Negotiation Strategies
and the Due Diligence Process
All the strength and force of man comes from his faith in things unseen.
He who believes is strong; he who doubts is weak.
Strong convictions precede great actions.
—JAMES FREEMAN CLARKE
C
hapter 7 describes the financial
analysis principles used to value income-producing assets in considerable
detail, and Chapter 8 discusses the practical application of those principles,
so by now you should have a fairly good understanding of the valuation
process used to analyze multifamily properties. Once you have identified a
value-play opportunity and have determined through your research and
analysis the maximum amount you are willing to pay for a property, the
next logical step is to negotiate for the best possible price and terms. Upon
reaching an agreement that is acceptable to both parties, you are then ready
to implement your due diligence process. This chapter explores the five
cardinal rules of artfully and skillfully negotiating the best deal possible,
and then examines a step-by-step approach to performing the required due
diligence.
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CHAPTER 9
Five Cardinal Rules of Successful Negotiation
Negotiating the purchase price and terms of your acquisition requires a
combination of art and skill. As in playing a game of poker, you must be
careful not to reveal your own hand, while simultaneously attempting to
force the hand of your opponent. The master negotiator will implement
every one of the cardinal rules of successful negotiation.
Five Cardinal Rules of Successful Negotiation
1. Engage a competent broker to act as your intermediary.
2. Justify your offering price armed with the seller’s operating statements.

going—the commission. No deal, no commission.
On several occasions, I have seen buyers and sellers attempt to circumvent
a broker who did not have an exclusive listing on an apartment complex,
thinking they could save the commission. More often than not, the negotia-
tions fell apart because the two parties were unable to reach an agreement.
Consider the seller who, for example, stands to gain $500,000 from a sale,
less a $50,000 commission if a broker is involved. Trying to save the
$50,000 by dealing directly with the buyer may very well end up costing the
seller the entire $500,000 gain. Yes, eventually the seller will be able to sell,
but this opportunity to do so is lost, and it may be another three months, or
six months, or even a year before he or she is able to sell. Meanwhile, a seller
using a broker could have taken a net gain of $450,000 and been on to the
next value-play opportunity. So you see, while the possibility is there to save
the broker’s commission, it is a potentially risky strategy and could ulti-
mately derail the transaction.
I do not want to imply that you should never talk directly to the seller,
because there are times when it is appropriate to do so. The negotiation
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Negotiation Strategies and the Due Diligence Process
phase just is not one of them. If, for example, you are gathering general
information about the property that is not readily available in the documen-
tation already provided, sometimes it is better to take the broker out of the
communication loop and ask the seller directly. Preliminary discussions
with the seller can also provide you with greater insight into his or her
motive for selling. Subtle comments made by the seller that would probably
not be picked up by the broker can be used to your advantage when it does
become time to enter the negotiation phase. These comments can offer
clues as to the seller’s underlying motive for selling, regardless of the reason
stated by the broker. The seller will have in essence revealed his or her hand,
and it will be time for you to call the bluff.

$760,000.
Price == =$761,905
Okay, I am going to repeat it one more time: You should be willing to pay a
price based only on how the property is operating today, not based on how the
broker or seller tells you it can potentially operate. Repetition is the key here.
I hope that by repeating this one point, you will not get caught in the trap of
overpaying for an apartment complex. If the broker is the seller’s agent, the
broker is going to tell you every reason he or she can think of as to why the
apartments are worth the $1 million the seller is asking. You politely but
firmly explain to the broker that if the property were truly worth the full ask-
ing price, then it should be generating a minimum of $100,000 of net oper-
ating income today—not tomorrow, not a year from now, but today. If all of
the potential the broker claims to be in the property truly exists, then why
has the current owner not achieved that level of performance yet? Why is
the property generating only $80,000 of NOI instead of $100,000? These
are the types of arguments to make to support your position. The more
$80,000
ᎏ
0.1050
NOI
ᎏ
cap rate
$80,000
ᎏ
0.10
NOI
ᎏ
cap rate
NOI
ᎏ

180
a $3-million apartment complex over a 12-month period, the seller may in
fact be willing to accept $2.85 million for the deal, thinking that a bird in the
hand is worth two in the bush. In other words, instead of holding out for the
full $600,000 in profits—which could take as long as another six months to
a year—the seller can go ahead and accept the lower price, lock in a gain of
$450,000, and be ready to move on to the next deal. You may be inclined to
think that $150,000 is a lot to leave on the table, and, granted, it is, but a
value player has a different mindset. The value player is thinking about the
next deal and the $500,000 he or she will make on it.
Poor management is another primary reason sellers look to dispose of their
apartments. The degree of motivation will correlate directly with the seller’s
degree of distress. This is where subtle clues can be detected by direct com-
munication with the seller. A meeting with both the broker and the seller at
the property site for a general tour can be very revealing to the astute
investor who is attuned to the seller’s needs. Does the seller seem anxious,
frazzled, or short with the staff? Indications of poor management will also
show up in the financial statements. For example, the vacancy rate may be
high relative to the area as a whole; the unit turnover ratio may be high; and
make-ready costs may be higher than normal. If the seller is suffering from
burnout related to managing the property, the seller will most likely be
highly motivated, and a highly motivated seller is a flexible seller.
Changes in macroeconomic conditions are changes that occur outside of
and unrelated to a specific property, but which may affect the property
either positively or negatively. A shift in demographics, crime, or employ-
ment trends, for example, are all changes over which the owner has no direct
control, but may affect the operations of the property anyway. The apart-
ment owner may have been doing an excellent job over the years of keeping
up the property and managing it, but something like an increase in crime or
job layoffs will have a direct adverse impact on the property’s level of prof-

