In commercial real estate, as in most businesses, it is best to yield to an agreement that is win-win, meaning both parties are satisfied with the results at some level. If the strongest concerns of each party are addressed and a solution results, the agreement is of mutual benefit to both parties.
If you are not familiar with negotiation, I suggest that you take a class, purchase a book, or find a seminar that covers the basics of negotiation. There are many generic tips and tactics that will sharpen your negotiation abilities, and make it easier for you to get what it is that you want out of an opportunity.
In commercial real estate, there are specific negotiation tactics that can be written into contracts. Many of these tactics require some creativity and are specific to certain situations. Don’t be afraid to get creative; after all, this is where commercial real estate gets really fun! You’ll be surprised how you don’t have to have everything figured out when you put a property under contract!
In commercial real estate, it is always a good idea to write a letter of intent before actually purchasing a property. In residential real estate, a letter of intent is usually not necessary, but in commercial real estate, I consider it a necessity.
The letter of intent should be clear, concise and not in legal format. It should appeal to the owner as a direct, personal letter, explaining your purchasing intentions with the property. Many people put in terms, closing dates, length of due diligence, and so on in the letter of intent. Negotiation can take place here, without any money being permanently spent by the buyer, or a deal completed. It can open a dialogue between you and the buyer, and start negotiations early in the game without anything being set in stone.
Another tactic that can be written into the letter of intent is known as an option contract. This option contract is a good way to investigate the property; you then have time to begin putting together a deal to make sure it is feasible. You can offer a certain amount of money to tie up the property in order to do some initial research, and not even mention closing a deal yet. This is a great option that can allow you to decide to move on with a property and begin negotiating, or simply move on to the next opportunity in a short amount of time. The option can be as simple as 15 days to do some preliminary work with $15,000 at risk. At the end of the 15 days, you may option for a full due diligence period and continue with the purchasing process.
When negotiating an offer, and you still have some questions left unanswered that will be unveiled during the due diligence, you can always write an item subject to or contingent upon the ability for you to do to the property what you intend. For example, if you are purchasing raw land zoned R-1, single family housing, and the broker mentions that the city would be supportive of rezoning the property commercial, which would greatly increase the return on investment, then you could write in the contract that you will purchase the property if you can get the property rezoned to commercial. This is done often, and works with many different variables that could affect the use of the property.
Writing in contingency clauses can be a great way to protect your interest and make sure that you end up with a property set up properly with a favorable exit strategy.
As we all recognize, seller’s have specific needs that need to be met. A buyer may really want to take the opportunity that the property would provide, but realizes that he or she may not be able to satisfy all the needs of the seller up front. A negotiating tactic that would work here would be for the buyer to satisfy the seller’s needs in two or more parts.
The buyer could set up two dates to pay the seller- with money in the beginning, and then money at the end of a certain period. This would allow the buyer to take the profit that he made from the property, and give the seller his money. As long as you satisfy the basic, up front needs of the seller, he or she may be willing to accept these terms, and you are on your way to fulfilling another opportunity!
As there are many other negotiating tactics that you will create to satisfy the requirements to make a solid deal, there is a really great tactic that allows you to continue to invest money into commercial real estate without paying taxes on capital gains! This option was made possible through the Internal Revenue Service tax section 10-31, better known as the 10-31 Exchange. This allows for sellers to use the profit from the sale and reinvest it in another commercial property without paying one cent in taxes! Can’t get much better than this for investors!
There are investors who are strictly involved in 10-31 exchanges, and it is a great way to keep the cash flow moving from one property to another with the benefit of full profits and no taxes. Sometime this tactic is a great choice and should be added to the contract when it can be optimized.
As you can see, the negotiation tactics in commercial real estate are there to protect your interests and maximize results. Be creative with these negotiations, and always be confident when walking into a deal. Be prepared, informed and persuasive. It is also necessary for you to keep your emotions at bay and your ego out of negotiations. You have to be prepared to walk away from any deal that cannot be made to fit your needs.
Always make an effort to sharpen your negotiating skills, and finely tune the tactics you use to increase your bargaining power. Having a few extra “tricks” up your sleeve will enable you to make a deal in your favor and get the results you want.