Are You Smarter than the Undergrad Business Club at Rider University? A Case Study in Negotiating the Purchase and Sale of Real Estate

By
Real Estate Agent with Coldwell Banker Residential Brokerage

A few months ago I received a call from a high school football team mate. 

"Lenza, my son Brendan is in charge of scheduling guest speakers to address Rider's Business Club. Can you help him out?"

Brendan and I traded texts, set a date and there I was before sixteen young, fresh faces yearning for knowledge. Okay, maybe notandrew lenza weichert realtors holmdel nj yearning. More like killing a cloudy Thursday afternoon.

I have to admit I dug the moniker of "Guest Lecturer" even for one day.

I chose "How to Price an Asset" as my topic, but don't buy the red herring.

I staged a negotiating competition between three groups of students: two teams represented opposing buyers with similar needs and the other team represented the seller of the commercial property.

Here are the "secret" case studies for all three teams. There were no rules to the negotiation because, quite frankly, there are few rules in the real world of buying and selling property. Each party danced upon the fine line of subterfuge, feigned interest, bluffed intentions and bravado.

How did the kids do in the mock Thunderdome? Realize that not one of the students has ever negotiated the purchase or sale of real estate before.

  1. One team decided to adopt an aggressive, adversarial tone from Jump Street, down to where they sat at the bargaining table.
  2. One team succumbed to the temptation of minutia, arguing about a fictitious road one team concocted.
  3. The selling team chose to ignore the comp's and set an unrealistic list price that both teams eventually rooted out as mythical.

After two rounds of timed, heated negotiation neither team could agree to terms. Afterward we reviewed the process and here are the students' observations.

  • "I got too emotional. I made it about winning instead of achieving the objective, which was to buy the property."
  • "We couldn't agree to lower the price amongst ourselves."
  • "You tend to think you have all the time in the world to hammer out a deal. You forget the clock is a silent enemy."

I went into Rider University as the guest lecturer. I walked out the student.

How do you think you would do?

*************************************

Green International -- Seller

Green International owns a 150,000 square foot manufacturing facility it built two years ago.  Green uses the complex for the processing of glutein-free foods: potato chips, cookies, cereals. The facility is designed for either liquid or solid foodstuff processing. Green International is headquartered in Denmark and the worldwide recession has prompted the company to dispose of assets outside of Europe.

Green International paid $3 million for the property and spent an additional $5 million to build the plant. Its “net” cost of the facility is $53.34 per Square Foot [$3,000,000 + $5,000,000 divided by 150,000 square feet].

You are a member of Green International’s Property Management Division. The senior management has issued your negotiating team an objective that includes (a) effect a sale as soon as possible for as much as possible, the higher the better; and, (b) do not sell the facility below a discount of 10% of cost [$53.34/Square Foot - 10%].

**************************************

Red Draft  -- Buyers

Red Draft Incorporated is a micro-brewery that has just finished its second round of private financing. Red Draft pays an enormous lease rate to rent an old, inefficient 50,000 square foot facility, a lease due to expire in 90 days. Red Draft beer has taken off since its introduction and large orders continue to stream in from its Madison Avenue advertising slogan.

The Board of Directors has assembled your team to procure the rights or ownership of a facility that minimally doubles current capacity.  The C.E.O. has stated at the recent management counsel that “Red Draft needs to triple our capacity as soon as possible, based upon our forecasts of demand.”

The company has allocated a cash budget of $8,000,000 for the project; however, Red Draft can tap into an additional line of credit from an Investment Bank for an additional $2,500,000. The scout team of Red Draft has reported that a comparable 150,000 square facility (called “Happy Harry’s Jersey Devil Moonshine”) a half a mile away from Green International’s facility sold for $4,875,000 in late February.

************************************

Blue Taco Chips -- Buyers

Blue Taco Chips Inc processes and distributes a line of blue corn products under its signature brand “Blue For You.” The senior management of Blue Taco Chips recently took the company and brand private in a leverage buy-out from Orvieto Ortego, an Italian-Spanish conglomerate.
Orvieto Ortego, the parent company, has filed notice with Blue Taco that it is rescinding its right to use Orvieto Ortego’s 125,000 square foot food processing plant.

Further, Orvieto Ortego is calling its short-term loan of $2,000,000  that it extended to Blue Taco.  Repayment is due within 30 days.

