Let's face it, making a bad deal is far worse than not making a deal at all. It may be difficult to walk away from a deal, but very necessary if an investor is not getting the deal he/she desires. The ability to reject a deal if it is not up to your standards and requirements is a useful tool to have in order to avoid a potential pitfall. When negotiating a deal, it is essential to have a game plan in place. By doing so, you can negotiate from a position of strength. A mental attitude of being prepared to walk away if you cannot make the numbers work is vital.
Before negotiating with the seller you should know where you money is coming from. Is your deal being financed through a bank, a private mortgage broker, or from seller financing (which puts you in a weaker position than the seller because you opt to become more dependent on them).
An investor should also know exactly know why the seller is selling. Find out what you could potentially be getting into in regards to this deal such as if the house has any structural damage or any financial problems attached to it. Familiarize yourself with exactly what it is you are buying and what is the target property's stand alone value. What is the property worth “as is” right now. You should also discern how the seller would need payment. Is the payment is to be received in one lump sum or payment over time with the offer of a good interest rate.
The idea of making a deal should only be entertained only if it could be potentially profitable. It should be workable for the buyer and the seller. Walk away if the intentions of the seller are unclear. The guidelines of the agreement should be carefully defined and understood by both parties involved. Also, it is imperative to include a Material Adverse Change (MAC) clause. This aims to give the buyer the right to terminate any agreement before its completion or the ability to re-negotiate the terms of the agreement if information is found out during due diligence that is detrimental to the target asset.
As a buyer, the bolstering of due diligence results in avoiding a possible bad bargain. The MAC clause offers buyers an “out” legally and refers to events in the time frame from the announcement of deal to the closing date of the deal. If new evidence that could hinder the long term value of the property is presented, you can opt to walk way or re-negotiate.
Knowing your priorities and what is important to you is also valuable. Walk away if a deal compromises your integrity or if you feel that you are getting involved in an agreement that you feel is dishonest, unethical, or immoral trust your instincts. Another element to consider is what you have to gain from the deal. Does it have long term potential or is this sacrificed for short term gain? Immediate gratification is not worth mortgaging your future or having the property investment not offer a future profit.
Be clear on the top price, or maximum purchase price, you are willing to pay when final negotiation has been conducted. Be familiar with the current retail market values in the area. Estimate how much you will be paying for repairs, closing, holding, and selling costs, profit potential and factor them into to the overall equation. Knowing the competition, all costs, and the capabilities of the property will allow for a more educated decision.
Having an exit plan is also very important. For example, if you plan to flip the house, do you already have investors in place do you have investors already? If you do end up walking away what would your alternatives be? If alternatives are better than the deal at hand, walking away would be in your best interest.