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If you’re looking to close or have closed on a multifamily property, you likely understand how hectic purchase negotiations can be. Negotiating a multifamily real estate deal requires a combination of preparation, strategy, and effective communication. At JP Acquisitions, we’ve won and lost deals but with each negotiation, we’ve sharpened our skills which has allowed us to be more effective. That being said, the purpose of this post is to provide you with some of the insights we’ve learned while negotiating multifamily deals. Whether you’re a passive and/or active investor, these tips provide useful context and strategies for negotiating multifamily deals.
Before we dive into this post, I want to state that successful negotiation is often about finding common ground and creating a deal that satisfies every party. Flexibility, preparation, and effective communication are key components of any successful negotiation strategy. You should make it a habit to understand the wants and needs of the other parties involved in any given negotiation to create a win-win situation for all the parties involved.
The Tips
1. Identify the Seller’s Motivation
When negotiating deals, you should seek to understand the motivations and priorities of the seller. Knowing their goals and constraints can help structure an offer that benefits you and the seller. Our team at JP always makes it a habit to ask the broker on a deal why the seller wants to part ways with their property. The reason for asking the questions is that knowing the seller’s motivation helps us understand which party is in a position of power. When working with mom/pop multifamily owners, the two motivations we’ve experienced that most clearly put you (the buyer) in a position of power are old age and divorce. Going through a divorce is rough to say the least and no one should wish that upon any couple. Getting old on the other hand is natural and simply cannot be controlled. Nevertheless, those two motivations are signs that the seller is likely to accept a lower price and be more loose with the terms of the contract. If the seller is simply looking to sell his property to look for another investment, they may be more likely to wait for the price they’re looking for.
When negotiating with sellers that are professional firms (syndicators/investment groups and other financial firms), the size of the transaction is typically larger and you’re up against what is usually a smart and conscious seller. Professional sellers are more likely to hold out until they get what they’re looking for because they often have key metrics/goals they’re trying to hit that they’ve strategically thought about. When dealing with professionals, a common motivation that puts you in a position of power is dependent on the lending environment. This shouldn’t come as much of a surprise depending on how up-to-date you are with what’s been going on in the commercial real estate market and rising interest rates. It hasn’t been uncommon for borrowers with floating rate debt to default or be close to default and as a result, looking to dispose of their properties at below-market prices. However, I’ll reiterate here that if there is no necessary reason to sell, be prepared for a long negotiation.
2. Understand the Property’s Value & Trust Your Numbers:
When negotiating a deal, you should seek to have all the facts regarding the condition and location of the property. When our team receives the offering package for a deal, we’ll underwrite it but understand that the potential value of the deal is truly only discovered after obtaining all of the relevant facts. Stated differently, the financials of any given deal can only tell you so much and as the saying goes, the devil is in the details. Touring the property reveals and helps sharpen key underwriting assumptions such as the capex budget, curb appeal, neighborhood look/feel, and more. The more information you can garner from the tour, the questions you’ve asked the broker, and third parties (general contractors, mentors, etc.) you’ve potentially discussed the deal with, the better position you’ll be able to analyze the value of the property. Experience is truly your best friend in real estate as it will help you see how to improve the operations of any given property.
Taking this one step further, once you’ve gathered all of the facts regarding the property in question, you’ll want to confirm you’re underwriting is reasonable and obtainable. If you’ve verified your underwriting and the numbers tell you it’s a good deal, it’s critical to decide the highest price you’re willing to pay for the asset. Once you have the maximum price, you can start the negotiation at your initial offering price which you should set below your max price, and expect that the seller will counter above your offer. I want to echo that business and negotiating is a numbers game with little room for emotion. The goal is to make money, not to be nice and fall into the wants of the seller.
3. Be prepared to walk away:
This third point flows perfectly from the last as we just spoke about knowing your walk-away point. If it so happens that the terms of the negotiation are not aligned with your investment criteria, be prepared to walk away from the deal. Make sure the seller knows you will, too. I understand it’s hard to walk away especially if you’ve convinced yourself the deal was yours, our team recently experienced just that. It’s far too easy to get emotionally attached, but you must remain loyal to the numbers. At the end of the day, there is more to gain from not doing a bad deal than there is from doing a bad one. Let this mindset strengthen your negotiating position as opposed to being overly attached to a deal.
Conclusion
To reiterate, the three tips for negotiating a contract are knowing the seller’s motivation, understanding the underlying value of the property by trusting your numbers, and being prepared to walk away. These three tips have proved to work for our team and other investors we’ve spoken with. The final thing I’ll remind you is that getting good at negotiating takes time and with time comes experience. Being patient and focused can yield great results in the long term and real estate is after all a long-term game.
If you have any questions regarding the terms and concepts in this post or previous ones, please reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain further. If you’re interested in investing with us at JP Acquisitions, you can contact us via our contact form, by emailing a member of our team, on LinkedIn, or our investor portal to set up a meeting.
As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!
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About the Author
Tedi Nati is the Managing Partner of JP Acquisitions. In his role he is responsible for broker outreach, establishing deal flow, underwriting, marketing, investor relations, and assisting in the closing process. In addition to his role at JP Acquisitions, he is an Assistant Equity Underwriter at Cinnaire, a non-profit Community Development Financial Institution (CFDI). In his role at Cinnaire, he is responsible for assisting the underwriting team in evaluating and structuring real estate equity investments and assessing the risks and mitigants associated with such. Tedi earned his Bachelor of Science in Finance from DePaul University, where he graduated Summa Cum Laude. In his free time he enjoys reading, looking for multifamily deals, and working out.
Make sure to always do your own research before making any final decisions on buying/investing real estate, stocks, or other securities. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.
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