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Negotiating the Terms of a Commercial Real Estate Contract

This is part four of my six part series to help guide commercial real estate investors through all of the steps of selling their commercial property privately.

There are entire courses and books written on how to negotiate a real estate contract.  One of the older yet still interesting reads is Donald Trumps, The Art of the Deal.  Being able to negotiate is not just important when it comes to real estate but the skills you learn can be used in almost every facet of your life.  There are essentially two groups of people when it comes to negotiating, those that live for it, and those that live to avoid it.  However if you're going to be involved in commercial real estate and be successful you will need to know the basics of negotiating.  Regardless of which of these groups you fall into, here are some fundamental tactics you need to know to survive a negotiation session when it comes to buying or selling a property.

Know Your Style

There are different negotiating styles that work for some people, and not others. There is a theory of negotiating called the “big stick approach”.  This is a negotiating tactic where you take a very hard, strong and intimidating approach to the negotiation.  This can work if the person you are negotiating with is either inexperienced or very passive.  But it can also cause many potential buyers to walk away from you thinking “this person is going to be more trouble than the deal is worth.”

I have found the most success using a very straight forward but firm approach.  I use facts and figures to support my side and do my best to be very persuasive.  I will have all of the laws I need to bring up in the negotiation handy and use them to my advantage. (For example the disclosure laws I discussed in my last article can be used to show a potential buyer how solid the property is.)  I try to anticipate all of the rebuttals the other side will bring up and have answers ready for them.  However, different styles will work better depending on the situation so always pay attention to how people around you negotiate and learn what approach works best in what situation.

Avoid an Argument if You Can

When the negotiations break down into a yelling match, no one wins.  You have to enter into every negotiation knowing that you are not going to get everything you ask for.  Make a list in advance of the items that are crucial to you and those that you can live without.  You may be surprised at the difference between your list of priorities and the buyers list.  Offering up one of your non-critical items as a concession may turn out to be the one thing the buyer needed to make the deal. Look for win-win scenarios.

Legal tactics

Always try to use the law to your advantage when you sell commercial real estate.  There are going to be buyers who try and take advantage of you so you need to be prepared.  Here are some common scenarios:

  • Buyer continues to negotiate after the deal is signed.  Simply refuse to negotiate any further.  Do not let the Buyer back into the property for endless inspections.  State a strong due diligence period in the contract and when it's over let the buyer know he had his chance to negotiate.  Also write into the contract as large of a deposit as you can.  Buyers are less likely to walk away after the deal is signed and face litigation if they have a large amount of money already invested into the deal.
  • Buyer signs the contract but makes it contingent.  This is also known as the “two bites from the apple” approach to negotiating.  This normally happens when the buyer insists on having parties who are not present during the negotiation, sign off on the contract.  The best way to counteract this tactic is to insist on a written deadline for obtaining any necessary approval of a third-party who is missing from the negotiation. I’ve learned it is best to word the clause very carefully, such as “This contract is contingent on the seller receiving written approval of all of the terms of the contract from buyer’s attorney, John Jones, within five calendar days from the seller’s acceptance.  Unless attorney Jones disapproves this contingency in writing within said five calendar days, then the seller has the right to either nullify this contract or state the contingency is waived by the buyer.” What this does is put a firm deadline on how long the buyer has to get his contingency satisfied.  If he fails to abide by that contingency then you have the right to either cancel the contract or announce the contingency as null and void and force the buyer to proceed with the purchase.
  • Write into your contract that you have the right to show the property and take back up offers while the buyer is doing his due diligence and even up to the closing date on the contract.  This accomplishes several things.  First it protects you if the buyer turns out to be a flake and doesn't perform his obligations on the contract.  Second, it lets the buyer know that if they drag their feet you are prepared to move on to another deal.
  • Keep the terms of the contract firm.  Many sellers open themselves up to further negotiation on a property by failing to write very specific terms into the contract.  For example, consider this clause: "Buyer may obtain an acceptable appraisal of the property." Does this mean that the Buyer can get out of the contract if he doesn't like the results of the appraisal? Or does it merely mean that the Seller will allow an appraiser access to the property to obtain an appraisal? If the clause is construed as a contingency, is there a time limit? Could the Buyer produce an appraisal the day before closing and use it as an excuse to get out of the contract? What is the standard for determining whether the appraisal is acceptable? This is a clause that is just asking to be litigated or renegotiated.

As you can see, the negotiation tactics in commercial real estate are there to protect your interests and maximize results. Be creative with these negotiations, and always be confident when walking into a deal. Be prepared, informed and persuasive. Also do your best to keep your emotions in check and not let your ego get in the way of a deal. You have to be prepared to walk away from any deal that cannot be made to fit your needs.

Don’t miss part five of this series where I will talk about tax planning and the IRS 1031 exchange to minimize your capital gains on the sale of your commercial real estate. Please leave your questions or comments!

Disclaimer: Nothing stated in this article should be taken as the giving of legal advice.  As always, you should check with a licensed, competent real estate attorney who specializes in your field when unsure of how to proceed.

Daniel Doran About the author: Dan has over 20 years of experience as a real estate attorney, title closer and mortgage lender. Dan is now working with BuildingsByOwner to help educate commercial real estate investors on how to sell and lease their properties privately.


Mar 10, 2015

I really like the "big stick approach", that you mentioned, and how straightforward it is. By stating laws, facts, and reason you can easily intimidate the people that you are trying to strike a deal with, and get the exact terms that you were hoping for. The only downside, like you mentioned, is that a lot of potential buyers will initially walk away, thinking that it's not worth the fight.

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