Let’s start negotiating the deal. This is one of my favorite topics by far, as I firmly believe that everything in life is sales and so is negotiation.
I have a small eight-year-old daughter, and I feel that everything has to be negotiated with her, even staying awake. The second day, I was sold on being over it; I wanted her to go to bed at a reasonable time but she won the conversation.
So let’s go ahead and roll with it.
In one of my last deals, $2 million worth of underwriting was renewed. Also in this deal, I made a $1 million mistake when negotiating with the seller. Yep, $1 million mistake.
I was very aggressive about the rent. I thought we could raise them to a $200 per-unit average. That’s why it’s good to have a team and a second set of eyes to do some more digging and hire a compass. He has much wider experience than me in terms of understanding the market as he is more on the asset management side. And so with that, it was determined that my fares were too aggressive by $75.
Think $75 over 12 months for 156 units. That’s a big change in terms of income, so that’s how we determined what the offer was going to be for the sellers on the other end. So that’s a mistake.
But it also came down to a conversation where we knew they were highly motivated and we had built up a good rapport. And I want to talk about how it’s really set up with building relationships.
Building Relationships As A Real Estate Investor
One important thing that I always like to do is to meet with the sellers of the property and not make it the basis of the transaction.
I met him at his office, where his community manager usually works. IThe lot really works in terms of staying on top of things, as it is a community of 156 units. So you’re able to get those economies of scale; You can hire a number of maintenance techs on site as well as a community manager who also lives on site. You really are able to get boots on the ground.
With a smaller property, the property isn’t really capable of retaining anyone actually on site. It can be, but it can be really difficult from a financial perspective.
So I ended up meeting the seller in their office and sat down to understand them, build a relationship and rapport, not just make it transactional. A little hack I always use is that I always have a thank you card with me that I provide to the person on the other end.
When I made them a verbal offer of $7 million and it was determined that our rates were too aggressive to rent, wE actually had to back out and offer around $6 million. So they verbally accepted $7 million and then we had to pay back $1 million. It was a very difficult conversation.
But we were still able to get the deal done and submit the first LOI, which is a letter of intent that details everything that’s going to happen in the contract, because the contract is going to be a lot more robust. TeaHey we agreed to the terms that we had, and that’s when we got under contract and started the rest of the due diligence.
Everything is negotiable as a real estate investor
The really important thing I want to talk through is understanding that everything is a conversation. Let’s say someone rips you off on price. You don’t need to approach it linearly. Let’s say something comes up and you want a reduction in the purchase price, then you can get a little more creative. If the purchase price is, say, $6 million and they are firm on that, you can ask the seller if they can put in replacing roofs or repairing parking lots.
Being creative like this shows that you are flexible on that side and that you are willing to work with them. Because it’s all about how things are understood in conversation and then leverage.
We had leverage in our deal because the financial they provided was not the largest. wE had the T12, the profit and loss for the last 12 months, as well as the rent roll. But there were a lot of holes in the details, so we were able to use all the renewals and deferred maintenance associated with the asset as leverage to work around our previous mistake.
Connected: 8 Negotiation Techniques That Will Help Every Newbie Get a Better Deal
Bottom-line
I still make mistakes and that’s what I share with everyone. That way, you can avoid the pitfalls and mistakes I’ve experienced and just replicate the successes.
To reiterate, I used all that leverage and was able to bring down the purchase price. We have submitted the LOI. There was some back and forth regarding terms. And then finally they agreed. At that point, we drafted the purchase agreement, which was even more robust, with all the conditions, the closing timelines, the feasibility period, all that good stuff.
Have you ever had to recover quickly from a miscalculation in a deal?
Tell us about it in the comments.
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
