The Capital Stack
Nearly every real estate transaction involves some type of negotiation, typically occurring between the group purchasing a property and the group selling it. In most cases, before a Purchase Agreement (PA) is finalized, the buyer and the seller need to reach an agreement on price, terms, inspection items, closing costs, property disclosures, contingencies, earnest money, and possession date. We have negotiated successful agreements on the buy and sell side, let’s discuss the negotiation process and share a few tricks we’ve picked up along the way.
Negotiating To Sell a Property
When we have a property listed on the market for sale, we always ensure the price is public for buyers to see. Some commercial real estate sellers prefer to leave listings unpriced and ‘let the price be determined by the market.’ In this case, the listing agent will have a “whisper price” to give potential buyers an idea of what the owner is expecting. I like to avoid this song and dance by making the asking price known. I know the price I want to sell for and have found that making this common knowledge helps improve the quality of offers. In my opinion, unpriced listings generally do not garner as much attention. Priced listings will reach a larger group of buyers, as people often set their auto-emails for a certain price range.
By publicly disclosing the asking price, we can control the pricing narrative. Buyers may say “We think it’s a 7-cap market”. However, when we have a list price, we gain the opportunity to show it’s justified for one reason or another. Additionally, when buyers enter their underwriting process aware of our asking price, they may adjust their numbers to meet that figure, rather than strictly anchoring to their initial underwriting standards. This approach allows us to potentially influence a buyer’s perceptions and hopefully achieve a higher sale price.
Pick Your Battles
Last year, we successfully sold three properties, each achieving record pricing on a per-unit basis within their respective submarkets. While we received many offers below our desired price point, we worked with buyers who submitted the strongest offers to ensure successful closings.
We’ve found the saying “pick your battles” to be incredibly relevant in negotiations. When buyers ask for small adjustments like a lower Earnest Money Deposit (EMD) or a slightly longer Due Diligence (DD) period, we often oblige. In the big picture, the EMD’s exact percentage holds little weight whether it’s 1% or 10%, it’s typically fully refundable anyway, so the amount is meaningless until it becomes nonrefundable. As for the DD period, we usually suggest a timeframe that we find reasonable. We typically don’t have issues with DD periods of 30-45 days, but anything longer, such as 60 days, can raise red flags, signaling a potential intention to retain an exit strategy throughout the contract period.
Negotiating To Purchase a Property
When negotiating with sellers we want to find their motivation. Negotiation timelines can vary greatly, spanning from several months to just a few hours. We always try to identify the minor concessions, accommodating those terms, and then focusing our pushback on the larger issues at hand.
For instance, if we propose a 45-day due diligence period and they counter with 30, we’re typically willing to make that adjustment. What can be accomplished within 45 days can typically be achieved within 30, the longer timeframe simply provides an additional buffer. If we can swap a shorter due diligence period for a reduced price or other advantageous terms, we’re prepared to make that exchange.
A key to negotiation is getting creative. When there’s a motivated buyer and a willing seller, there’s often a deal to be made. Creative financing solutions often serve as the bridge between the seller’s and buyer’s requirements.
For instance, let’s imagine we offer $4 million for a property the seller values at $5 million. Initially, it seems like a significant gap. Our typical approach involves proposing, ‘We can meet your $5 million target if you’re open to a seller note of $XXX at X%’. By securing financing terms that outperform the current debt market, we can often get the deal to pencil as good or better than market rate debt would support. Our price, your terms vs your price, our terms.
We used this strategy to purchase the Suburban 36 Portfolio. The seller was holding firm on a purchase price that didn’t cash flow with current debt terms. We felt great about the basis, but our investors like cash flow. We structured a Seller Financing Arrangement with favorable terms, ultimately allowing us to meet the seller’s price. In a debt market with interest rates hovering around 5.5% we locked in a seller financing note with a 4% interest rate, a 5-year term, and 80% LTV. We could pay more for the property because the financing terms were in our favor. The money we would normally allocate toward bank debt was added to the purchase price. It’s a win-win situation for the seller and the buyer. We’ve also been significantly outpacing projections at this property which you can read more about in our last quarterly update.
Major Market News
Northville Downs Race Track Redevelopment
What was formerly the Northville Downs racetrack is being redeveloped by Hunter Pasteur. Hunter Pasteur has built and developed over 2,000 luxury single-family homes and multifamily condominiums throughout Metro Detroit. According to the Downs website, “The Downs will be a community of single-family homes, townhouses, row houses, apartments, condominiums, and small businesses”. The development will also include several parks and green spaces. The entire project is expected to be completed in 2027 with construction starting in 2024. The cost of the development is projected to be around $250 million. For more information check out the Downs website.
Tips and Tricks
Purchase Agreement: A purchase agreement, also known as a sales contract or purchase and sale agreement, is a legally binding document that outlines the terms and conditions of a real estate transaction between a buyer and seller. It typically includes details such as the purchase price, property description, financing terms, contingencies, closing date, and any other relevant terms agreed upon by both parties. Once signed by both the buyer and seller, the purchase agreement signifies their mutual acceptance of the terms outlined and initiates the process of transferring ownership of the property.
Whisper Price: A whisper price refers to an unofficial or informal price range that sellers or brokers discreetly share with potential buyers or interested parties. Unlike the listed price, which is publicly advertised, the whisper price is typically communicated privately and may be used to gauge initial interest or to start negotiations before officially listing the property for sale. It’s often used in situations where sellers want to test the market or assess buyer interest without committing to a specific price publicly. The whisper price can serve as a starting point for negotiations but is not binding until formalized in a purchase agreement.