There is an art to renegotiation based on the science of what’s worked in the past. In this Self-Storage University podcast we’re going to explore the best methods to get what you want when renegotiating a contract.
Episode 130: The Correct Way To Renegotiate Transcript
Webster's Dictionary defines renegotiation as negotiation of something again in order to change the original agreed terms. This is Frank Rolfe with the Self Storage University podcast. We're going to talk about renegotiation and the correct way to do it. I've been renegotiating deals now for 45 years. That is a long time. I've done so many renegotiations, it's beyond count. I don't have any idea how many I've done. But I have learned in those 45 years, there are certain things that will improve your odds of success. So let me share those with you as far as what you need to know about how to renegotiate correctly. The first thing is don't be afraid to do it. Because probably 75% of every storage deal out there ends up being renegotiated. You can't help it because there's things that we all don't know when you tie things up under contract, when you're doing your due diligence. Mom and pop, they knew, the seller knew, but the buyer didn't know. And when those things pop up, you have to try and fix the deal and make it correct again. Or maybe it's market factors. Maybe the interest rate on the loan from the bank went up. Maybe the amount that the bank requires for the down payment went up. Whatever the case may be, when things pop up that you didn't expect, then you have to renegotiate. So rule number one is you got to renegotiate. You have to do it.
Number two, you got to be fair. You got to use the golden rule in renegotiation. You can't be unreasonable about it. If it turned out that there was five units less than you thought there was in the storage facility, you can't ask for 25% lower price. It has to be proportional. It'd only be 5% lower price. So you'll never get anywhere in renegotiation if the seller senses you're using that to take advantage of them. Don't do that. Then the deal is gonna die. And sometimes people do that deliberately when they renegotiate, trying to see how far they can push it. The problem is you're gonna destroy all of the trust that you built up already with the seller if you try to take advantage of them. So just don't even do it. Next, you got to be inclusive. And by inclusive, I mean, you have to demonstrate to the seller why you need that concession. And if it's a cost issue, you need to back it up with bids. And if it's anything else, you, again, need to show them, share with them. If your bank says, "Oh, I'm sorry, the interest rate isn't going to be six, it's going to be seven."
Well, let's show a letter from the bank to the seller to show them these things. The sellers are pliable. They're willing to work with you if they believe it's fact, but they don't like when they think you're trying to basically retrain them for fun. So be inclusive and show them what the problems are. They're much more prone to work with you if they feel like they're in the loop. Next, be sure and show them the timeline. Use a past, present, future structure when you talk to them on these reductions. Show them how they came to be where they are now. When you tied up the property, you thought XYZ was what the givens were, and now you've turned out that XYZ are wrong. And as a result, we've got to fix it, because in the future, we'll not get this deal done. I can't get a loan and it won't meet the appraisal unless we get the appropriate price. It's a lot easier for a seller to comprehend when you give them a structured approach and explain to them how you got to the point that you are actually at. Also, remember that renegotiation is a form of bartering. And what we all know about bartering is when you barter with someone, you each have to trade something. You got to trade something.
So what are you going to trade? If they lower the price by X, what do they get in return? And it may be the only thing you have to barter is if they'll agree to drop the price, you'll agree to go ahead and say the diligence is completed and move on to your financing contingency. Now, in all honesty, if a contract has both a due diligence and financing contingency, then it's really not a done deal until the financing contingency is over. But the bottom line is you've got to give something to them. That's the whole point of negotiation and bartering is trade. You have to have something to give them in trade. Also, bonding helps renegotiation enormously. Bonding is basically spending time with the seller, either in person or by phone. The more time you spend together, the more comfortable you are with each other, the more you get to know each other, and it just makes things go so much better. And it's a fact that people renegotiate and tend to succeed at it more when they have bonded with the seller when they have not. So from the minute you first talk to the seller, you need to be focused on bonding, spending time with them. And that way, when you go to renegotiate it, they feel like they know you better and they trust you. So bonding is a very, very big part of renegotiation.
Also, you always want to renegotiate well ahead of the due date when they have to make the decision. No one likes the concept of you putting them in a vice, saying, "Okay, you got to go ahead and have this done by this time, which is only in an hour. Do you agree or not agree? That almost seems like some kind of mafia-styled blackmail. That's just not a very, very good way to do it. So instead, if you want them to drop the price and the due diligence period ends on October 9th, don't show up on October 9th trying to renegotiate. Go to them well in advance, maybe October 1st, so they have an entire week to think about it. No one likes to be called on the carpet, and if you get them in a defensive posture where they think that you're trying to take advantage of them and trying to put them under time pressure, they're more likely to say no. Just on basic principles of, "Hey, you can't threaten me, I'm not gonna do it." So the way you position it, the timing that you position it under, can have a lot to do whether you succeed or fail. Also remember that no matter what the problem is in many deals, there is one solution to almost every problem, and that's seller financing. Because when you seller finance, you can restructure the deal not in price, but in the terms of the financing.
We've had many deals over the years that the way to success was simply to change the seller financing at a very low interest rate. We've even had deals that changed the seller financing where the interest was stair-stepping, for example, year one zero, year two 1%, year three 2%. That structure can sometimes save things, or maybe a deal that's zero down. Maybe there's more risk than you thought to the deal. So what you do there is you have a zero down format, and once again, that pushes you over the top to making the deal attractive to you. There's probably nothing that can make deals more compelling than seller carry, and when you're renegotiating, don't forget you always have that backup escape valve of just going to the seller and saying, "Well, here's an idea for you. What if you were to carry paper based on these terms?" I don't know what percent of storage deals have been made using seller financing, but it's probably a fairly high amount. The bottom line to it is that renegotiation is a natural part of life. Some people, particularly new to the real estate industry, they're afraid. They're too shy to renegotiate. That's a terrible position to be in.
Instead, you need to grab the bull by the horns. You need to understand that renegotiation is a very simple part of life. Take out the effort required to successfully do it. Bond with the seller, be inclusive, give them a correct timetable, and you should be able to get the job done. This is Frank Rolfe with the Self Storage University podcast. Hope you enjoyed this. Talk to you again soon.