Blue Taco lists assets of $9.5 million in cash and expects a consortium of Wall Street banks to approve a $3 million line of credit once the due diligence is completed. Blue Taco estimates the line of credit won’t be available until 60 days. The scout team of Blue Taco has reported that a comparable 150,000 square facility (called “Sin City Spirits”) one mile away from Green International’s facility sold for $5,500,000 in early March.

 

 

Comments (41)

Gary Pike
Better Homes and Gardens Real Estate Metro Brokers - Powder Springs, GA

The review of why they could not come to terms is so typical in residential real estate, not just commercial.  It's amazing how fast people forget they are buying a home and not an investment.  Great case study and thanks for posting.

Apr 25, 2010 05:39 AM
Anonymous
Kathleen Sheridan

Excellent exercise for those students, and for us, Realtors, too. I don't believe that anyone in my area has ever offered a negotiation class for agents. It would be a fantastic idea. I recently acquired a Buyer who 'fired' her previous Buyer Agent, and is talking about writing a book about 'what your real estate agent doesn't tell you about the negotiation process"!

Apr 25, 2010 06:06 AM
#23
Martin Kalisker
Greater Boston Association of REALTORS - Boston, MA
Professional Standards & Legal Assistant
Too funny. I'm working with a client who wants to meet in the middle with the seller, and have been pitted against her son (who is a lawyer) who wants to "win" at all costs. The situation is all too familiar!
Apr 25, 2010 06:37 AM
Coleen DeGroff
Coldwell Banker M.M. Parrish Realtors - Gainesville, FL
Haile Plantation Real Estate - Gainesville FL

Wow, Lenza! First off, I must say I am impressed you weren't scared to death going in as a "Guest Lecturer."  And second, WOW! What a great simulation exercise you put together for the students!  You could have gone the "blowhard route" boring the students to tears and teaching them nothing at all...but the fact that you went in with a real-world participatory exercise means they most likely won't forget it for a long time.  GREAT job! Those kids were lucky to have you stop by! :)

Apr 25, 2010 06:53 AM
Bob Krus
Keller Williams Foothills Realty - Evergreen, CO
What About Bob? For All Your Real Estate Needs!

Lenza, you have done those students a great service! If I'd had teachers like you when I was in school, I'd have paid more attention - and had a lot more fun! Great job!

Apr 25, 2010 07:21 AM
Andrew J. Lenza
Coldwell Banker Residential Brokerage - Holmdel, NJ

@ Tanya, very cool students. They wanted to be there while the quad was buzzing with Spring fever.

@ Lane, many folks believe they are operating in a vacuum, that their own actions dictate the result. Sometimes but most others the contra-party, the opposition, has its own goal in mind.

The first key I warn clients of is the rationale "Why would they do X or Y?" I have no clue. I've been involved with sales that the financial reasons were not the most important consideration. Let's not mind-read out there.

Apr 25, 2010 10:16 AM
Andrew J. Lenza
Coldwell Banker Residential Brokerage - Holmdel, NJ

@ Kathleen, we learn by doing. We learn better by teaching.

@ Dagney, interactive teaching -- an exchange and implementation of ideas -- is the cornerstone of adult education.

@ Mari, one of my maxims is to know the other side. Of course, they're not going to tip their hand. Yet a suspicious, crafty person is more prone to a straw man negotiation, giving up minor points as if they were major one; however, that's a poor tactic when negotiating a person who plays it straight-up and honorable.

A thief doesn't trust anyone. He knows, like himself, what folks are capable of.

Apr 25, 2010 10:19 AM
Andrew J. Lenza
Coldwell Banker Residential Brokerage - Holmdel, NJ

@ Judith, I rarely see sales training on negotiation. I've worked the disccussion into my Broker's training course, along with a module on how to start your own brokerage (i.e. LLC formation, Compliance, Management systems).

@ Ellen, you are welcome to anything on my blog -- so long as you cite me as a source ;-)

@ George, thanks for the ad on my comment stream. I believe even Einstein used only one equal sign in his equations. Throw in some plus signs. It'll improve your copy, sir.

Apr 25, 2010 10:24 AM
Andrew J. Lenza
Coldwell Banker Residential Brokerage - Holmdel, NJ

@ Rick, I considered an honor to be asked. Thank you for the compliment, sir.

@ Larry, absolutely. They did lose sight of the goal. I know I have on a myriad of occasions. When we did the post-mortem not one student tried to alibi or excuse. The introspection was honest and succinct, qualities we forget when we're mired in "the real world."

