Things You Should NEVER Do When Negotiating With Multi-Family Real Estate Owners

Hello YouTube, it's Cody and Christian, Multifamily Strategy. Today is Multifamily 101 Negotiations.

Now when I got started back at 19 years old, I bought a 12-plex zero money down. There was a lot of things that I messed up on, and what we're sharing with you today I wish I knew because it cost a lot of money. Christian, what's the basis of negotiation? We're talking multifamily, getting started started specifically in real estate?

Well, negotiation, I think the basis is you need to know what it is that makes your deal work. So I think the base of negotiation is figuring out what things are important, which things really don't matter, and just going after the important things.

There's a lot of things that don't matter.

Yeah, and I wish I knew that. I learned that the hard way. So in today's video, we're going to go deep into all of these. I'm excited for this. By the way, if you haven't, hit the like button, hit subscribe, turn on those notifications because we launch these every single Tuesday. I want to start with one of the stories that I learned really early. It was on a washing machine.

This was on your duplex in Moses Lake, right? Yes, it was. All right.

I was really, really caught up because I was right on my contract. And being right is irrelevant. Making money—

I'd rather be rich than right.

Yeah, exactly. I was so stuck on this. So there's— on the contract it said, for what we signed, washers and dryers are included. Now, as we're getting close to the close, we're about halfway through, just finishing up our feasibility study. I go into the unit, there's no washer and dryers.

What? Imagine that. Yeah.

Now, it had listed in the original offer, there was no mention of washer and dryers. It was checked on the purchase and sale agreement. The other party said, "Oh, well, you know what? You need to go back to the original offer." Well, it turns out the original listing, is not a binding agreement. What you guys signed for on the contract is. So technically, I am right. I am owed a washer and dryer for this deal. It was a big deal to me because I was a new investor and I was like, this is what we signed for.

Yeah.

And it's going to cost me money. Is it a lot of money? No, it's probably $1,000. Two washers, two dryers, duplex. But I was really stuck on it and someone gave me the advice, like, it doesn't make a difference in your deal. Well, I'll tell you right now, if $1,000 made a difference in that deal, it was a horrible deal. It didn't matter. And so we cut that completely out of the negotiations. What did matter is what we got up front. We got the price that made sense to me.

Great price. Yep.

And I got financing lined up. This was private financing, but I was able to buy the thing $0 out of pocket. Those were the things that mattered to me. The money works, it's going to cash flow, and I got the price that I wanted. Now when you're negotiating, Cody has some much bigger negotiation pieces than that, but the first point that I want to make is do not sweat the little things. Don't even bother negotiating them. Even if you're right, even if you're owed them, the little teeny dollars that you miss here or there closing your transaction, you do not want to blow up a deal over something that doesn't matter.

Yeah, and in the very beginning, I didn't really negotiate at all. I negotiated the down payment down. However, there's a lot of things that today I'm kicking myself for. It's also really important when you're thinking about negotiations to not think about just today, but into the future. Bought my very first 12-plex. I signed, I bought it zero money out of pocket, it cash flowed $800 a month day one. Today it's closer to $4,000 than it is to $800. However, I signed this thing called a prepayment penalty. And for 6 years I have a $150,000 prepayment penalty, and then another 4 years after that it's $100,000. It's a lot of money on a 12-plex, especially in Central Washington. Now, I didn't really think into the future. I was just thinking about day one. And so if I could go back, you got to think about what's actually important. Well, while I got a 30-year fully amortized debt, having that fat prepayment penalty for a decade, that's expensive and that's hard. So I'm really stuck with my product. Now, is it a bad loan? No. However, it could be a lot better if I could refinance today. So it's really important to focus on the important things, but also focus on, okay, down the road, is future Cody and/or Christian going to be happy with this decision? Because it's not just about does it flow day one, but you also have to look into the future and say, will this make sense over the long term?

Yep. Something like your washer and dryer.

That's pretty irrelevant over the long term.

I can tell you, outside of this video, where I remember where I learned that lesson, I don't think about that washer and dryer. I really do appreciate the cash flow from these buildings though. So if you can not sweat the little things, that's number one. What I want to get into now is the timing for negotiation. One of the things that I tried to do, this is actually on my first deal ever, I knew I was off about $10,000 from what I really wanted to offer. And the advice I was given, which was incorrect, was, look, get the darn thing under contract, go through your feasibility, and then at the end of feasibility, We already know there's some little things wrong with the building. Just mark them off on the inspection report and ask for $10,000 less. So do the negotiations in the future. Well, guess what happened? This is my first deal, and this is how you learn this. I went through, I did the feasibility. There were things wrong with the vents, some of the appliances, and a minor issue with the furnace, but enough to, you know, bring it up. Go, okay, the deal works for me, $10,000 off. Guess what they responded? No.

