Seller Strategies to Deal with the Retrade Problem
Almost every Seller is aware of the vexing and common practice of Buyer's attempting to renegotiate the agreed to purchase price in the sale of commercial properties. Buyer's attempts to "retrade" are a common practice. However, Seller's often fail to take any steps or employ any strategies to combat retrading.
Most CRE deals will start with a LOI presented to Seller's broker. Once a Seller agrees to terms with a Buyer and signs an LOI the parties will engage legal counsel to negotiate the final contract for the parties signature. Sellers will not ever have a chance to interact directly with the Buyer before the contract is signed. The Brokers' role in a deal is to get the parties to go to contract and most Broker's will not introduce the retrade topic since it could delay the contract signing or even kill the deal.
From the Buyer's perspective, retrading has little downside risk with a potential significant financial benefit in cost savings by way of a reduced purchase price. In a typical retrade scenario the parties have gone to contract and Seller has incurred significant costs including legal fees and ordering survey and title. Seller has also invested considerable time and effort over a few months responding to their attorney in contract negotiations and collecting and delivering documentation to the Buyer. Another significant cost to the Seller involves the listing process of selling their property. The first days of any asset hitting the market are the best opportunity to create excitement and buzz. An asset that is taken off the market for three months only to be added back to available properties can sometime have a tainted or stale feel.
Sophisticated and knowlegeable Buyers make intelligent well thought out arguments to support their position that a price reduction is necessary. Buyers will state that some tenant lease provision or defect in the condition of the building, parking lot or mechanicals in the building demands a price reduction from Seller. From the Buyers position these price concession demands made just prior to the end of their due diligence period are made without any risk to the Buyer since a Buyer can abandon their retrade demands and simply move forward and close if they choose. A Seller faces serious risk of significant loss if in fact a Buyer terminates when Seller refuses to retrade.
The best two strategies to deal with the retrade problem from the Seller's perspective are as follows:
Don't ignore the retrade problem, instead openly talk about it early in the transaction. Make the last move in the negotiations and agree to Buyers price or other Buyers term conditioned on an agreement from the Buyer not to retrade. Once an LOI is signed and before the attorneys start contract negotiations, ask questions of the Buyer: 1) how many properties has the Buyer purchased and did those transactions close at the original contract purchase price? If not, why?; 2) How often does Buyer ask for price reductions from Sellers?
Seller's should ask for non-refundable earnest money at some point prior to the end of Buyer's due diligence period. If the sale price is $2 million and the earnest money deposit is $25,000, Seller should request that $5,000 of earnest money deposit be released to the Seller as a non-reundable earnest money deposit applicable to the purchase price midway through Buyer's due diligence. If Buyer is given 60 days of free due diligence then perhaps by day 30 of Buyer's due diligence period Buyer would be willing to make this small concession to Seller. A $5,000 commitment is minimal but perhaps enough money to dissuade a Buyer to terminate in furtherence of their retrade efforts.
The above strategies will not solve the retrade problem for Sellers but they may help deal with the vexing issue.