The 5-Step Negotiation Framework for Buying Apartments

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0:00 You know what's worse than never buying
0:01 a property? Losing money in the
0:04 negotiation. I see hundreds of
0:05 thousands, sometimes millions of dollars
0:08 lost in the negotiation phase. And it's
0:10 actually simpler than a lot of people
0:12 think. After 30 some odd deals and
0:14 hundreds and hundreds of multif family
0:16 units, I have some perspective on
0:18 exactly how to win your negotiations and
0:21 more importantly what you should avoid
0:23 when negotiating. Now, a lot of these
0:26 I've personally been hammered on, so
0:27 I've made a lot of the mistakes for you.
0:29 I've also done a few things right that
0:30 I'm going to share here, but I'm going
0:31 to break this into five tangible steps
0:34 and two things that you need to avoid.
0:36 So, let's head over to the whiteboard
0:37 and check it out.
0:42 [music]
0:54 When you are entering negotiation, there
0:55 are five steps that you need to follow.
0:56 If you follow these simple steps, you're
0:58 going to get a lot more deals accepted
1:00 at the terms you want. Now, if you do
1:01 this correctly, this can actually make
1:03 you hundreds of thousands, if not
1:04 millions of dollars when you win the
1:06 negotiation phase. First and foremost,
1:08 we want to make sure that we map the
1:09 deal first. Don't just write an offer
1:12 before you've identified what the seller
1:14 actually wants and what you actually
1:15 need. This is easy to do in a ven
1:17 diagram. So, you're going to go ahead
1:19 and put together a list of what you need
1:24 and what the seller needs.
1:28 Where those two intersect, this area
1:31 here, that is the sweet spot. That is
1:33 where you have the deal. That is what
1:35 you negotiate. Rule number two, they
1:37 give the price. When you are buying a
1:40 property and they are willing to sell
1:42 it, you need to figure out what they
1:43 want. This ties right into number one.
1:45 You need to make sure that they drop
1:48 price first. If you anchor in correctly,
1:51 they're going to just accept it. It's
1:52 too often I see people be like, "Hey,
1:53 I'll offer a million and a half for
1:54 this." Sellers like, "Yep, that works."
1:56 The only thing you know when they accept
1:58 with no push back is that you could have
2:00 offered less. They might have accepted a
2:03 million, too. You just lost $300,000
2:05 immediately.
2:07 Always, always, always, always, always
2:10 let the other party anchor with price.
2:12 If they are playing the same game as you
2:14 and it's going back and forth, just
2:15 don't drop a price. You need to know
2:18 what it is that they want to get through
2:20 step one anyway. So, make sure that they
2:23 anchor the price. Now, it is in your
2:25 control to counter it or accept it. In
2:28 most cases, you're going to counter by a
2:29 little bit because we're going to assume
2:30 the number that they give you is a
2:32 little bit higher than what they would
2:33 accept. Easy enough. Number three, ask
2:37 for exactly
2:41 what you want.
2:44 The worst they can say is no. If you
2:46 underwrite the deal and you find it's
2:48 worth unbelievably less than what they
2:50 want, it's okay. Let them know this is
2:52 where I am at. If you need specific
2:55 terms or creative finance, you're going
2:56 into the seller financed, give them the
2:58 exact seller finance terms that you need
3:00 to make the deal work. It is okay if
3:02 they counter and you can either
3:04 negotiate back and forth with them or
3:06 you can say no, this is exactly what I
3:07 need. But either way, you need to come
3:09 in with a strong ask for exactly what it
3:13 is that you want. Do not take into
3:15 account the price that they wanted.
3:17 Don't take into account the terms that
3:19 they wanted. Your ask is what you want
3:22 and what makes the deal work for you.
3:24 Especially if you're raising capital,
3:25 this is how you open up enough room to
3:27 give a return to your investors. Know
3:29 what you want and ask for it.
3:31 Four, agree in writing. Once you finally
3:33 get this done as soon as possible, you
3:35 want to get everyone to sign on the
3:37 agreement before anyone has time to
3:39 change their mind or to stew on it.