You lost.

Yeah, exactly. I was like, well, shoot. Um, nothing. Like, no, we don't really need to sell it. We wrote it where we wanted it, and if we don't get our price, we don't even want to take $1,000 off it. We have the deal that we want, and we don't have to do it. We're not in that position. You don't have any power if you don't have any power. I didn't know their position going into that. So for the negotiation, I just made an assumption, hey, we're going to be able to figure this out. Let's get it under contract and let's go.

Now, that said, we are buying from rather affluent people off market. Typically there's been some on market stuff, but we're buying from people that are typically not in distress. The person on the 38 unit, they had that on the market for 13 years. If they were in distress, they would have sold it a long time ago. It would have had to happen. The duplex you bought, they're wealthy individuals that you bought from. I mean, it's just we are buying from a different demographic. Now, if you're buying and you know the person's under the gun, they really need to sell, then you're going to have some more leeway in the negotiation. But it's important to know that and really know your negotiation play field before you enter it, because if they were in trouble financially, you probably could have gotten away with that.

Yeah. Now, there's multiple points in the deal. That are set aside for negotiation. And that post-feasibility is a great spot. Maybe you did find something that was materially different to the original deal. We found out, oh, there's a problem with the roof. Or maybe the financing wasn't what we originally thought we had negotiated. You had something major that needs to be negotiated. There is a point for that. However, what is the best point in time to do your negotiation 100%?

Day 1.

Day 1. It's upfront before you sign that contract. You should have something on paper that you are happy to close with all the assumptions considered true. Then you have a feasibility to make sure that the assumptions that you made that decision on are actually accurate. And if they're not, then you have a less ideal but still set aside negotiation period.

Now, one last thing I'd like to share on the negotiation piece before we exit and really segue out of this video today is I show my cards. I don't hide a lot of cards from people. I don't hide my pieces. I let them know. What I'm working with, where I'm coming from, where I'm going, and why I'm going there. That's the whole circle drill idea. But I tell people exactly where my pieces are. I don't need to hide. I'm honest and transparent, meaning I'm not just telling them the truth, but I'm telling the truth upfront. Some people like to hold back cards. I'll share the majority of my cards upfront, let them know exactly what I'm working with so that there's not a whole lot of back and forth. I really don't like back and forth. I like to negotiate great deals upfront, like we're talking about day one. And to do that, you got to let people know what you're working with day one.

The closing piece that I had for this, and Cody, you're still allowed to add a bonus piece if you think of one, but my big close on this was it's all about the relationship. Now, if I had known the seller of my first deal better, I would have known they're not going to renegotiate.

It won't happen.

They don't need to. And I would have pushed that price up front before we got it under contract. Now, the deal worked with or without that, which is why we did close it. I did buy it, and that's a great piece of my portfolio today. I'll probably never sell that building because it's in 30-year fixed-rate debt back when interest rate was sub-3%. I'm a happy camper with that deal. That being said, you want that relationship because you want to have that chance to communicate, this is who I am, where I'm going, why this deal is important to me. You want that buy-in because a lot of these people, especially with The ones we work with.

Yeah.

Multiple properties.

People I started buying from in Moses Lake, they never need to renegotiate and they won't. If you shake their hand, they will close it on those terms. And so that, on the negotiation piece, make sure you're doing it on the front end. Because if you try and do it on the back end, you can get pinched, you can lose opportunities, and you can lose relationships most importantly.

And a lot of these are going to be repeat customers. I mean, this is going to be someone who you work with again and again and again who can really help you move forward. If you blow the deal early on the first deal, that second duplex that I bought in Central Washington, the washer and dryer, the broker on that deal ended up being one of the biggest owners in that city.

They sold us a whole block of duplexes. They're selling us more right now.

If we blew that negotiation for a deal they were brokering, they weren't even the owner, they were just a party in that deal. If we blew that there—

Over something little that didn't matter.

That washer machine wouldn't have just cost me that duplex, it would have cost me 3 other duplexes and then the duplex that we're buying next week. That's a heck of a lot of duplexes. That's 5 duplexes that a washer and dryer could have cost me if I got stuck on little details.

Yeah, so that's it for today's video, but we appreciate you sticking through all the way. Like, comment, and subscribe, and we'll see you next time. Mm-hmm.