The Art of the Deal
People assume that the high bid always wins, but -- when you look beneath the surface -- you may find that other factors are more important than money
Habits play a far more important role in business than most people realize. I'm talking here about habits of mind, ways of thinking. Some of them are negative, of course, and they can hurt you. But there are also positive habits you can develop that will help you deal with a variety of business situations.
My best habit is one that I picked up from my father, who instinctively broke down problems and challenges into their basic components. He believed that most issues in business -- and in life -- are fundamentally simple, even though they may appear complicated at first. He taught me that to deal with them, you have to examine the underlying elements and figure out what's really going on. Never assume, moreover, that the real issues are those you see on the surface.
That way of thinking has been one of my most powerful business tools over the years. Recently, it helped me to buy some real estate that my company needed for expansion -- and to do it with the low bid.
My business is located on the Brooklyn side of the East River, directly across from midtown Manhattan. Alongside my site are 588,000 square feet of undeveloped waterfront property. For years I'd wanted to buy the block next to mine (172,000 square feet) and build a new warehouse on it, but it wasn't available. Then suddenly, last fall, all 588,000 square feet came on the market -- just as I was getting ready to close a deal on some real estate a couple of miles away. I immediately put that deal on hold and began looking into the possibility of buying the land next door.
On the face of it, I didn't have a chance. The land, though relatively cheap by Manhattan standards, was way out of my price range. What's more, there was bound to be competition. I knew that a lot of people would be interested in an opportunity to buy waterfront property zoned for commercial development and located in the heart of the city, with a panoramic view of the Manhattan skyline. If there was a bidding war, I'd lose.
But that was, as I said, on the face of it. Was a bidding war inevitable? Not necessarily. Most people assume that money is always the key factor in a sale. In fact, many other issues come into play, and some of them may be more important than money. Only the seller can tell you for certain which ones will be decisive.
Then again, sellers are often reluctant to give out that information. In this case, moreover, the seller was a bank based in the Netherlands that had an office in Iowa. A real estate agent was handling the deal. I knew the agent wanted to sell the property for as much as possible, but what did the bank want? Maybe the obvious answer -- a lot of money -- wasn't the correct one.
Fortunately, I have on my staff two people, Ben and Sam, who have experience in these matters. (See " Hiring the Best," Street Smarts , February 1999.) Ben tracked down the banker responsible for the property and let him know we were interested. "So is everybody else," the banker said. "Get in line."
"But our offer is real," Ben said.
"I have a lot of real offers from companies bigger than yours," the banker said. "Where's your financing? I'm getting sick and tired of not being able to close this deal."
It turned out that the bank had given a mortgage on the land to a guy who'd defaulted in the late 1980s. The bank's attorneys had tried to foreclose, but the buyer blocked them for years with various legal maneuvers. After finally taking possession of the property, the bank had signed a contract to sell it to a developer, subject to certain conditions. When the conditions weren't met, the sale fell through. "I'm not going through that again," the banker said.
Although the banker didn't name a price, it was apparent that the size of the offer wasn't the primary issue in his mind. The bank had already contracted to sell the property once for a lot of money and been burned. I thought about what the banker had said. What he really wanted, I decided, was a deal that was absolutely certain and that would close fast, preferably before December 31. Banks typically pay bonuses to employees responsible for liquidating bad loans. The size of the bonus depends on the amount of money collected during a calendar year. My guess was that we could get the land for 20% less than its market value if we could communicate our willingness to satisfy what I thought were the banker's biggest concerns.
By communicate, I don't mean talk. The banker wasn't going to believe mere words. We were going to need rock-solid financing, and we'd have to put down at least 10% of the bid as a deposit. To demonstrate our commitment, moreover, we'd have to make a significant portion of the deposit nonrefundable.
Sam and I contacted an investment company we knew in Washington, D.C. What we wanted was a letter of commitment for the full amount of the bid. I asked the investment company to come in as our partner. We'd buy the land together; I'd keep the block next to mine for the new warehouse; then we'd sell off the remaining 416,000 square feet, and the investors would keep the proceeds. I'd get the land I wanted, and they'd get a substantial profit.
The investors agreed, provided I met two conditions: I had to put up the nonrefundable portion of the deposit, and I had to find someone else to come in as a partner and commit to buying a portion of the remaining land.
Finding that partner proved easier than I'd expected. I called a friend of mine who owned a business in the neighborhood. His land had recently been rezoned for housing, which had made it much more valuable. "Yeah, sure," he said, "I'd buy some of your property in a second. I'm going to sell my land anyway, and I'd like to stay in the area."
So all the pieces were in place. We could make an offer and close the deal fast. As long as the title was valid, we didn't have to attach any more conditions. Other bidders would probably insist on doing an environmental study and an appraisal, but I knew that an environmental study had been done recently. I had a copy of it. As for the appraisal, I'd just had one done on my own land next door. Why would I need another?
In October my partners and I submitted our bid and asked the bank to name its conditions. The next day a purchase-and-sale agreement arrived, with a closing date in 30 days. We were instructed to sign and return the contract with a 10% deposit, all of it nonrefundable.
Those terms weren't acceptable, but they confirmed my assessment of the bank's priorities. What's more, we were prepared. We offered to close in 60 days instead of 30 days and insisted that only a quarter of the 10% deposit be nonrefundable. After a week or so of tweaking, the agreement was signed. Sixty days later we owned the land.
I'm sure that the other bidders were surprised. At least one of them, a major utility, had offered 20% more than we had, and I suspect there were others that had put in even higher bids. Since we closed the deal people have come to us offering to buy the unsold portion of the property for twice as much as we paid for the entire site.
Even the bank's attorney was baffled by our success. "How did you get this deal?" he asked us.
The truth is, I owe it all to my dad.
Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc. 100 company and an Inc. 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available online at www.inc.com/keyword/streetsmarts/
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NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.