Don't Make a Deal You Don't Intend to Honor
Q. I’m a junior acquisitions guy in a large real estate development company, and I’ve been assigned to work closely with our senior partner.
On my first deal, he told me to bid high on a property to make sure our firm beat out the other bidders, but not to plan on actually paying that price. “We will negotiate it down after the contract is signed, when we find lots of ‘issues’ with the property during due diligence,” he said. “On the eve of settlement, the seller won’t have the time or inclination to put it back on the market, and he’ll accept our lower offer.” This man is a mentor to me, but I’m troubled by his hardball approach to deal-making.
A: You should be, because what he told you to do is unethical. If this is the way the firm does business, you should find someplace else to work. I’ve heard of some legendary developers who have a bad reputation for doing this, under the principle that “the negotiation begins, not ends, when the contract is signed.”
An ethical businessman bids what he truly believes the asset is worth and what he is fully committed to paying. It is dishonest to make a bid -- and sign a contract --that you don’t intend to honor.
Sure, there are reasons a contract buyer may legitimately decide to walk away from a deal or renegotiate the price. For example, he might discover during due diligence that the property was misrepresented by the seller. Or a new problem might surface, calling into question the real market value. At that point the contract buyer and seller have a choice to make -- keep the deal alive under different terms or let the contract lapse.
Sellers can protect against a bad-faith bid by requiring a large deposit that’s subject to forfeiture, making sure that the property is accurately represented, and being prepared to enforce the original contract, if necessary.