“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
– Sun Tzu, The Art of War
Ok, so maybe the analogy of war is a bit extreme when you are comparing it to real estate, but I think you get the picture. In all transactions, there are contrasting sides. There is always a buyer and a seller. One wants to get as much as possible and one wants to pay as little as possible. To add to the equation, there is also a broker and other potential buyers. These additional layers make it very difficult to navigate a multifamily negotiation at times. We must know when to increase the price and when to stand firm.
For instance, do we increase the price right away and get out in front of the pack, or do we hold on to the “ace in the hole” until the last minute? There are many strategies for acquiring multifamily properties at the negotiating table. The most important one is knowing who you are dealing with. Knowing the broker is the first step to winning a negotiation. There are certain factors that go into “knowing” the broker. First, how many deals have we worked on with this broker? Have we spent time with them on a personal level talking about family or playing golf? Are they accessible? Are they friendly? Do they reach out to us on deals, or are we constantly chasing them?
This is very important when it comes down to the end of the process and getting good feedback from the broker through the process. If the broker takes us seriously and we have a good relationship with them, then they will be more likely to push us to the seller as a legitimate group. They will also give us as much guidance as they are at liberty to give to help us be as competitive as possible. This includes them telling us about the seller and what they are looking for the most—terms, price, surety to close, the timing of the close, etc.
Understanding what type of process the broker runs is very important to our success. The broker is our ally in this process. That being said, they are also selling us something, and they are incentivized for selling it to us for the highest possible price. Those are the facts. No matter how frustrated we may become with the broker during a deal process, we must always remain professional and know that this is not the last deal we will do with this broker. As Winston Churchill said, “There is at least one thing worse than fighting with allies, and that is to fight without them.”
The second part of knowing who we are dealing with in a transaction is knowing the seller. We must understand who we are dealing with on the seller side. Who are they? What are their interests?
What is most important to them? What is their background in the space? These questions are all very important. Is the seller a family who built the property themselves and is more particular about who buys the property to pass on the legacy? Or maybe they are someone who jumped into multifamily because they realized it was a brilliant investment, but they did not understand what it would take to run a property. Or they may be a multibillion-dollar real estate corporation like Blackstone or CBRE. Each one will have its nuances, which are important to understand.
As mentioned, the broker can help paint that picture for us. Price is obviously the most important piece of the negotiation, but it is not the only piece. If the seller has never transacted us before, then they may be concerned about the surety to close. They may, in fact, take a lower price from another group they are more familiar with. Non-refundable hard earnest money day one is a great way to build confidence in the seller about our group.
The seller may be a DST (Deferred Sales Trust) group and so the closing time frame may have great importance. The seller may not want a long drawn-out listing process and may take a preemptive deal. They may only need to hit a certain price and as soon as they do, they can repurpose the equity into another deal. The list can go on and on for why a seller is selling and what they are most concerned about getting out of the transaction. It is important to know that ahead of time, if possible.
The same thing holds true for the relationship with the seller as it did with the broker. No matter how frustrated we become with the seller, we must always try our best to remain cordial and professional, especially when it comes to large institutional sellers. They have more properties, and they will eventually sell them. If we can come out of a transaction with a great reputation, they are more likely to sell us future deals.
No matter the transaction or who we are transacting with, we must know ourselves with our strengths and weaknesses and we must know our counterparts with their strengths and weaknesses.
Here are some parting quotes about negotiating:
“The most difficult thing in any negotiation, almost, is making sure that you strip it of the emotion and deal with the facts.” ~ American diplomat Howard Baker.
“A negotiator should observe everything. You must be part Sherlock Holmes, part Sigmund Freud.” ~ American entrepreneur Victor Kiam.
“You have to persuade yourself that you absolutely don’t care what happens. If you don’t care, you’ve won. I absolutely promise you, in every serious negotiation, the man or woman who doesn’t care is going to win.” ~ English publisher and philanthropist Felix Dennis.
“Let us never negotiate out of fear. But let us never fear to negotiate.” ~ President John F. Kennedy.