If you are in any way involved in real estate, you have probably heard about the National Association of Realtors settlement which is going to change the landscape of our industry’s compensation model for buyer’s agents in the near future. Many of the residential real estate agents I have talked with are concerned (freaked out) about the unknown future compensation structure, and how it will work.
The settlement requires that offers of buyer’s broker compensation can no longer be shown publicly or listed in the MLS. Until now, buyer’s agents/brokers could look at the MLS and know immediately what compensation was being offered by the seller.
Commercial real estate agents have been much less concerned with this change because commercial buyer’s agent compensation has largely worked this way for many years.
How is commercial real estate different? Many, if not most, commercial real estate agents and brokers use LoopNet, CoStar, Crexi, Catalyst, CBA, and other commercial real estate search engines and listing platforms to list their properties. Most of those platforms do not show a buyer’s agent the compensation that is offered for a buyer’s representative. Few commercial listings are shared on the MLS. So, for the most part, commercial brokers have been working under this compensation structure for a long time. In addition, commercial compensation in general has been much more varied. There is a wide range of compensation offered because the price range and complexity of deals can vary vastly. You can sell a $100,000 commercial property, or a $1 Billion commercial property. The percentages paid are on a sliding scale with the highest percentages paid on the lower price points and lower percentages paid as your deal size increases. Basically, commissions can never be assumed to be “standard” and each deal is different.
So how do you navigate this lack of transparency? There are five steps we follow and you might consider following them as well.
Step One: Hosting a buyer consultation where you discuss exactly what your buyer is looking for, set expectations, and discuss how you will work together, including how much you charge for your services, and having them sign a representation agreement is the first step. Typically, representation agreement has a section that outlines the minimum fee you will charge them once they successfully purchase a property. My goal is always to negotiate with the seller to get them to pay the compensation, but sometimes that is not possible, so the Buyer needs to understand up-front that they may be required to make up the difference between what we can get the seller to pay and the minimum.
Step Two: Once we have identified a property the buyer has interest in pursuing, we typically reach out to the listing agent to ensure the property is still available (another caveat of not using the MLS for listing properties for sale or lease is that sometimes brokers do not remove them or mark them as pending in a timely manner because there are no requirements to do so with the non-MLS listing services). Once we see that it is available, we typically ask a few clarifying questions about the property, the seller’s needs and goals, and then we ask, “what co-op brokerage fee is being offered to the buyer’s agent in this listing”. The listing agent tells us that the seller is offering a certain fee and we politely thank them for the information.
Step Three: You can opt to send the seller (via the listing agent) a compensation agreement to sign with the fee you were told by the listing broker, or if you want to negotiate the fee higher, you can send one with a higher fee to the seller. You can send this immediately after your call with the listing agent, or you can wait and send it with the offer you submit on your client’s behalf. My suggestion is that if you need to negotiate, do it before you submit an offer. If you are just confirming the amount that was expressed to you by the listing agent, then you can send together with the offer.
Step Four: If the listing agent tells you the compensation is less than what your Buyer Representation Agreement lists as the minimum fee you will accept, then you need to let your Buyer client know (in writing preferably) prior to drafting an offer, that they are going to be obligated to pay the difference and help them understand the total that they may be required to pay at closing. It is also important to explain that this amount will be in addition to the purchase price and will require additional available cash in excess of their down payment. This may eat into their funds available for their down payment and could affect the total they are able and/or willing to offer for the purchase of the property.
Step Five: Write and submit an offer based on the knowledge of what will be required from the buyer (if anything) in addition to their down payment, to close the transaction. Once the offer and the compensation agreement with the seller are agreed and executed, you proceed with the transaction as you always have from that point forward.
While the process is a little more cumbersome and does require a little more work on the part of the Buyer’s representative, it really is not difficult to properly, and professionally address Buyer’s representative compensation.
If you would like to discuss the best practices that we have learned in the commercial real estate market, please don’t hesitate to reach out we are happy to discuss your concerns or ideas around this or other related issues.
High Ground Commercial Real Estate - A KW Commercial Affiliate
Gregg Davis (208) 344-6275 or GDavisCRE@gmail.com
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