3:41 Give, you know, and give it a day or so.
3:43 But you need to have this in writing.
3:45 This could be done in either a letter of
3:46 intent where both parties sign. Hey,
3:48 this is what we agreed on and we like
3:49 it. We're going to go ahead and draft
3:50 the PSA, but let's get some
3:52 documentation in place. Or if the deal's
3:54 100% ready to go, just write the
3:56 purchase and sale agreement. skip the
3:58 letter of intent if it's a simple
4:00 contract. The LOI is going to be
4:01 preferred if there's some complicated
4:03 steps or unique clauses you're adding.
4:05 It's nice to make sure everyone agrees
4:07 on those in writing prior to drafting
4:09 the PSA so that we have a template to go
4:11 off of. And five, prove your assumptions
4:15 and only renegotiate as necessary. Once
4:17 we get everything that we wanted, we go
4:19 into contract. Now, I just had this
4:21 happen with an office deal. We went
4:22 under contract for 4.1. They had listed
4:24 for 4.95. So, on paper, we took $8.5
4:28 $850,000
4:30 off of the deal. Great deal, right?
4:33 Well, no. What we find out is that their
4:36 expenses were $80,000 higher per year
4:40 than they were actually listed for. And
4:42 we had done a ton of verification of,
4:43 hey, are these accurate expenses? Are
4:45 there going to be any surprises? They're
4:46 like, nope, this is exactly what we
4:48 spend. I get three years of P&Ls. They
4:51 have not spent anywhere close to the
4:54 tiny amount that they sent us for the
4:56 expenses. It's actually like way way way
4:58 higher. They said it was $143,000.
5:01 They're spending about $225,000
5:04 on operating. And that is your baseline
5:06 like taxes, insurance, HOA fees,
5:10 utilities. Like the baseline baseline
5:12 expense load is unbelievably higher.
5:15 That is a material
5:18 need to renegotiate.
5:21 Now, we're going to head back to the
5:22 main studio and I'm going to share some
5:24 of the tools that I use to renegotiate.
5:26 I'm actually going to share something
5:27 that I use that I would never use in a
5:29 negotiation, which is multiple options.
5:32 But I'm going to share how you use that
5:34 to reframe a deal when it gets off
5:36 track. But stick with this if it's not
5:39 material. Like I've had deals when I was
5:41 buying duplexes when I started my
5:43 career. The contract said they come with
5:44 washers and dryers. 3 days before close,
5:47 we do a walk through of the building.
5:48 there's no washers and dryers. The
5:50 sellers go, "Oh, yeah, no, the tenants
5:52 owned those." It's like, "Well, you
5:53 probably shouldn't have signed in the
5:54 contract that this comes with washers
5:55 and dryers." That was a huge sticking
5:58 point for them where they're like,
5:58 "Well, you know what? I'm not replacing
6:00 them." You have to ask, "Is it material?
6:03 Are the washers and dryers what made
6:05 this a good deal?" No. Does it cost me a
6:07 few thousand? Yes. Am I right? Yes. Do I
6:10 need to renegotiate? No. with an office,
6:13 $80,000 a year. That's worth
6:17 well over a million dollar in a seven
6:19 cap market. That's a huge hit to your
6:22 net operating income. If I'm missing
6:24 $80,000 a year, we have to come back to
6:27 the table and adjust. So, renegotiate as
6:29 necessary. Again, the big five, map the
6:31 deal first. Make sure they give you the
6:34 price that they want before you offer a
6:36 price. Ask for exactly what you want
6:38 when you make your offer. Make sure that
6:40 it is all signed and in writing exactly
6:43 the way that you negotiated it. And only
6:46 renegotiate when it is material to the
6:49 deal and absolutely required to make
6:50 your deal work. Okay, that's our
6:52 structure here for doing the deals. You
6:54 want to go through those five steps. You
6:56 want to identify what they need and it's
6:58 so important that you actually ask for
7:00 what it is that you want. Which brings
7:02 me to mistake number one. And I see this
7:04 way too often. People do a multiple
7:08 option. They give up control of the sale
7:11 and they say, "Hey, I have a couple
7:12 options for you, seller. Uh, I can give
7:15 you this price
7:17 and this is going to be bank finance.
