How to Negotiate with Authority

Just to be clear: you aren’t negotiating against Authority, you are using what you know of Authority to Negotiate. I had an interesting negotiation with a seller’s agent this week.

The Background

I had found a 48 unit apartment complex and had submitted an LOI on it. The seller put it on the market 9 months ago for 5.4 million dollars – way too high in my opinion. He came down about 6 months ago to 5 million even. He obviously wasn’t getting any traction because the place was still on the market. Also, remember that 9 months ago interest rates were low and we could get a commercial loan around 4%. Now, the rates are climbing and I’ll be lucky to get a rate of 7.5% on a new commercial loan. There’s only one way I can pay that much: pay less for the property.

Sadly most sellers are still living in the heyday of 2022 where apartments were selling for crazy amounts. Those of us still making offers (not many) have to make the numbers work. We don’t want to insult the sellers, but if they want to sell, it needs to be a deal that works. So, we have to negotiate.

Negotiation is tough. Think about the last time you had to speak in front of a group. You probably had a lot of mental resistance. You were worried that you wouldn’t be good enough or that you would make a mistake or even that you might get laughed at. When you go up against someone in negotiations, you get all those feelings as well. It’s adversarial. Your mind thinks you are going into a fight. Your heart rate rises and your palms get sweaty. Even after years of experience, this never completely goes away – and you don’t want it to. You want to manage it and use it to your advantage.

Give Options

After doing my diligence, I made my offer for 4 million dollars, one whole million less than he was asking (and 1.4 million less than he wanted, judging from his initial price). I knew this was a bitter pill – he would be giving me Authority, and I wanted to sweeten it a little. I was sure he would dislike that, but that would make my other option seem better by comparison. If you let them choose, then they feel like they kept some Authority because they got to choose. In reality, it was you who chose by giving two options that you were comfortable with.

I led the second option with this line: “I will pay exactly what you are asking, 5 million dollars.” Who wouldn’t want that? “You just need to finance the property.” This is called seller financing and is a means of doing a deal where the seller acts like the bank. I offered to give him 1 million down and then pay him 22 thousand dollars a month for 15 years. I didn’t mention anything else to cause confusion. Do the math and this adds up to about 5 million dollars, exactly what he wanted. The catch? it was over 15 years.

The agent asked me why the seller would want to give me a 4% interest rate, stating that was far too low and that the 30 year amortization would be too long. I could tell he misunderstood and it was time to let him in on the secret. If I had given Authority now, I might have stammered about trying to explain, or I could just spell it out confidently. I told him that it wasn’t a 4% rate, it was a 0% rate, paid off in 15 years and done. The seller wasn’t getting any interest. “Why would the seller want to do that?” The agent asked. “Because he wants to sell his building.” Was my calm reply. The agent got pretty heated but without giving Authority, I had no mental ‘skin in the game’, and I wasn’t worried about what he would think of my answers. This allowed me to calmly explain my rationale: This monthly payment would be the exact same I would have with the bank at the lower price. I want to pay that interest to the seller to get him the 5 million dollars he wanted and I was offering a means to do so. He wasn’t needing extra. All that was left was to get the seller to trust me enough to pay it. He will get back to me this week.

Think about what you will do with your Authority before starting negotiations. Sometimes it’s best to give Authority and come in acting like you are just learning and they are helping you. Sometimes it’s best to come in knowing all the answers and have a take it or leave it attitude. Sometimes it’s best to be in the middle. The elements of this are in my book, Your Authority Problem. I plan to write one on negotiation next.

Dr. Equity