Let’s get into negotiating the deal. This is by far one of my favorite topics, because I’m a firm believer that everything in life is sales and also negotiation.
I’ve got a little eight-year-old girl, and I feel that everything is even negotiation with her, even with staying up. The other day, I was sold on her staying up; I wanted her to go to bed at a reasonable time but she won that negotiation.
So let’s go ahead and roll into it.
In one of my previous deals, $2 million worth of renovations was built into the underwriting. Also in this deal, when negotiating with the seller on the front end, I made a $1 million mistake. Yes, a $1 million mistake.
I was too aggressive with the rents. I felt that we would be able to push them up $200 on the per-unit average. This is why it’s good to have a team and have a second set of eyes that did some further digging and rent comps. They have more extensive experience than I do in terms of understanding the market because they are more into the property management side. And so with that, it was determined that my rents were too aggressive by $75.
Think of $75 across 156 units times 12 months. That is a huge swing in terms of the income, which is how we determined what the offer was going to be to the sellers on the other end. So there’s that mistake.
But also it came down to a negotiation, where we knew that they were motivated enough and we had built a good relationship. And I want to talk about how it was really established with building that relationship.
One key thing that I always like to do is actually meet with the sellers of the property and not make it a transactional basis.
I met them at their office, where their community manager typically works. Everyone works in terms of just really staying on top of things, because this is a community of 156 units. So you’re able to get those economies of scale; you’re able to have multiple maintenance techs on site, as well as a community manager that also lives on site. You’re really able to get boots on the ground.
With a smaller asset, the property is just not able to sustain someone being actually on site. It could, but it could get really tough from a financial standpoint.
So I ended up meeting the seller in their office and sat down to understand them, build the relationship and the rapport, and not make it just transactional. One little hack I always use is that I always have a thank-you card with me that I provide to that person on the other end.
When I ended up giving them a verbal offer of $7 million and it was determined that our rates in terms of rents were too aggressive, we actually had to pull back on that and offer closer to $6 million. So they verbally accepted $7 million and then we had to go back by $1 million. That was a very tough conversation to have.
But we were still able to get the deal and submit an LOI first, which is a letter of intent that details everything that’s going to be in the contract, because the contract is going to be a lot more robust. They agreed to the terms that we had, and that’s when we got under contract and started the remainder of the due diligence.
The key thing I really want to talk through is understanding that everything is negotiation. Let’s say someone throws you out a price. You don’t need to look at it linearly. Let’s say something comes up and you want a reduction of the purchase price, you can be a little bit more creative. If the purchase price is, let’s say, $6 million and they’re firm on that, you can ask the seller if they could throw in replacing the roofs or making repairs to the parking lot.
Being creative that way shows that you’re flexible from that side and that you’re willing to work with them. Because it’s all how things are perceived in the negotiation and then also the leverage.
We had leverage in our deal because the financials they provided just weren’t the greatest. We had the T12, the trailing 12-month profit and loss, as well as the rent roll. But there were a lot of holes in the details, so we were able to use that as leverage, along with all the renovations and deferred maintenance associated with the property to work around my earlier mistake.
I still make mistakes to this day and that’s what I share with everyone. That way, you can avoid the potholes and the mistakes that I’ve experienced and just replicate the successes.
To reiterate, I used all that leverage and was able to get a reduction in the purchase price. We submitted the LOI. There was some back and forth with regard to the terms. And then finally, they agreed. At that point, we drew up the purchase agreement, which was even more robust, with all the terms, the closing timeframe, the feasibility period, all of that good stuff.
Have you ever had to quickly recover from a miscalculation in a deal?