7:19 So, with conventional financing, you can
7:21 have a lower price and we'll go with
7:24 this financing package. Or if you want a
7:26 little higher price, I can offer you
7:28 this much with these creative terms."
7:31 Now, people think that this might get
7:33 them the creative finance terms they
7:34 want. But what you're doing is you're
7:36 giving them options, hoping that they
7:38 pick the one that you want. Just ask for
7:40 what you want. Here's the call that I
7:42 get every single time someone does this.
7:44 They give them an option one, two, and
7:46 three. Here's the three structures that
7:48 work for me. First of all, again, you're
7:50 giving up control of the sale. Never do
7:52 that. But second of all, they always
7:54 call me and say, "Oh, they chose the one
7:56 I was hoping they wouldn't choose." Why
7:58 would you give them an option that you
7:59 don't want them to choose? Ask for what
8:01 you want. If you want creative finance
8:03 and that is what you are targeting and
8:05 you believe it is possible in this deal,
8:07 send them the offer with just that. If
8:09 they say no, now you can counter with
8:12 the next thing. But don't give up the
8:14 control of the sale and don't ask for
8:16 something that you're hoping they don't
8:17 select. If you write down three options,
8:20 my question to you every single time is
8:21 going to be the same. Which one do you
8:23 hope they choose? Send them that one.
8:27 The worst they could say is no. And now
8:28 you can go to your other options. But
8:29 only put in front of them things that
8:31 you want them to accept. Don't give them
8:33 options. Tell them what it is that you
8:36 want. That is the most critical part of
8:37 every negotiation. I see people botch
8:39 all the time. Second big mistake that's
8:41 going to cost you a lot of money. This
8:42 is an actual direct story that's
8:44 happened to me. Robin Hood Village
8:46 Resort. We're in their uh office talking
8:49 about, "Okay, here's the price that
8:51 we're good with. We've negotiated seller
8:53 finance terms. We're doing an interest
8:55 rate of 4%. It's an 8-year note." They
8:58 go, "Okay, well, how much do you have to
8:59 put down? We screwed this up. We gave
9:02 them a piece that we shouldn't have
9:03 given them yet." We said, 'Well,
9:06 we are looking at putting a million
9:08 dollars down on another deal. So, we're
9:10 in the middle of a capital raise for
9:12 this. That was true. However, magically,
9:15 the next day, the seller got back to us
9:17 and guess what number they wanted us to
9:18 put down on this? A million dollars. We
9:21 slipped up and gave them a piece that we
9:23 didn't want. Now, what I really wanted
9:24 to do on this resort is I wanted to go
9:26 10% down. We're buying for $4.5 million.
9:29 I wanted to put down $450,000.
9:32 When they asked, we immediately answered
9:34 honestly, well, there's this other deal
9:36 that we're looking at. And so, they were
9:38 really asking, "How much money can you
9:39 get your hands on?" No surprise to
9:42 anyone, that's exactly what they asked
9:44 for. And that ended up being what we did
9:46 on that deal. It was a difficult raise.
9:48 It was an expensive raise. And in the
9:51 future, I had to buy partners out. It
9:53 was unbelievably more expensive because
9:54 everyone had unbelievably more money in
9:56 the deal than we really wanted to put
9:58 in. We suggested something unrelated to
10:01 the deal that gave them a critical
10:02 piece. Just tell them what they need to
10:05 know. I'm not saying be secretive or
10:08 manipulative, but I'm just saying if
10:09 you're negotiating, make sure that they
10:11 drop the price. Let them anchor what
10:13 they're looking for. You can counter off
10:15 that or accept it. Sometimes they even
10:17 suggest a price that's lower than what
10:18 you're looking for. There was a deal I
10:20 wanted to buy for a million dollar. I
10:23 let them give me the price. They're
10:24 like, "Well, we're hoping for $900,000."
