Mentally gearing up for a negotiation during due diligence
I was wondering if anyone had some advice going into negotiations after doing your due diligence?

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We have gone through the leases, the financials, and the inspection report. While I don't think the seller was deliberately misrepresenting the information, they utilized in-house maintenance that they allocate to a completely different cost center. Therefore, the NOI is quite a bit lower than what was presented. Given low cap rates, incorporating even relatively cheap maintenance costs result in a valuation that is massively lower in terms of the selling price. Any recommendations for presenting this to a seller where the ask is quite large? Is it better to pick up the phone first? 

I'm also struggling mentally with making the big ask, which I know has to happen. The alternative is to just walk away.
[{"id": "ijv9pi3", "text": "Did you sign a PSA and have you had 3rd party consultants conduct a property inspection with costs associated with taking on the site? During negotiations it's a lot easier to educate the seller if you have hard facts that aren't disputable. Just remember the seller and market dictate the price and even with the facts on hand they may just move on to another buyer just part of the game. \n\nI would also try to get a OM from a similar asset in size in the same market and compare the OPEX.\n\nLastly numbers aren't everything in real estate if you see value in a location or asset then go for it. \n\nTake my advice with a grain of salt tho only been acquisitions/dispositions for a short period.", "replies": [{"id": "ijvhwcd", "text": "Yes, signed PSA. Third party inspectors have been through it, and sellers own maintenance people walked with our inspectors during the entire 30-40hr inspection. Repair items will not be a surprise to them I believe. \n\nI have OPEX comps, and we also operate a similar property just around the corner so I think we have a fairly good picture. I\u2019m using that directly in the discussions.", "replies": [{"id": "ijvkbwn", "text": "I think you have everything you need to be confident in the negotiation. Just be clear in the execution and good luck \ud83e\udd1e!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ijvb74a", "text": "Read \u201cnever split the difference\u201d by Chris Voss. Been really helpful in helping formulate strategies around negotiations", "replies": [{"id": "ijy4dir", "text": "Great book! Find myself using several of his techniques regularly in negotiations. Of course you'll find your own style within it, but some of the core principles are great. Even if you don't use them, you'll be aware when it's used on you.", "replies": [], "depth": 2}, {"id": "ijyo2ml", "text": "What are some strategies you\u2019d incorporate into this situation based off of what you\u2019ve read?", "replies": [], "depth": 2}], "depth": 1}, {"id": "ijvc131", "text": "Never Struggle with making this ask. If there were material mis reps with the numbers thats a big deal. \n\n&amp;#x200B;\n\nProvide the salient facts, in memo format, and get to the punchline quick \n\n&amp;#x200B;\n\nIn this business the deal either makes or it doesnt, so dont worry about it if they are unreasonable up front. I cant tell you how many times Ive won deals we previously dropped just by hangning around the rim and waiting.", "replies": [], "depth": 1}, {"id": "ijvcjbg", "text": "I'd try to 'soften' the blow with a call (ideally with a request for more info).  It is better to make a call like \"hey our maintenance numbers are projected a lot higher than yours, I am trying to work through that.  Can you send us the last month of tickets so we can work through that to better understand condition issues?\" then to blindside them.\n\nThat said what you just said if I were the seller I'd read as a you problem.  You didn't discover anything new, you just didn't understand what you were given and made an offer that was too high because you were inexperienced.  That would cause concern for me about you closing regardless and I'd not necessarily jump on lowering my price vs just going back to the previous offers I had received from folks who priced it more correctly to start with.\n\nRepricing is better when there is new information to both parties.  \"you gave us your maint costs but you do it cheaper than I can!\" isn't a good reason to ask for a price reduction.  I guess you should vs just killing the deal, but expect them to view you as inexperienced and a pain in the ass, and if they have better buyers near your price and aren't in a huge hurry they would consider this info when deciding what to do.", "replies": [{"id": "ijvewks", "text": "I think this approach", "replies": [], "depth": 2}, {"id": "ijvh49u", "text": "They gave an OM without details - just a bottom line NOI. Called them up before making an offer and they ran down the expense numbers for me. I asked them at the time because they seemed low from my experience. Seller said that that was all there was. It was just because the property is in very good condition and was easy to maintain. \n\nWhen they shared financials during DD, again it seemed low so I asked specifically for maintenance logs. When I asked how the items in the logs were reflected in their financials, finally they said that they don\u2019t include maintenance hours in their cost. \n\nIm hoping the repeated questions means this won\u2019t be a surprise. The other issue is that they would not allow showing until after a purchase contract was signed so obviously a lot of new information came from there. \n\nI\u2019ll give them a call first and give a heads up.", "replies": [{"id": "ijviokm", "text": "ah ok that sounds more reasonable on your side.  Sorry if that seemed to discredit you but its a common thing (which honestly sellers/brokers don't help by putting bs proformas out).  \n\nYeah I wouldn't worry about it, they should see that coming based on that update.  Someone in another comment mentioned EVERY buyer is going to price it up which I agree with now, so I'd probably mention that low key when you ask for the reprice.  I typically toss in some unbiased data too like \"IREM survey costs for our region are x% of gross rents on maint, which we are seeing on other properties we are considering and our personal portfolio\".\n\nNever make anything a problem with your side, make it a problem for them IMO.  That was more my point", "replies": [], "depth": 3}, {"id": "ijvjo8w", "text": "That is really fishy stuff that the seller didn't have a showing before the PSA was signed. It either shows inexperience or they are trying to hide something. At my company we require the buyer to visit the property at least one time to be awarded the deal.", "replies": [{"id": "ijvnuzb", "text": "To be fair to the seller, the PSA has very easy outs for the buyer. They are very protective of their tenants but were more than happy to allow access after signing as long as accompanied by a representative. I\u2019m guessing they wanted to avoid time wasters.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ijvcm2a", "text": "This is likely echoing what others are saying, but you'll just want to come across like you don't need to do this deal and you won't if it doesn't fit your investment model. And, obviously, walk away if it ultimately doesn't. In the negotiation, you're either agreeing to give this guy a portion of the future NOI via higher purchase price or not. That's all there really is to it.", "replies": [], "depth": 1}, {"id": "ijve7d2", "text": "You can initially flatter them and insist you want to do the deal while presenting your problem - \u201cwe unfortunately don\u2019t have the economies of scale and sophistication that you guys do so the maintenance line item on our pro forma is a lot bigger.\u201d\n\nI\u2019m not sure what kind of property you\u2019re looking at or what the buyer pool looks like but more than likely any other buyer will have the same issue. If the conversation isn\u2019t going well, you can tell them that everyone else will have the same issue so they can either come to terms with the actual value of their property and sell it to you now, or kick you out and waste another six months with a different buyer who will inevitably have the same problem.", "replies": [], "depth": 1}, {"id": "ijvf6mr", "text": "i work in property tax appeals. one thing ive learned is that sometimes there are localized ways of doing the NOI calc a little differently (ill leave out why, for sake of brevity). just because your NOI calc is one way, does not mean that is how the local market participants do theirs. If they place expenses in the wrong spots and are blatantly uhhh dumbasses, that's one thing. Call em up and out, and make it a quick yes or no, not a month long maybe.\n\nto solve the above question, i have time and again requested commercial property tax appeal documents via the FOIA process from whatever jurisdiction im working in. I look up same/similar properties, determine if theyve ever filed property tax appeals, and request copies. it's incredibly eye opening because you have an inside view of the competition numbers.", "replies": [], "depth": 1}, {"id": "ijvk60g", "text": "Are you representing yourself? These are the kinds of things your broker should be doing for you. Use a level tone and write the seller what you wrote Reddit. Phone calls don't leave a paper trail. Did you use a Letter of Intent (LOI) prior to signing an offer? Questions about valuation and related topics are usually worked out in the LOI, before making the offer. The outcome you want is a \"meeting of the minds\" not an argument.", "replies": [{"id": "ijw84td", "text": "Yes, I\u2019m representing myself. I\u2019ve done a handful of a deals. I\u2019m by no means experienced, but have gone through the full buy and sell on a project a few times. \n\nThey wanted to go straight to a PA. PA allowed for easy walk away so working out the details now.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ijw5yin", "text": "Never be afraid to ask for the sale or an adjustment where their math is off. Just say hey it\u2019s advertised at this cap rate and that\u2019s what we need to go any further.", "replies": [], "depth": 1}, {"id": "ijwbyhd", "text": "That\u2019s why I prefer GRM to advertised cap rates. You should be able to figure costs out in your own before going through all the hoops.", "replies": [], "depth": 1}, {"id": "ijwnw0j", "text": "Just be upfront and don't dance around it. When people are on the phone and they hear you start listing off this and that and accounting categories and such, they're essentially just waiting for you to hit them with your ask. \n\nI'd summarize what you found, how that impacted your numbers, and what your new price is. If it was truly material misrepresentation or items that could not have been discovered until DD, then the broker won't be upset and even if they were, who cares. It's your money and investments have to make sense.", "replies": [], "depth": 1}, {"id": "ijxix77", "text": "Make the ask. Be silent. For that moment, play a character.", "replies": [{"id": "ijy5bi1", "text": ":)", "replies": [], "depth": 2}], "depth": 1}, {"id": "ikyuco5", "text": "These are great questions and answers... it does really depend how many u nits is this and is it multifam or ind etc?  It sort of depends is this a 10mill deal or less", "replies": [], "depth": 1}, {"id": "il0xco9", "text": "Typical situation. You should present what you\u2019ve learned. Then ask the sellers agent (direct?) \u201chow am I supposed to tell my client is worth X when the income is Y\u201d. Sometimes they know, sometimes they don\u2019t.", "replies": [], "depth": 1}]