Ep 267 – Site Negotiation Secrets Every Property Developer Should Know

Introduction

Hello and welcome to the Property Mastermind Podcast, episode 267. Today we are unpacking the negotiating skills that every property developer must know. Stick with us and you will walk away thinking, I’m glad I listened to that one.

Hilary: Today we are talking about negotiation, and when you think about it, we do it all our lives. We negotiate with small children constantly. The two year old who wants the biscuit but not the veggies. The five year old who wants to stay up a little longer. The teenager who wants a new phone. And then, as we get older, we start negotiating with ourselves. The alarm goes off, and there is an angel on one shoulder and a devil on the other. Life is full of negotiations. But in property development, we really need to sharpen the skill. Bob, what is your tip for the day?

Bob: If you want to learn negotiating skills, study a handful of five year olds. They reach a crescendo around five, they communicate well and they are relentless. There is a lot to pick up there.

The most underrated skill

Hilary: Is negotiation one of life’s, and property development’s, most underrated skills?

Bob: It can be, and the good thing is you can improve on it. In property development it is very handy. It will save you money, and it can save you problems too. Can it save you hundreds of thousands of dollars? It can. And it is not all about price. There are other aspects that come into it.

It is not just about price

Hilary: So negotiation is not just about getting the cheapest price?

Bob: Price is part of it, but it is not everything. Think about a purchase contract on a site. Price matters, but so do the conditions, and conditions are worth money. Say you could buy a site for 1.5 million on a 45 day contract, or 1.55 million, fifty thousand more, but on a twelve month contract. The price is slightly higher, but with a long settlement I do not have to sort my finance yet, and if the contract lets me get access, a development permit and a building permit, I could line up my builder and be almost ready to start before I even settle and begin paying interest. That condition has real monetary value. It was not just the price.

Negotiating with your partner

Hilary: The first negotiation I thought of was the one with your partner. Often one person wants to do the development more than the other, and there is a lot of negotiation about delaying that instant gratification, the beautiful home now versus the bigger picture. It happens both ways. That is still a negotiation, isn’t it?

Bob: It is, and I have seen it both ways. One partner wants to lock in the family home or a bigger home in a better suburb, and that consumes the capital and delays the development dreams of the other. So where does negotiation begin there? It comes down to a common vision. If you share a vision, there is not much to negotiate. When the vision or the timing is different, that is where you have to work towards a compromise.

Needs versus wants

Hilary: From your own perspective, do you prefer to lay out what you want first, or see what they have?

Bob: I like to know where I am trying to go. If everything went perfectly, what would the outcome be? Then I study the other party and ask, what would their preferred outcome be, and what do they need versus what do they want, because needs and wants are two different things. If you can reduce or dissolve the want while still covering their absolute need, you are getting somewhere.

The one million dollar story

Bob: My mind goes back to a site we bought some time ago. During the negotiation I worked out the seller had a figure stuck in his head, a lovely round one million dollars. It was not about conditions, he was happy to take a longer settlement. He just had to have a million. If he had sold for 990 thousand, ten short, he would have been unhappy. So I paid the million, but I got a long settlement. For me that was far better than paying 950 thousand and making him unhappy. I saved interest through the long settlement, and he got his million dollar contract to wave around. We both came out better.

Hilary: And you both got the win. Too often people go into a negotiation thinking one person wins and the other loses. You are showing that is not a thing. You do not have one party 100 percent happy and the other at zero. You have both parties sitting at 80 or 85 percent happy.

Know your walk-away point

Hilary: Are you firm on your walk-away point once you have it?

Bob: You have to know the point below which you will not negotiate, and you have to know when to walk away. But keep perspective. At one auction we set an absolute walk-away of 1.6 million. Bidding reached 1.6 with two of us left. If we had flatly refused to go a dollar more, we would have lost the site. We went another five thousand, to 1.605, and the other party pulled out. On a project selling four and a half to five million dollars of duplexes, who cares about five thousand? Know your line, but keep your eyes on the bigger picture.

Talk to the real party

Bob: The best deals are done when you can talk to the other party directly, not through the person in the middle. Most of the time you are dealing with an agent, and some like to keep the parties apart. A good agent helps, but I have seen agents stuff up deals that two reasonable people could have settled themselves. And one big tip: make sure whoever you are talking to can actually make the decision. I once spent two and a half hours in a meeting that felt like a done deal, only for the other person to say, great, I’ll now go and discuss it with the landowner. I had spent two and a half hours with someone who could not decide anything.

Hilary: It is the same when you work through a lawyer. We once needed a short settlement extension, just a couple of days, and the letter came back a flat no. We went direct to the other party, who we knew, and they said no worries at all. When there is a third party involved, make sure they have genuinely checked with the other side, and are not just filtering it through their own opinion.

Get creative: the stock-back deal

Bob: Sometimes the best deal has nothing to do with price. Years ago, with my mate Ben Smith, we looked at a site that had been on the market a while. The owner wanted to develop 27 townhouses himself and hold some, but he could not afford to. So we did not negotiate on price, we negotiated on conditions. We paid some cash up front, plus two brand new townhouses at the other end as part of the payment. We call it a stock-back deal. It got us into the project with less cash, and it gave him part of his dream, holding some product where he lived. I went in to talk about price and ended up doing a great structured deal instead.

Sophisticated sellers versus mum and dad

Bob: How you negotiate depends a lot on the person. Some of my best deals have been with other developers, because they understand the process. It is hard for a developer to justify an inflated price when we both know how to run a feasibility and we both know what the land is really worth. I once bought a site off a developer whose price was way too high, and I just kept working away, asking where the number came from, showing him the feasibility, until it broke down to the right price.

Hilary: For anyone new, land only has a value that lets the numbers work. To fund a development it has to leave the developer’s margin, anywhere from about 12 to 25 percent depending on the product. That margin has to be met, and that is what the land is worth.

Bob: With a mum and dad who have owned an old house for 40 years, you cannot pull out a feasibility. They do not care about your numbers, they just think, greedy developer. It is a totally different, and harder, conversation.

Knowing when to walk away

Bob: You have to know when to walk away, and be prepared to. Sometimes walking away is a good thing, it leaves them cold and gives them time to think. Often that is the end of the deal, but not always. I have gone back much later and bought a site for less than I was first willing to pay, because by then the seller was conditioned. There is always another good deal around the corner, so never be afraid to walk.

Wrapping up

Bob: The best negotiators are not aggressive. Do not go in like a bull at a gate, it just gets people’s backs up. Sometimes I even play it a little less sharp than I am, so the other person feels at ease. Underneath, I always know where I am going.

Hilary: So to recap. Find out the other party’s wants and needs, know yours and theirs, and remember it is win-win, not win-lose. Do not go in confrontational. Talk to the other party directly whenever you can, and always make sure they are the decision-maker. The best thing you can learn is often something you already know, so let this be a reminder to sharpen your skills, even if you start by practising on the two and five year olds. If you don’t ask, the answer is already no.