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Chapter 13 - Real Estate Negotiations: Commercial and Residential

At the most basic level, negotiations involving real estate are like other negotiations— you identify your interests and the issues to be negotiated and establish opening offers, target, and resistance points for each issue. There are, however, a number of unique aspects that make real estate negotiations significantly different than other types of negotiations.

REAL ESTATE BASICS: RESIDENTIAL

As with any negotiation, the first step in finding and purchasing a home is to identify your interests.

After you have identified your interests the next step is to determine how much home you can afford. This will be based on the size of your down payment and your mortgage.

Typically, the total of your principal, interest, taxes, and insurance (PITI) can be no more than 28%—and total debt can be no more than 36%—of your gross monthly income.

Identifying how much you can afford and deciding on the type of home you want is only the beginning. As with all purchases, you need to identify what you must have and what you would like to have.

Property Value.- The first indicator of what a home may be worth is the list or “asking” price. This is essentially the seller’s opening demand

A second indicator of what a home may be worth is the state equalized value (SEV). SEV is the taxable value of the home and property; however, it can vary considerably from the true market price.

Financing

The difference between the purchase price and the amount of your down payment is the amount you will need to finance.

There are a number of options when it comes to financing, the most common of which are conventional and adjustable rate mortgages (ARM). Depending on your situation, you might also qualify for Veterans Administration (VA) or Federal Housing Administration (FHA) financing.

Conventional financing is for a predetermined number of years, often thirty, at a fixed interest rate. Conventional financing provides the least risk to the borrower because the borrower’s house payments, excluding property taxes and insurance, will not increase over the life of the loan.

Seller-financed means the seller is loaning you the money (and assuming the risk) for the home. Many sellers simply cannot afford to do this; they need to get the equity out of their current house to put into their next house.

Regardless of who is lending you the money, the lender will want to protect her investment and make sure the loan gets repaid. The most commonly used measure of your credit record is your FICO score, it determines whether you are able to obtain a loan.

Initially some lenders protected their investment by requiring buyers to obtain private mortgage insurance (PMI) that would pay off the mortgage in the event the buyers weren’t able to do so. A more recent alternative is a piggyback mortgage, essentially a second mortgage, which closes simultaneously with the first,

Realtors

The main function of a real estate agent is to match buyers and sellers, a process complicated by the fixed location and heterogeneity of homes, infrequent transactions among buyers and sellers, and complexity arising from the financial and legal dimensions of the transaction.

There are three types of real estate listing contracts, the most common of which is an exclusive-right-to-sell listing. Under this type of contract, the real estate agent is entitled to a commission if the property is sold during the life of the contract, even if you find your own buyer.

With an exclusive agency contract, the seller agrees that a particular broker is the only one who can sell the property; however, if the seller finds her own buyer, the realtor is not entitled to a commission.

The third, and the least common, type of listing agreement is an open listing which allows the seller to contract with multiple realtors and pay a commission only to the one who actually sells the home.

There are several considerations when leasing commercial space. Commercial space is usually priced per square foot, but it is important to understand whether the square footage leased is based on total space or usable space.

NEGOTIATING COMMERCIAL LEASES

Depending on the situation, there may be a need for build-outs, which involve customizing space for a particular business. In this case, all the details of the construction, as well as who pays for it, are negotiable.

Retail Leases

A retail lease may be for space in a shopping center, mall, or stand-alone store. In some cases the rent will consist of a base rent and a percentage rent, which is based on a percentage of sales.

Retail leases for tenants in a shopping center or mall will likely address common area maintenance (CAM), tax and insurance expenses, and possibly, management or administrative fees.

Industrial Leases

Industrial real estate leases fall on a continuum from gross leases to triple net leases. In a gross lease, the landlord has the responsibility for all building costs and maintenance of the property. Conversely, in a triple net lease the tenant is responsible for all costs, including building upkeep.

Commercial real estate negotiations involve most of the issues addressed in residential real estate transactions and more.

PURCHASING COMMERCIAL PROPERTY

Offers may be contingent on a variety of things ranging from obtaining financing or zoning variances to favorable building inspections or environmental hazard reports.

Because all of the details take time to address, you might offer to pay the seller an “option fee” that would grant you the right to buy the building within a certain time period at an agreed upon price.

Real estate negotiations for the purchase of commercial property are also more complex because there are often others involved beyond the buyer and seller.

Because of the complexity of commercial real estate negotiations, you may begin with an exchange of letters of intent. These are typically nonbinding, but allow you to make a preliminary determination as to whether you will be able to reach agreement on the major terms of the transaction.