for, sometimes the sellers expectations are too much to overcome. If you've determined that the property will be valuable for your business, then it is better to put in an offer closer to asking price in order to get a potential home run property under contract. Controlling the property is more important than the price at this point because...
Again, negotiations don’t stop once a property has been placed under contract. Use your Due Diligence period to have the property properly inspected. Gather bids for repairing deferred maintenance and get a roofer to estimate how much life the roof has left. For investment deals, always talk to any current tenant in order to gage their temperature for staying put and paying rent. Get the place appraised. Once you have figured out how much it is going to take to get the property up to speed bring the evidence to the table and ask for a discount large enough to cover that looming cost.
Give the listing agent a script to deliver to his client. Over the phone casually give the listing agent a list of reasons why you think your price point is justified and an idea how they might be able to deliver that message to the seller. The agent wants to get paid and they don’t get paid unless a deal gets done. Trust me, they are more than willing to obtain ammo that can help get a deal done.
Sellers, even the most desperate, have limits. Push to get the price point down but if the numbers add up and you end up paying a bit more than you wanted to, then it’s ok to give in a bit. Everyone needs to put food on the table. If you’ve presented the facts and met closer to the middle consider it a sacrifice to the deal gods and be proud of your new revenue producing property.
Don’t lose a deal negotiating for every last cent. Buying an investment property for $1.25M instead of $1.5M matters. Buying the same property for $1.25M instead of $1.23M doesn’t. Don’t lose a deal over a few thousand dollars. You’ll kick yourself when you see the same property trade for $2.25M a few years down the road. Approach purchase negotiations like a problem to solve not a war to win. This will give you a better chance to close. Price is crucial, but smart investors spend more time strategizing than stressing the bottom line.
Are you new to Commercial Investing? Contact us and let us know what you’re looking for and we’ll provide a free Commercial Investment Property Analysis which can help you decide if the deal you’re looking at is optimal.