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182
Kiyosaki asked about the missing partner’s whereabouts. The reaction from
the partners who were present was one of nervousness, clearing of throats,
and evasive eye contact. Because they refused to discuss the missing part-
ner, Kiyosaki got up from the table and promptly excused himself. He said
that as he did so, he could almost feel a sense of despair and disappointment
from those partners who were present.
A phone call to the broker confirmed his suspicions—something had hap-
pened to the missing partner. He had had a stroke and was hospitalized.
Kiyosaki now knew the remaining five partners no longer had the luxury of
holding out for their full asking price of $1.2 million. If they did so, they ran
the risk of the sixth partner dying and the property ending up in probate
court. He immediately made an offer of $500,000, and ultimately settled at
a price of $695,000. In retrospect, it appears the sellers should have taken
Kiyosaki’s initial offer of $1.1 million, but a life-changing event forced them
to settle for much less than that.
Finally, another reason for selling is retirement. At some time in everyone’s
life, they reach a point at which they are ready to retire. I shared an example
earlier of a 25-unit building I bought. The couple had owned the apartment
complex for 25 years and had just made their last mortgage payment. They
were both of retirement age, and selling the apartments would give them a
sizable lump sum of cash on which to retire.
Rule 4: Safeguard Yourself with a 30-Day “Free Look”
One key point you should include in your negotiating technique is to pro-
tect yourself by providing an open-ended out for any reason whatsoever
within the first 30 days of signing the contract. This initial period, also
known as a “free look” or feasibility period, gives you the right to walk
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Negotiation Strategies and the Due Diligence Process

184
Price × cap rate = NOI
$1,000,000 × 0.10 = $100,000
$1,100,000 × 0.10 = $110,000
$1,100,000 − $1,000,000 = $100,000 of value created
Now, back to Rule 5. The bottom line is, do not be afraid to walk away from
a deal if it does not make sound financial sense for your investment capital.
Earlier, in Chapter 8, I used the example of a nice 52-unit value-play oppor-
tunity that presented some unique twists in the way the financing for the
acquisition could be structured. The asking price, at $1.15 million, was very
reasonable. I made an offer of $1.1 million with the standard 30-day feasi-
bility period and 0.5 percent of the purchase price as earnest money,
matched with another 0.5 percent after the 30-day period when the earnest
money goes hard, or becomes nonrefundable, and an additional 60 days to
close. These terms are not at all out of the ordinary, and in fact would be
considered reasonable and customary. As it turns out, the seller in this case
had an abrasive personality, was extremely arrogant, and had adopted a “my
way or the highway” attitude. Because the seller demanded 5 percent down
up front as earnest money with no feasibility period and a closing in 30 days,
I took the highway. No matter how promising a potential deal appears, I am
not about to assume the risk for an investment on which I have not had the
opportunity to perform due diligence. In this case, if the deal went south, I
would have been out over $50,000 in earnest money.
The Due Diligence Process
Your preliminary analysis brought you to the negotiation phase and you have
successfully reached an agreement. Now it is time to thoroughly research
and analyze virtually every aspect of the property in question through the
process known as due diligence. The due diligence process should include
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Negotiation Strategies and the Due Diligence Process

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Negotiation Strategies and the Due Diligence Process
Exhibit 9.1 Exterior Physical Inspection Checklist.
Physical Inspection Checklist—Exterior
General Information
Property name
Number of units
Number of buildings
Total square footage
Date of inspection
Description Comments
Drives
Boiler equipment
Central cooling and heating
Common area flooring
Common area grounds
General neighborhood area
Hallways
Individual air-conditioners
Individual furnaces
Landscaping
Laundry facility
Lawns
Lighting
Mailboxes
Office
Parking lots
Pool equipment
Roofs
Sidewalks

Refrigerator
Cabinets
Flooring
Fixtures
Other
Bedroom 1
Paint
Flooring
Fixtures
Other
Bedroom 2
Paint
Flooring
Fixtures
Other
Bedroom 3
Paint
Flooring
Fixtures
Other
Bathroom 1
Tubs/sinks/commodes
Paint
Flooring
Fixtures
Other
Bathroom 2
Tubs/sinks/commodes
Paint
Flooring

Income statement—revenues
Scheduled income
Utility income
Other income
(continued)
In summary, obtaining the best possible price and terms when acquiring an
apartment building requires a combination of art and skill. As a master
negotiator, you will take care to exercise each one of the five cardinal rules
to successful negotiations. Upon reaching an agreement with the seller, you
will then be ready to implement the requisite due diligence steps.
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190
Exhibit 9.3 (Continued)
Description Comments
Income statement—expenses
General & Administrative
Repairs & Maintenance
Salaries & Payroll
Utilities
Taxes
Insurance
Rent roll
Number of months
Vacancy rate
Turnover ratio
Lease agreements
Balance statement—assets
Supplies
Prepaid items
Utility deposits