🤔 Retrading on Commercial Properties! 🤔
Gooood mornin’ BP!
I have heard on several podcasts about the concept of “retrading” (the term for going back to the seller after you are under contract and asking for credits, concessions, etc.) and how it could potentially be detrimental to that deal as well as potential deals with that seller in the future.
I have not personally done a commercial multifamily transaction YET, but I am curious of your guys thoughts around this.
As most of us are familiar with, retrading in the residential multifamily space (2-4 units) is extremely common and happens on most deals.
The difference that I have heard from multiple folks, is that when you are buying bigger commercial properties, you want to make that transaction go as easy for the seller as possible, because you may do more business with that individual in the future. If that seller knows, likes, & trusts you and you are able to provide the most seamless purchase as possible, in a perfect world, who will be the person who is top of mind when they are ready to 1031 or cash out and liquidate more buildings?
I have heard on a few podcasts that asking to retrade should be the absolute last option, even after potentially leaving a deal altogether first to preserve the relationship and just tell the seller that it wasn’t the one for your team.
Thinking bigger picture, if there is something negatively impactful with the property and it costs 10k to fix, it may be much more lucrative to eat that 10k on one purchase upfront instead of asking for a credit, to then make it on the backend, and potentially with more deals from that seller in the future because you were a buyer who made that particular transaction as easy as possible…
Really cool concept, especially coming from the residential multifamily world where everyone does this pretty much all the time and it is very common…
I would love to hear your guys thoughts!
Have a kickass Tuesday! 😁
-Kyle
•
•
•
•
•
#househack #massachusettsrealestate #realestateinvestor
#Gardner #leominster #worcester #massrealestate #multifamily #realestateinvesting #Candorealty #realestateagent #realtor #investor #assets #cashflow #Lowell #Boston #Duplex #Triplex #Quadplex #smallcommercialmultifamily #commercialmultifamily
@Kyle Curtin. I try not to ever go back on anything in the deal, I would rather have my client walk after an inspection then try to renegotiate. This is one of the biggest issues with agents that I encounter. If you do not have the expertise to evaluate a multifamily and know 95% of the issues that will come up at inspection and price for them, you should sell single family houses and worry about colors and wallpaper.
The best way to address these issues is to PRE NEGOTIATE them.
eg. If the appraisal comes in short the buyer will pay X over the appraisal, or both parties agree to the bank's appraisal as the purchase price.
Negotiating after you have the property under contract is typically sign that you have not done your due diligence as an agent. I had a listing earlier this year on a Flip that was great. The buyer's agent tried to renegotiate so we told the buyers they could have their money back. Turns out they were willing to take the house as is for the original price. Imagine that.
I sold an office building last year and the buyer "retraded" after their inspection when they discovered that 6 of the 8 AC units were about 20 years old and were near the end of their life.
They estimated the need to eventually replace the units to cost in the $50k+ range and asked for a $50k reduction on the purchase price. We ended up meeting in the middle and I gave them $25k.
There is nothing wrong or offensive about this. If something major comes up during due diligence that was not expected or disclosed, then buyer and seller just need to have a conversation (through the brokers of course).
@Scott E.. I guess my curiosity is how the buyers' agent and the buyers didn't know the age of major components. This should be addressed prior to making an offer. Roof, Windows, HVAC, Electrical, Plumbing. These are as important as the rent roll, and the expenses. But on the flip side, Sellers and their agents often do the same. Take a higher offer from someone who they think will Retrade after inspection instead of the offer from an educated buyer. They hope they end up with a higher price from uneducated buyers. The goal of these transactions is for the agents to level the playing field on both sides so there is a mutual gain from trade.
Quote from @Brian J Allen:
@Scott E.. I guess my curiosity is how the buyers' agent and the buyers didn't know the age of major components. This should be addressed prior to making an offer. Roof, Windows, HVAC, Electrical, Plumbing. These are as important as the rent roll, and the expenses. But on the flip side, Sellers and their agents often do the same. Take a higher offer from someone who they think will Retrade after inspection instead of the offer from an educated buyer. They hope they end up with a higher price from uneducated buyers. The goal of these transactions is for the agents to level the playing field on both sides so there is a mutual gain from trade.
I respectfully disagree. The due diligence period is literally intended for what you are describing. That 30 day window is meant to request rent rolls, review expenses, review personal guarantees, do a property inspection, interview the tenants, talk with the HOA if applicable, etc etc.
#5 Multi-Family and Apartment Investing Contributor
- Investor
- Shelton, WA
- 6,770
- Votes |
- 6,512
- Posts
#5 Multi-Family and Apartment Investing Contributor
- Investor
- Shelton, WA
As a buyer I make an offer contingent upon inspection of financials and property, if accepted, we then move into the due diligence period, any discrepancies are dealt with prior to going under contract. I would not expect any negotiating or concessions after going under contract. Does this fit with the process y'all are describing here?
@Kyle Curtin The seller is not the one you are worried about, it's the broker. Brokers like @Brian J Allen will "black list" you if you re-traded on a deal they represented the seller.
Now here is the reality of things:
1) In a HOT market, Brian is right, sellers and seller brokers have SO many options that a buyer that's trying to re-trade is not worth their time in the future. This is also the same reason why "hard money day one" offers came about.
2) That said, as the market cools, all of these brokers will have to change their attitude or they will lose potential buyers for their listing.
3) Personally, I believe that Re-trade should ONLY be limited to things you could not see during your initial tour/visit. Don't come and try to re-trade because the building needs new paint, you should have seen that and account for that before making an offer. If the ACs are on the ground, same. But if you found serious plumbing issues under the building during Due Diligence, then that's a legit reason to re-trade. Common sense is very important at this point. If you're buying a $20M property, don't waste everyone's time over a $20K issue you might have found. Stick to material items otherwise you will back on the black list and this time for a good reason!