10:26 I'm like, "Boy, you know, that's going
10:27 to be tough, but we're going to make it
10:29 happen." Got a $100,000 off, made
10:32 $100,000
10:33 instantly by letting them go first. In
10:36 the same way, don't volunteer
10:38 information that they don't need. It
10:39 almost always works against you. Have a
10:42 great conversation. Be open, honest,
10:44 just not too open. If you can avoid
10:46 those two things, dropping price or
10:48 anchoring the wrong down payment, or
10:50 even worse, just giving them options you
10:52 don't want them to accept, you're going
10:54 to do so much better in this negotiation
10:55 game. Just ask for what you need, make
10:57 sure that it matches somewhat what
10:58 they're looking to get, and move through
11:01 the order of operations. I'm going to
11:03 give you guys one piece of bonus content
11:05 here. There is actually a time to use
11:07 the multiple options for negotiation.
11:09 So, we're going to get a little bit more
11:10 advanced here. After you are under
11:12 contract for a deal, when you're doing
11:14 your due diligence, if you find there's
11:17 a material issue with the deal, you can
11:19 give them a one, two, three step as long
11:22 as you're using it to direct them to the
11:25 answer that you want. So, this is not a
11:27 101 level. This is if you have some
11:29 experience negotiating. I just did this
11:31 with an office.
11:33 We found $80,000 of expenses more than
11:35 the property was listed for. Now, in a
11:38 sevencount market, that's over a million
11:40 dollar less value than we were
11:41 originally told that it was worth.
11:43 That's a huge material change. So, the
11:47 deal still works $400,000 off the price.
11:50 It actually works quite well and cash
11:51 flows quite well. So, I told them, "Hey,
11:54 there's over a million less value in
11:56 this. However, if you reduce the price
11:57 by $400,000, I'm willing to play ball."
12:00 Asked for exactly what I wanted. They
12:02 countered with, "No, we're willing to
12:03 meet you in the middle at 395." Well, it
12:05 doesn't work at 395. We're under
12:07 contract for 4.1. We found it's worth a
12:09 million less today than we thought it
12:11 was. Uh, we're going to need to get 100%
12:13 of what we're asking for. I gave them
12:16 options knowing they're not going to
12:18 accept two of them. Option A, we can
12:20 just resend. Like, I can't do this. So,
12:22 we can not waste anyone's time and we
12:24 can go ahead and terminate the contract
12:25 now. A B, you guys can accept 3.7 and
12:30 I'm your buyer and we're going to close
12:31 this. That's the one I want them to
12:32 accept. See, we haven't discussed
12:35 creative finance, but if you wanted to
12:36 hold a contract, it would have to be
12:38 long-term, at least 5 years, and lower
12:41 than market interest. We haven't
12:42 discussed this, but if you're open to
12:44 it, we can open that conversation. Now,
12:47 if they actually said yes to that, I can
12:49 absolutely work that equation. And the
12:50 upside on the deal is there. If I got 4%
12:52 interest, fantastic. I don't think
12:54 they're going to accept that, though.
12:55 And if they did, I'm 100% okay with it.
12:59 This is a best and final. they've
13:01 already rejected my offer. I'm giving
13:04 them multiple offers to reframe the
13:07 exact same offer. So, I don't want to
13:09 say the multiple offers is completely
13:10 useless, but never use that on the front
13:12 end of your negotiation. And only use it
13:14 in a renegotiation after you've already
13:17 asked for exactly what you're looking
13:19 for with no options attached. Hope this
13:21 was helpful. Uh, this can save you, as
13:23 it did with, uh, me and the Robin Hood.
13:25 This could save you a million dollars or
13:27 more. Apply these correctly. Get under
13:29 contract for your deals. And I'll see
13:30 you on the next episode.