When you’re looking to acquire a commercial property, getting the best price is an important step in the process. Whether you’re a first-time investor or a veteran in the game, you’ll want to follow steps to negotiate a figure and terms that work for you and your business plan. I always share with others that the one thing you can’t change in a deal is the price you’ve paid—and if you can gain inside information, you’ll be in a great position going into the bidding process.
Follow these steps to get the best value when investing in real estate.
Understand the Seller’s Motivation
One of the most important pieces of information to find out in a transaction is the reason why an owner is selling. It’s a great question to ask when you are talking to others about the building. Once you know their reasons for selling, you’ll be better aware of how flexible they might be on pricing.
In recent times in the commercial space, many properties have been put up for sale due to financial distress. That said, just because a seller is under financial distress doesn’t necessarily mean they can offer the property for a great price. In some instances, the seller might even owe more to the bank than the property is worth, and they may have to hold out for an over market price.
Be an Educated Buyer
To be ready for negotiating a great price, you’ll want to know the market you’re operating in. Working with a good sales broker can give you a sense of the various transactions that have taken place in the area. They’ll also be able to share market insights and inside knowledge on trends that you might not find elsewhere.
You can also study sales comps, though keep in mind that these provide a look in the rearview mirror. They reflect transactions that started several months or longer in the past. Make sure you’re looking at the most applicable sales comps, which include price per square foot (the price of the property divided by the square footage). For multifamily, you’ll want to calculate the price per unit by taking the sales price of the property and dividing it by the number of units. Investigating the cap rate (the net operating income divided by the purchase price of the property) can be helpful, along with reviewing the conditions of the properties that have sold in recent months.
Recognize an Opportunity
During my career, I’ve seen thousands of deals, which helps me identify factors that could indicate a great investment. The less a property is properly exposed, the better chance that you can get it at a below market price. If there is less competition, you may be able to arrange for better pricing. That’s why understanding the broker that’s handling the listing is important. If the property is on market, some brokers have a great track record of doing well and maximizing price. Others might be newer to the business or might not have as much experience. For instance, if a residential broker is handling a commercial listing that can sometimes be a great opportunity for an investor. Or you might have a leasing broker handling the sale, and they may not be as knowledgeable about how to value the property. That said, working with an experienced broker who has off market opportunities might be a great way to find value. You might be able to see something before it goes online and is sent out to the masses. .
Be a Disciplined Negotiator
It can be easy to get caught up in the excitement of bidding for a property. Sticking to your business plan can be beneficial in the long-term, as it will help you avoid overleveraging. Some of the most successful investors I know will bid on properties and be ready to walk away if the price doesn’t meet their investment criteria.
Former FBI hostage negotiator Chris Voss penned a book called Never Split the Difference, in which he explains effective negotiation is about understanding the other party’s perspective, empathizing with them, and gaining their trust. In real estate negotiations, this can be positioning your offer in a way to engage with the seller. In my brokerage role, I’ve always been a little more direct. Suppose a property is asking $10 million and you think it is worth $8.75 million. You might start a $8 million because if you start lower, you might not even get a response. You have to make an offer that’s within range, and then depending on how the seller comes back, you can evaluate. If the owner is only coming off a fraction of the price, they might not be as motivated. A seller that is really willing to engage and is responding at a bigger level could be more flexible.
Pay Attention to Seller Responses
If you decide to make a bid, you can observe how a seller reacts to help you determine next steps. A quick counteroffer, for instance, could be a sign that there is some flexibility on price and willingness to negotiate. A lack of response, on the other hand, could be an indicator of a less motivated seller. By paying attention, you may be able to identify which sellers are flexible and where you may have leverage.
Look Beyond the Price
I always advise to think about terms along with the price. If the seller is currently occupying the property and needs time to move to a new place, you might allow them to stay in the property post-sale for a set time. Or they may be interested in closing fast so they can move on to a different investment. If you’re able to move quickly, you could gain a competitive advantage. Looking for flexibility with terms can be just as valuable as negotiating a lower purchase price.
By understanding seller motivations, studying the market, and identifying great opportunities, you will be well positioned to get the best price when investing in real estate. You may be able to spot ways to add value to a property, which could increase the income it generates. As Harry Helmsley, a well-known New York investor used to say, “Your price, my terms.” By thinking beyond price, you’ll be equipped to negotiate wisely, which can lead to long-term success.
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