4) Another reason why we started seeing a lot more re-trading going on recently is interest rates. The Fed has been moving the target so fast that if you got under contract in October 25th trying to close before year end, you will see 2 rate hikes before you get to rate-lock (yes, I'm including the one that will happen next week). This caused many buyers get to a point where they had to re-trade or walk away from the deal. The sellers had to "eat" those re-trades in most cases because walking away meant the next guy still has to live with the new interest rate in the market.
Quote from @Brian J Allen:Brian! Top of the mornin’ sir! Thank you so much for the comment man! I love that concept of beating the issues to the punch and already knowing the vast majority of what’s going on before and the pre negotiation in the contract to be a buffer for the few unknowns that may/may not come up. Absolutely awesome!
@Kyle Curtin. I try not to ever go back on anything in the deal, I would rather have my client walk after an inspection then try to renegotiate. This is one of the biggest issues with agents that I encounter. If you do not have the expertise to evaluate a multifamily and know 95% of the issues that will come up at inspection and price for them, you should sell single family houses and worry about colors and wallpaper.
The best way to address these issues is to PRE NEGOTIATE them.
eg. If the appraisal comes in short the buyer will pay X over the appraisal, or both parties agree to the bank's appraisal as the purchase price.
Negotiating after you have the property under contract is typically sign that you have not done your due diligence as an agent. I had a listing earlier this year on a Flip that was great. The buyer's agent tried to renegotiate so we told the buyers they could have their money back. Turns out they were willing to take the house as is for the original price. Imagine that.
Quote from @Scott E.:
I sold an office building last year and the buyer "retraded" after their inspection when they discovered that 6 of the 8 AC units were about 20 years old and were near the end of their life.
They estimated the need to eventually replace the units to cost in the $50k+ range and asked for a $50k reduction on the purchase price. We ended up meeting in the middle and I gave them $25k.
There is nothing wrong or offensive about this. If something major comes up during due diligence that was not expected or disclosed, then buyer and seller just need to have a conversation (through the brokers of course).
Hi Scott! Thank you for that! I definitely see the balance there, that makes a ton of sense!
Quote from @Bjorn Ahlblad:
As a buyer I make an offer contingent upon inspection of financials and property, if accepted, we then move into the due diligence period, any discrepancies are dealt with prior to going under contract. I would not expect any negotiating or concessions after going under contract. Does this fit with the process y'all are describing here?
Hi Bjorn! That makes a lot of sense for all parties! Thank you!
Re-trading is not too different than what investors do with 1-4 units after an inspection (you sign an offer stating AS-IS, so any negotiations is usually about the mechanicals, not paint or anything you could see during your inspection).
The bigger issue I believe in the larger MF arena is that during the last 24-ish months, some sellers (and Brokers) were very light on information within the OM, T12, RRs and their proforma projections.
So the newer syndicators (because let's be real, if you purchased a larger MF property on your own, you were seasoned and experienced) sometimes got themselves in pickles and tried re-trading on issues that are not usually allocated for this part of the negotiation process. So they probably pissed off Brokers and got blackballed as noted above. As always, just my opinion.
Retrading is typically looked down upon by brokers because it can be a time-consuming and complex process that may not always result in a successful outcome. In addition, retrading can create uncertainty and delay the closing of a deal, which can be frustrating for both buyers and sellers. Furthermore, retrading can damage the reputation of the parties involved and may make it more difficult for them to do business in the future. For these reasons, brokers may discourage their clients from engaging in retrading and may instead suggest alternative solutions for resolving any issues that arise during the course of a commercial real estate transaction.
I think the key is to know what your asking for upfront as far as documents and questions when performing your due dilligence. The less back and forth for the seller and the listing broker the smoother the transaction. It's perfectly normal to ask for concessions if you find something obvious. The seller and broker will have more respect for you if you have the experience, Excitement about the deal, and your financing in order.
#5 All Forums Contributor
- Lender
- The Woodlands, TX
If costs/issues are discovered during the due diligence period that were either not disclosed upfront and have a negative impact on the property value/cash flow then a renegotiation of the purchase price or request for seller to “fix the issue” is appropriate. As a buyer, if the market is so hot that I’m going to be “blacklisted” for exercising my due diligence right then I’m probably purchasing near the high point of prices in the current cycle and stepping away from buying at this point wouldn’t be a bad thing. All those brokers not wanting to deal with me when real estate is hot will be contacting me with deals when we’re in the other side of the property cycle.
When I think of the term "retracing" I'm inclined to think that this actually refers to buyers who never intent to pay the initial agreed upon price even if their due diligence uncovers nothing that detracts from property value or profitability. But with commercial property we're looking at so much more than residential SFR investors. For example details contained in leases, and not disclosed upfront can have a seriously negative impact on property value. I remember looking at one property that had a lease in effect where the tenant was a solar farm. The property flyer and contact with the broker confirmed that the lease to a National operator had 10 years remaining. Upon examination of the lease I discovered that, buried on page 57 was a paragraph that provided the tenant with the ability to terminate the lease after 2 years under very loosely defined conditions having to do with pricing of solar energy. Further, the solar panels and equipment, as well as all structures built by the tenant were to be considered fixtures and not real property, allowing the tenant the option of removing them. Needless to say the risk/return valuation changed drastically with this new information. The seller had a contingency offer at the ready, obviously in case I actually read the whole lease and recognized the increased risk, which would result in a smaller investment for me and him remaining as a partner. However, due to the inherent dishonesty of the seller I would not trust him as a partner, and so although I very much liked the deal I exercised my termination option.
