A good negotiation is all about finding balance, not browbeating the other side into submission. Here’s how to negotiate in an effective way that will set you up for continued success in the multifamily sector.
There is often a mistaken notion that negotiating involves battering the other party into submission, that it is nothing more than two people hammering away at each other, at times heatedly, until one of them gets their way.
Certainly there are times when things can get tense, as I have discovered in four decades in real estate. As the managing principal and founder MZ Capital Partners, a Northbrook, Illinois-based private equity real estate firm, roughly half my job involves negotiating, usually for multifamily properties, and I have discovered that yelling usually leads nowhere.
Good negotiating is about finding balance
Rather, negotiations are a matter of balance, not browbeating — understanding the person sitting across from you and finding the middle ground.
In fact, I would submit to you that the best way to negotiate is to not seek every last concession. I usually find that leaving a little bit of money on the table for the other side — making a concession that’s not that important to the overall deal — is always good.
That’s counterintuitive, I realize, and anathema to less-experienced negotiators, who frequently believe they should try to extract everything they can from the other side when seated at the bargaining table.
It’s simply not so, and here’s why: Negotiations are complicated, long-term propositions that can drag on for weeks, if not months. Even when you come to terms, the deal’s not done. There are several other steps that must be completed before it actually closes, and resolution depends upon the relationship you have established with the other party.
Consider the future impact
The fact that you left a little meat on the bone for the other side or that you gave in to something is seldom forgotten. It’s kind of like a chit that you can use for an unforeseen twist in the deal in the future.
Parties are happy to continue to do business with you, when that is the basis for negotiations, but less inclined to do so when you hold their feet to the fire, go for the last buck, fight to the death. You tend to not want to accommodate that kind of person. You feel you’ve got to be tough back.
Use common sense
There are other common-sense rules of negotiating, like always being prepared and never accepting the first offer that is made. Richard Harroch, managing director and global head of mergers and acquisitions for VantagePoint Capital Partners, a global venture investment firm in San Bruno, California, once wrote for Forbes that there are several other things that should be kept in mind as well.
He mentioned the importance of professionalism, having the right advisers and, as mentioned above, understanding the other party — again, common-sense stuff.
His list also included the following:
- Draw up the initial agreement: This enables you to establish the deal’s initial parameters, from which both parties can work
- Understand when it’s time to walk away: It’s important to keep your target price and walkaway prices in mind
- Don’t fixate on a single issue: In other words, don’t get hung up on minutiae, at the expense of the larger goal
- Prepare a Letter of Intent or Term Sheet: But only at the appropriate time. This makes the whole process more efficient
- Time is the enemy of many deals: The more things drag on, the less likely it is that things will turn out well.
I would agree with all of this, while also amplifying on that final point.
The longer a negotiation drags on, the worse it will go
Recently we came to an agreement on a property through a real estate broker, only to see the owner change his mind and raise the price. I agreed to that, but after a time, he raised the price again, and later a third time. He also wanted to change some other terms of the deal, like whether we could raze an existing structure and build a multifamily property, and it was at that point that I realized it was time to walk away; the goalposts were always going to keep moving.
No less frustrating is the fact that the agreement required some zoning changes and entitlements, and that we were already in discussions about those things with local officials. Moreover, we had already incurred architectural fees and engineering fees. But it was simply time to cut our losses and move on.
There are other deals — deals where the leverage is in your favor — that go far more smoothly. That has been the case in the multifamily sector of late, as investors have sought to get involved with our assets. All those investors are highly qualified, and all of them are competing with each other. It’s just a matter of finding the best deal of the lot.
But generally speaking, negotiations come down to personalities — who you can work with, and how they go about their business. The more amenable they are, and the more amenable you can be, the better things tend to go.
Michael H. Zaransky is the founder and managing principal of MZ Capital Partners. Founded in 2005, MZ Capital Partners, based in Northbrook, Ill., deals in multifamily properties.