Negotiating 101: The Importance of Agreeing on Methodology BEFORE Making an Offer

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In this 3-part series, I want to share with you three top secret but highly effective tips for getting your apartment building offers accepted. Before we jump into the first tip, let’s first talk about why …

Making and Negotiating Apartment building Offers is all about the Numbers

Yes, you can use clever phrases and find the “3rd level of the seller’s pain” to push the right buttons, but at the end of the day, numbers are what drive the deal.

One reasons that numbers are so important is that they help us to answer the question, “what is the most I can pay?” Without this knowledge, how do we know when to walk away? This is absolutely critical.

Related: Real Estate Numbers Can’t Lie, They Don’t Know How!

Another reason the numbers are important is that it lets us be consistent and “reasonable” with our negotiating.

When someone tells me, “the building was appraised for $1.1M and that’s what I want for it!” you can share with the seller your analysis and how you arrived at your offer price. I’ve found that this results in agreement more often than not.

Most buyers, sellers, and commercial real estate brokers agree with this approach and conduct themselves accordingly. While there tend to be more emotion involved with smaller deals, the larger the deals become, the more “professional” and “rational” everything becomes as they negotiate around the numbers.

Because numbers are so important, here’s the first tip.

Agreeing on Methodology Before Talking Numbers

Before talking price, get agreement on how you will arrive at the price. You could say something like, “Buildings like yours are selling at a cap rate of 8% based on actual financials. And you would agree that buying a building on actual financials is reasonable, or would you disagree?”

Related: Getting to the Lowest Purchase Price Possible: The Skinny on Real Estate Negotiation

Many sellers will actually want to disagree with you because they want an offer price based on a Pro Forma, not on actual financials. If that’s the case, and you want to make offers based on actual financials, then don’t waste your time making an offer!

Because now you know, even if you complete the analysis based on actual financials, the seller would likely not accept your offer because he has unrealistic expectations.

On the other hand, if your seller agrees to your methodology, you can use it later on during your discussion about price. “I know you said you wanted $1.1M but we also agreed earlier that the value is around an 8 cap of actual financials.

It looks like from the financials you provided that the Net Operating Income is actually a bit lower than we thought. Based on that and the 8% cap rate we talked about, the building is really worth only $900K. And this doesn’t include the deferred maintenance we discussed during the walk through. But maybe I’m missing something. Maybe you can walk me through how you’re arriving at your asking price?”

If the seller agrees on the methodology, he is more likely to agree on an offer price and terms. He’ll obviously still want to negotiate, but you’ll at least be in the ball park.

This also helps you later on during due diligence. Let’s say you discover that 20% of the tenants are not paying the rent. This information obviously changes the deal.

You can now go back to the seller and say, “your Net Operating Income is now $10,000 lower per year than we thought at first. Based on the 8% cap rate we’ve been using, this reduces the offer price by $125,000.” The seller may not like this but he can’t argue with your reasoning!

Conclusion

Therefore, before you blurt out an offer price, get agreement with the seller or broker how you will be arriving at an offer price. The more you can explain HOW you arrived at a number, the more effective you will be in getting offers accepted.

Have you ever ruined negotiations by blurting out a price before getting an agreement from a seller?

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About Author

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook "The Secret to Raising Money to Buy Your First Apartment Building".

1 Comment

  1. Excellent post! Probably one of the best deal negotation posts I’ve seen on the forums..this just doesn’t hold true to apartment negotiations, you can use this for duplexes, commercial and etc.

    I think the reason why no one has posted here is because your title is too narrow.

    Either way, excellent post!

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