Thursday, May 22, 2014
Watch (video): Success Story-How To Deal With Seller Remorse
This story involves one of my own deals. It is actually a joint venture where my partner found the deal and I brought the money. It's a story of a common problem investors face: seller's remorse. How do you deal with it? Read on to find out.
Problem: I was negotiating with a potential JV partner to buy a 73-unit apartment building in Nashville, Tennessee. I flew to Nashville to view the property. When I landed, my partner said "We've got a problem. The seller's trying to back out of the deal." When my partner told me the argument the seller was trying to use, I immediately believed this was a case of seller's remorse; seller's legal arguments were simply too weak.
Solution: I asked my partner to call her local counsel and ask him to try to set up an "all hands" meeting with seller and his lawyers that afternoon so that I could meet with everybody and try to solve the problem while I was in town. We spent the morning looking at the property and the entire afternoon in that meeting with seller and his lawyers. After several hours, it became clear to me that, despite my efforts to "educate" seller on why the best answer to his objections and concerns was to close the sale and avoid the inevitable lawsuit and lis pendens, we were just too far apart. So, I declared the meeting to be "over" and we walked out without a settlement agreement and with the deal up in the air. However, within 24 hours of that "poker game", seller blinked and gave in to all of our demands. The deal was back on. I finalized my agreement with my JV partner and we closed the purchase a few weeks later. It turned out the seller was right to have remorse--the bank appraisal (which was delivered to us after the closing) came in several hundred thousand dollars higher than our purchase price, showing a nice paper profit on the day we closed.
Lessons: Real estate deals are messy. Seller's (or buyer's) remorse is not unusual. When it happens, follow this step-by-step approach: 1) try to remain calm; resolving disputes is harder when the parties let their emotions drive their decision-making and the dispute becomes "a matter of principle"; 2) understand the other side's full position, all the facts and the law; 3) evaluate the strengths and weaknesses of their position and yours; 4) consult competent real estate transactional and litigation attorneys to make sure you understand the legal aspect of everything, and your legal options; 5) meet with the opposition ASAP to try to resolve differences; 6) really understand the other side's position and the problems they are trying to solve; 7) try to build rapport with the other side to defuse the emotion and to forge a "team" approach to find a solution to their problems that doesn't create problems for you; 8) explore all settlement options (try not to be the first one to make a settlement proposal; get the other side to go first); 9) if, after making a good faith effort to understand, explore and resolve all problems, it appears you are simply too far apart, don't be afraid to state that fact and, if necessary, unilaterally (and professionally) end the negotiation. All of this is a strategic carrot-and-stick approach to dispute resolution. Make sure you clearly outline to your opposition all the benefits of being "reasonable" and settling the dispute on your terms, but don't be afraid to just as clearly outline what will happen if your opposition does not settle (in our case, I explained we intended to file a lawsuit and record a lis pendens against the property, which would result in us eventually getting the benefit of an appreciated asset at our original contract price, after we finally win the lawsuit, while seller continued to pay the mortgage; in other words, seller's refusal to cooperate would make our investment even better). Watch this short video where I discuss this case study with Dave Lindahl, the owner of what is probably the most successful apartment investing education company in America.
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