It amazing how often we are in a negotiation and forget to use basic negotiating principles. We negotiate every day, all day long, and quite often we do so by giving up.
In a real estate situation you would think that the participates would be on cue to use all their negotiating skills. However, I find most of the people only think that negotiating has to do with price and do not realize that every word spoken as part of putting a deal together is part of the negotiation.
Here is a real life situation that I had to negotiate a “paper” transaction. In this case my negotiating skills were of the utmost importance in that I had blown it on the math.
Situation: In the early 1970s, I owned a one story office building at 822 Figura Street, about a block up from the Hilton Hotel in downtown Los Angeles. (Don’t tell me about how rich I would be if I owned that land today. I’m sure it’s underneath a black glass office tower, and no, I didn’t keep the property for more than a year. At that point and time in life I was so interested in making quick profits that I thought long term was six months. But, that’s a whole other article.)
I needed to sell the building I had obtained in a very complex exchange. I had a buyer for a note and not a buyer for the office building. If I could get the building sold I could cash out of the note.
At an L.A. exchange meeting I presented my property. I told them that I was opened to any creative ideas but a sale with a down payment big enough to pay any commission due was all I really needed.
I had planned to attend eight exchange meetings in a row, one each day, until I solved my real estate problem. This was the second meeting I had gone to, and I wasn’t really expecting an instant solution.
Ed Savon, a local broker, approached me after my presentation. There was a man who owned an office supply and stationery company who was losing his lease. He and his father had been on Figura Street for forty years with the same business, and since they were to move it would be perfect to move down the block. (Isn’t it amazing how things come together when they are suppose to?)
He said the only thing to overcome was that his client was looking for a new place to rent, not to buy. However, if the payments could be kept extremely low, somewhat in line with the rent he was currently paying, at least initially, he might be willing to pop for enough money to cover the down payment.
In my euphoria I drafted a quick offer for him to take to his client. Since this was the first offer between us, I priced the building at my full asking price. I asked for only enough cash to cover closing cost for the down payment and a normal market rate interest rate, but I said I would carry back a wraparound and stated the amount of the payments. I did not have a financial calculator and took a wild guess at what the payments should be to amortize the loan.
Low and behold, the contract came back signed. It was exactly how I had written it without a single change! When I got back to my room I got out my financial calculator and started figuring out the amortization period. The calculator kept refusing to give me an answer.
Finally I got a pad and pencil and took the interest rate times the debt to see how much was necessary to service the annual interest rate. I took the monthly payments I had offered to accept and multiplied them by 12 and compared the two. Whala! I found out my problem. I quoted him a monthly payment amount that WAS LESS THAN INTEREST.
Now you can do this if you have somebody pay less than interest with the rest of interest adds to principal and the note keeps getting bigger and bigger and bigger. However, most of these situations at some point and time call for the payments to increase so that the note doesn’t explode!
Well I had designed an exploding note. My heart sunk with the thought of the explosion. How was I going to go back to this man and get him to pay far more per month than what he had initially agreed to.
I got out my calculator and checked out all the possibilities. To get a 25 year fully amortized schedule he had to double his payments.
I got out my calculator and figured out several possibilities. I waited till the next day to give him a call. I wanted him to have more time to tell 3 or 4 more people that he was buying his own office building in downtown L.A. Then I gave him the call.
“Hello Mr. Buyer, this is Barney Zick, the man who is selling you your new store and corporate headquarters. I wanted to go over the details of the contract and see if there is any way to make it better for you. I am able to give you everything that we have agreed to and it looks like everything you wanted. However, I am concerned with the financing we have in here.”
He in a non-emotional voice asked how so. “Well, most people like to get out of debt as quickly as possible. Are you one of those people?”
“Yes, I am. I don’t like borrowing money. That is the reason I hesitated signing to buy this place,” said the potential buyer. “I agree with you, and I was looking at your monthly payments here. I did some calculations, and if you will triple the amount that you are paying on monthly basis you will be out of debt in absolutely no time what so ever. (I quoted him the years). If you double the payment you will have the thing paid off in 25 years. At the rate you are paying on now, WHO KNOWS how long it will take to get the thing paid off. I know you have the desire, but would you be in the position to pay more per month?”
He asked me to review the three proposed schedules again. I again avoided telling him that there would be no payoff ever, ever, ever with the last choice. I knew if he decided to stick with what was in the contract I would have to expose that fact I had messed up on the math and go through trying to restructure the deal all over again. Hopefully, I could appeal to his desire to have the property free and clear rather than to having to dwell on my mistake.