@ Jenny, I'd like to think so.

@ Fred, yes sir ;-)

@ Gene, or in the classroom too.

@ Victoria, we're faced with the scenario of N.E.D. all the time: Not Enough Data. Yet the client still needs to make a sale. Our activity in the marketplace is an input that needs to be weighed the same as external outputs. The buyer does set the market, in conjunction with a throng of buyers or alone.

@ Dan, thank you. These scenarios are not as difficult to construct. I spent about 30 minutes thinking up the parameters and let the participants engage with the content.

@ Edy, aahhh the old sales award. Not a bad idea. I've crossed four lane highways, at my own peril, at a young age for bragging rights. Though, I wasn't near as smart as these young folk.

@ Jim, I'll not bore you with politics. The Middle East could be considered the longest, bloodiest real estate "negotiation" in the history of man. And I do not make that comment glibly -- in remembrance of all ou have lost their lives, either side, during the conflict.

Apr 25, 2010 11:12 AM
Josette Skilling
Keller Williams Capital Properties - Bethesda, MD

What a great idea.  Having just negotiated with a lawyer who was selling his own house and had to win, to the extent that my buyers - also lawyers - had no desire to deal with him through a losing battle, I can relate to the kids.  Sometimes you get too emotional and forget there was a goal.  I wrote a blog a while back about do you want to negotiate or do you want to buy a house - different end results and not always what you wanted.

Good lesson for those young kids and I hope it made a lasting impression.

 

Apr 25, 2010 11:21 AM
C Tann-Starr
Tann Starr & Associates, Inc. - Palm Bay, FL

What an amazing set of parallels. That was a fantastic idea. I love your post. :-)

Apr 25, 2010 12:12 PM
Roshan Quigley
Weichert Realtors - Manalapan/Marlboro, NJ - Manalapan, NJ

Hi Andrew - what a wonderful experience for all - agree we all need to continue to work on our negotiating skills - all those students at Rider Uni. were lucky to get a hands on experience in the "real world".

Apr 25, 2010 12:51 PM
Anonymous
Hugo meza

Great Post!

It reminded to my college time! I have BA on Professional Sales and Finance. I loved all my sales classes. I had role plays in each class, then  biggest of all National Sales Challenge. Your post made me wanting to go back for my masters on sales. There are very few schools offering BA on sales, but I think schools should offer this type of class as a requirement because it gives students a real life experience.

Keep up the good work!

Apr 25, 2010 03:34 PM
#34
Jirius Isaac
Isaac Real Estate &TriStar Mortgage - Kenmore, WA
Real Estate & loans in Kenmore, WA

Looks like you really had a good time in class.

Apr 25, 2010 04:42 PM
Kenneth Young
Uni International LLC - Virginia Beach, VA

Good post Andrew,  you just remined me that our objective goal rather then the process is important.

Apr 25, 2010 05:46 PM
Jill Watts
Realty Pro, Inc. - Vancouver, WA
A Luxury Experience at Every Price Point!

Lenza, very excellently set up. I'm sure the students had fun with that object lesson. They especially like to peck out things themselves rather than listening to someone drone on and one. You are a GREAT teacher!

Apr 25, 2010 06:25 PM
Anonymous
Suzzanne Medina

I would like to have those 3 points stated upfront before each transaction as guidelines for the negotiating process......Remember the objective

Apr 26, 2010 07:00 AM
#38
Tony Hager
United Realty Texas - Denton, TX
Broker

What a great simulation you laid out. That will benefit those kids so much more than a boring lecture you could have done. That should help them in real life more than anything. Isn't it so true too how agents often let the negotiation get persoanl and totally lose sight of what is best for their clients. Angents should always pull themselves back and just present the facts.

Apr 26, 2010 02:01 PM
Russell Lewis
Realty Austin, Austin Texas Real Estate - Austin, TX
Broker,CLHMS,GRI

Andrew this is the best career day class and shows your creatively humorous way of putting together something fun and actually informative at the same time. I have helped out many times at local schools and am always amazed at the fact that they just let me run amok and that everyone seems to have a good time with very little emotional damage ;-0

Apr 27, 2010 09:58 AM
Georgie Hunter R(S) 58089
Hawai'i Life Real Estate Brokers - Haiku, HI
Maui Real Estate sales and lifestyle info

I don't know if you made this up or not, but it sure is a good story!  And the comments are equally engaging.  cheers!

Apr 27, 2010 06:36 PM