While you're doing DD or under contract, how often is the sales price negotiated down, and what are the most legitimate grounds? It seems like the results of a Phase 1 can be a solid basis for negotiating an adjustment - what else? I'm curious how frequently a buyer would offer over their highest price, hoping for its acceptance and planning to negotiate it down - have you been in a transaction like this?
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yes
care to elaborate? how much above your expected price was your initial offer? what arguments did you make to negotiate it down? would you follow same strategy again?
I usually see it come down to property condition or financing. If a property needs substantial CapEx in the near term, and it hasnt been accounted for in the underwriting you may see an impact in either the terms or sale price of the offer. In some cases, the borrower;s source of funds will demand that the deal in question meet any number of risk and yield metrics tied to performance. In the case that a deal is fails by one or more of these metrics (think DSCR, Debt Yield etc) the borrower may request that the seller reduce the asking price so that the deal conforms to the lenders requirements.
As far as dropping the price strictly as a "tactic"? That would be a non starter for me. That's why you need back up offers. Buyers cant know they're the only ones in the hunt or they get greedy.
Thanks for this - yes I understand that the full extent of capex can't be known until after inspection and that this could require significanly adjusting the terms. I'm specifically thinking of uncovered land, so capex wouldn't be an issue. In that case, there's really just environmental - or are there other considerations, too?
Um..in my experience, what's buried under the land, if during your DD you uncover storage tanks/utility lines, etc that need to be moved or remediated so the footprint of the bldg can sit on your site, which was not anticipated at escrow, then clearly your purchase price would come down unless the deal still pencils. Also important to do a title search to see what obligations run with the land, if those aren't priced into your initial purchase price you would adjust the land price going in down by the fmv of those expenses.
So generally speaking, anything that was disclosed or is observable with proper examination of provided material would be a non-starter for a price reduction.
Unfortunately yes, there are buyers that submit seemingly strong offers with the intention of re-trading should the deal be awarded. I promise you, this is a poor strategy that will be exposed and result in irreparable reputation damage.
When purchasing dirt there are several items that may warrant a price reduction. Here are a few I've uncovered:
In short, if you're re-trading on price then do your darnedest to make sure it is warranted and don't look stupid. More importantly, don't make your superiors look stupid. If you made a mistake (about something that was disclosed and you missed or otherwise) do not try to hide it (this probably goes without saying). Share the mistake and your superior is likely savvy enough to come up with another excuse for a re-trade.
^Ditto. If you do this too often, you get a bad reputation/stigma in the market and it's almost impossible to recover from it/source deals if it gets too bad. I left a firm I was at previously because of this - it became almost impossible to get a deal done because we re-traded on every single one of the last 6-7 deals we did (not my call; the guys in ICOM kept asking us to do it). We only closed 3 of those deals, as an anecdote.
Heh, you'd be surprised. There is one company in particular that I will never sell to again but they'll do perfectly fine because they are one of THOSE companies that are too big to fail.
I'd call them out publicly but I have friends on the development side who I respect a lot, but their acquisitions team is a clown show.
Curious what "reps" does a seller make on the land? I've never come across a PSA where any reps are made but the seller simply sells the land on an "as is where is basis".
Thanks for this, its helpful and what I was looking for. I'm not intent on negotiating the price down based on fictitious concerns, but want to know what issues might come up that would be valid grounds. This is great to develop a set of DD checkboxes. One of the challenges is that the full extent of some of these might only be known after a phase 2 - which is usually outside the study period of most deals - how do you handle that?
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