He thought for awhile and said he would call me right back. He called back and picked a number that was slightly more than the doubling the payment we had agreed upon. I was flabbergasted, but I had managed to hit right on the mark. He knew how long he could be comfortable in paying for such a building and did not want the interest to accumulate for such a long period of time.
This of course is another example of a trade out. I pointed out to him the benefit of paying his loan off early, the trade out was a reduction in exchange for the benefit I was receiving of a higher payment. And, saying this in terms of benefits to the other party rather than calling up and saying I’m not going to close with you unless you pay me more got the job done.
While we are on this same story let me give you another example of the difference between keeping your negotiating lessons in your everyday memory rather than assuming this is a subject that could be filed away forever.
About two months later, I had closed the sale of the property to the stationery office product store owner. I had a wraparound mortgage (actually in California it is called an All Inclusive Trust Deed). I had contacted a note broker who was going to cash me out of the note. On Friday afternoon he said that he had a doctor who was going to buy the note and he would confirm the transaction over golf this weekend. He said we should be able to start the paper work for closing on Monday.
I was in the process of building a 48-unit apartment complex in Independence, Missouri and was out of money. I wanted to get that note cashed out as fast as possible. I hopped on a plane on Sunday morning and when the note broker came to his office Monday morning I was sitting on my suitcase.
That’s when he told me the great news. The doctor had changed his mind. I felt like someone had kicked me in the stomach. I really needed that cash to cover the payroll for the last of the construction of the apartment complex. And, I needed it now.
The offer I was getting gave me about $.75 on the dollar for the equity in the wraparound. I had talked to one other person who offered me $.50 on the dollar, but that seemed like throwing out the baby with the bath water. Most all my profit would be lost. I said a little a prayer that went something like this.
“Sir, I can’t believe you let me get this far only to give up the majority of my profit because someone has changed their mind, what can I do with note?”
I got an answer back. Really. I don’t get answers very often when I look up in the skies and ask the chief real estate investment consultant of the universe for help, but this time he really whispered in my ears, “Don’t be a dummy, call the guy whose making payments on the note. Remember, he’s the one who didn’t like being in debt.”
I ran to a pay phone on the side of the highway there in Santa Barbara. I plunked in my coins and called Los Angeles and asked the owner of the stationery story if he would like to get out of debt in a hurry.
He asked me what I had in mind. I told him that I was thinking about selling the note that he owed me to somebody else and thought I would give him the courtesy of letting him have the opportunity to pay off the note instead.
He replied, “It just happens that a man paid off a trust deed owed to me last night. I got a lot cash in my checking account and would be interested in doing something smart with it. It seems the smart thing to do is pay down my debt. However, I wouldn’t be willing to prepay the note unless you give me some kind of discount. What are you offering?”
My negotiating lessons (yes, I always considered my negotiating skill my number one skill even back then) came to the forefront. In this panic situation I didn’t blurt out that I was willing to accept $.75 on dollar and might even accept $.50 on the dollar if I had to. I instead said with as calm a voice as I could muster “Well, how much would you have to have to make it attractive?”
His reply made that same sort of special sound as having four sets of cherries come chucking together in a line on a slot machine in Las Vegas. “I have to have $5,000 or $10,000 off or I wouldn’t think it was a good deal.”
Now folks, we were talking about a third of a million dollar note. He would be very pleased if he got three or four thousand dollars off. I was looking at a potential $37,000 to a $50,000 discount!
I remembered a second negotiating lesson. Besides getting the other person to ask to make the first offer, never accept their first offer. If you give in it seems like you are weak and might give in more. If you give in, it makes them have less satisfaction with the transaction then if you argued some.
I told him that I could go $5,000 but $10,000 was a little steep. He said that he figured I would say that, that is the reason he asked for five. We both laughed. I asked him, “Where are you?”
He replied, “I am in the back room checking inventory.” I said, “Stay right there, I’ll be down to L.A. in two and half hours. When I arrived in L.A., I found that he only had $60,000 and the equity in the wraparound was more like $125,000. This was plenty enough cash to cover the completion of the apartments. I took his personal check and had him sign a promissory note for the difference due in thirty days. He paid in thirty days, and I was cashed out of the note in two steps with out ever “compromising.”
Like I said, when a deal is meant to happen sometimes you can’t just stop it from happening. However, if you keep your cool about you and remember to use your negotiating skills at each and every step of all your businesses transactions, it is amazing how much the end results are effective.
Everybody negotiates every day. Most people negotiate by giving in to the other peoples’ wishes. They will tell you they don’t negotiate because it is too small or too important or takes too much time. But, the fact that they are involved in a transaction where both people wanted things that were opposed and the fact that the transaction was culminated with the other person getting what they wanted, they didn’t negotiate–they just gave in.