The DREADED Re-Trade in Commercial Real Estate Deals!

Ahhh, the dreaded re-trade! Simply. A buyer asking for a price reduction well into the purchase process, prior to close, but before they are contingency free.

Buying a parcel of commercial real estate is really three negotiations. I even wrote about it here. https://allencbuchanan.blogspot.com/search?q=Three+negotiations. A quick review of the three is in order. First - price and terms. This conversation could take place through a binding Purchase and Sale Agreement but typically is negotiated via a non-binding Letter of Intent. Next - Purchase and Sale Agreement talks - if not handled in the first dialogue. And the final discussion - which occurs once a buyer has completed their due diligence - and where the re-trade can happen.

Generally, commercial real estate transactions allow the buyer a certain amount of time to inspect what he’s purchasing. Reviewing a title report, conducting environmental surveys, insuring the AC blows cold air, and confirming the roof doesn’t leak usually are done. Also in this no obligation contingency period - the buyer arranges financing, interviews the tenants if any, and pours over leases, utility bills, aged receivables, operating statements, and anything else they can dredge up. A quick trip to the city may be important to work out any zoning concerns. We see 30-45 days as a typical contingency time frame. Once ALL this is completed - the buyer decides to move forward, cancel, request additional time, or ask for a price reduction to offset anything untoward discovered. Since a monetary remedy is sought - in effect the purchase price is re-traded or re-negotiated. Bummer!

Let’s discuss in detail the four ways a deal can proceed once due diligence is completed - shall we?

Move forward. The BEST result for buyer and seller! Everything came out great. Lender approved the loan, city welcomed the new business with flowers, all systems are AOK and pilot you are cleared for landing! I can tell you from experience, this happens about 10% of the time. As a seller - if you get this outcome - awesome! Count yourself among the very fortunate.

Cancel. Extreme! But it happens. Generally cancellation is trumpeted far before the end of a buyer’s contingency. Sure. We’ve all had deals stall in the “red zone”. However, in my dealings, you know when a transaction is doomed. Entrenched within all real estate professionals is a sixth sense of sorts that shouts “danger Will Rogers!” Cancellation occurs in around 5% of all deals. What causes a buyer to walk away will be discussed another day.

Request additional time. Executing deals during our shelter-in-home period found many buyers asking for additional days to complete their study. Inspectors - hampered by rules and regs, lenders swamped by PPP loan processing, sellers squeamish about tours - all contributed to slow the process. Typical 30-45 day contingency periods became 45-60 days. Frankly, the delays were out of the buyer’s control. 50% of deals reach this crossroad.

Re-trade. Maybe my least favorite outcome! Why? Because you are so close - yet so far away. Sellers have agreed to the purchase price. Buyers now want some blood. If not properly managed - this can quickly spiral out of control. Plus, as the intermediary, you’re often sought to “bridge the gap”. Candidly, sometimes a cancellation is easier. At least contention is avoided and energy can be expended to locate another buyer. However, close to 75% of agreements include some sort of “ask”. Roof and heating, ventilation, and cooling head the buyer’s list. These are major capital expenditures that must be addressed. Buyers gladly ask for a seller to pay.

Next week I’ll discuss the ways you can minimize or avoid a re-trade. So, stay tuned!

 Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104. His website is allencbuchanan.blogspot.com.