Friday, May 15, 2015

HOW to Successfully Negotiate a Commercial Real Estate Price Reduction

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Recently, I have encountered two situations where buyers have attempted to reduce the contract purchase price while in escrow with the seller.

In one case, I represented the buyer and in the other, I represent the seller...as the conversation is ongoing.

This post will be aimed toward buyers.

If you are considering buying a piece of commercial real estate, there is a chance that you will encounter issues with the building...the roof has eclipsed its useful life, an inoperable HVAC unit (s), an environmental spill, an alligatored parking lot, etc.  Unless the seller has spent money conducting property condition assessments, and discloses the property's condition, chances are you will have to perform your own inspections to understand what you are buying.

Be prepared to encounter SOMETHING!...and have a plan in place. To prepare for discovering issues that need to be addressed, there is a strategy that you should employ. I have used this strategy many times to successfully negotiate a price reduction when something untoward is discovered during the buyer's due diligence.

Below is the strategy:

Don't attempt to extract the VERY last dollar in the initial negotiation. I have witnessed countless buyers that negotiate like Donald Trump on steroids...they are going to get the VERY last ounce of blood out of that seller...no matter what. If the seller agrees to the price that the buyer demands, there is an artificial line drawn in the sand...I'll agree to this price...but not a penny more! I advise buyers to aggressively negotiate, BUT, leave a little room in case something is encountered...which is ALWAYS the case...during the inspection of the property, the environmental survey, the title review, or in case the property doesn't appraise. In many instances, you as the buyer, can receive a larger price reduction...to correct issues...than if you had hammered the seller in the initial negotiations. The reason is...you have a tangible reason to request a price reduction.

Use reputable inspectors. You MUST engage reputable environmental consultants, building inspectors or contractors to provide a thorough survey of the building. Avoid using a contractor that provides the survey AND accomplishes the corrective work as this can create a conflict of interests...I'll provide the report inexpensively in return for accomplishing the recommended repairs. DEMAND that the contractors provide written reports. If the reports recommend repairs, take the time to get bids on ALL of the recommendations. You now have a concrete basis from which to request a price reduction.

Understand the seller's situation. Does the seller have a back up offer that he has accepted subject to you not performing per the terms of the contract? If so, he will be less likely to reduce the price or worse...he will cancel your deal and move to buyer number two. Does the seller have sufficient equity in the building to provide a price reduction? If not, you can clamor all you want...but the money just isn't there. Is the seller a bank or is the seller a private individual that can listen to reason?

Be realistic. You may have a written report (s) that suggests repairs are needed in the amount of x dollars. Are you asking for the seller to provide brand new HVAC units on a twenty five year old building? Can the roof be repaired to milk several years of life or must it be replaced? What if the seller says no to ANY price reduction...are you prepared to walk away? Consider all of these factors before you simply request a dollar for dollar offset.

A price reduction is generally preferable over a credit. There are three ways to handle repair requests...a reduction in the purchase price, a credit in escrow, or allowing the seller to make the necessary repairs. When I represent buyers, I suggest a price reduction for three reasons. The tax basis in the building is lowered which means the buyer has a smaller property tax liability over time. Lenders these days avoid credits as the loan ratios are affected negatively. I recommend the buyer accomplish the repairs with the reduced price vs. relying upon the seller to fix things to the buyer's satisfaction.