Simply Own It – The American Dream: Increase your wealth with commercial real estate – The Cost of Buyer Representation

Brokers: The Nuts and Bolts

Don’t be fooled! Many buyers confuse a seller’s broker for their representative. Inexperienced buyers can easily mistake the person showing the commercial buildings as someone who will take care of them in purchase negotiations. They don’t and here’s why: Sellers want to make money and buyers want to save money.

With that in mind, it’s unfeasible for a single broker to represent both sides of a transaction. The seller’s broker has a fiduciary duty to the seller or the building owner, so representing the buyer fairly is next to impossible.

When a seller’s broker insists on representing both buyer and seller, beware! They could potentially capture 100 percent of the commission, instead of the typical 50%, which may skew their representation.

Titles Matter: Broker Vs. Agent

To add to the alphabet soup of who’s who in CRE representatives, the term broker and agent should be discussed. Brokers are often incorrectly referred to as agents. Technically, a real estate broker has a designation based on state laws that exceeds an agent’s level of responsibility. This applies to both residential and commercial brokerage. Brokers often hire agents to work under them. In CRE, these agents are known as:

  • Listing Agent/Broker/ or Seller’s Agent, Broker or Agent are retained by the seller for representation.
  • Agent/Broker, Buyer rep/ represent the building buyer.
  • Most CRE brokers/agents are not Realtors®. The Realtor trademark is a designation indicating membership in the National Realtors Association. Not all agents are Realtors. Nevertheless, agents or Realtors® work with residential real estate. It’s rare that residential agents have training or experience in the complexities of CRE transactions. It’s best not to trust your commercial real estate purchase to a residential specialist.

The Real World…

In the real world, buy/seller representation isn’t black and white. At times, brokers specialize in representing either buyers or sellers. Large commercial brokerages separate duties to minimize legal liability. For instance, Cushman & Wakefield has a division of brokers who only represent sellers, and a separate division for buyers.

Medium-size brokerage companies often allow a broker to have seller and buyer representation on different transactions.  They discourage one broker from representing both seller and broker in a single transaction to avoid liability issues.

In smaller communities, there often isn’t a choice and brokers may have to work both sides of a transaction.  Brokers are required to fully disclose any conflicts of interest, such as if a property is controlled by the broker’s company. The broker code requires fair and truthful disclosure to all parties. Still, when a buyer elects to work with a broker representing both sides of the building sale transaction, it is even more crucial to understand the 11 steps of purchasing.

Business Owner Tip: If a broker shows you properties, ask who they represent in the transaction. If it’s the seller, when you elect to purchase the property, inform the listing broker you intend to have buyer representation.

The Ease of Legalese

A broker is legally bound to a seller after a listing agreement contract is signed. The broker’s fiduciary duty is to provide the highest standard of care to their client, the building owner. The same is true for buyer representation.

  • A listing agreement is between a building seller and a broker.
  • A buyer representation contract, or employment contract, is between a buyer and the buyer rep.

When the listing broker helps both seller and buyer negotiate a purchase contract, the broker’s legally obligation is to the seller because of the signed listing agreement. A deal negotiated directly with the seller without representation, costs the buyer, no matter how savvy they are. Buyers just don’t know what they don’t know.

Five Classic Mistakes

Frank got a smokin’ deal on his new 15,000 SF warehouse building…or so he thought. Frank’s automotive storage business bulged at the seams and restricted growth. For ten years Frank had filled his landlord’s pockets and his lease was up for renewal in four months.  He knew a warehouse purchase was the right step to build equity in himself.

Frank had bought a few homes and once Frank identified an office building to buy, he felt his residential experience sufficient and felt comfortable with the seller’s broker for the transaction. He didn’t want additional costs by having his own representation.  He anticipated three months would be adequate for the remodel.  Everyone rushed for an early close date, and Frank was confident with a 30-day buffer zone to meet his move in date.

With no one to guide him through the pitfalls, the walls started to crumble. Frank learned the city required a separate water meter for his new space. To separate the water meter, the building lots needed to be legally split. This involved building owners, engineers, attorneys and city officials. And lots of money.

He didn’t anticipate any of this. The county assessor map recorded the lots separately as two different parcel numbers. Each property owner had separate tax bills and didn’t know the parcels were still one. When the buildings were originally built, the city didn’t require a lot split because one owner used both buildings. The original owner subsequently sold the properties, yet neither of the new owners required city permits for cosmetic changes to the buildings, therefore no permit process was triggered. Had Frank used the building “as is”, the water meter/lot split problem would have remained dormant.

Frank made five classic mistakes when buying his dream warehouse:

  1. He did not hire a commercial real estate buyer rep.
  2. He did not utilize his due diligence process wisely.
  3. He did not hire a commercial real estate attorney to be a third eye and go over his purchase contract or the Schedule B from the title company.
  4. He did not insist on getting city preapproval prior to closing.
  5. He rushed the process.

Frank now owned a property that he couldn’t legally remodel without a major expense. He had three choices:

  1. Convince the other property owner to condo the property and share the water meter. Estimated cost: $50,000 to $75,000. Estimated time: up to six months.
  2. Split the water meter at the water main and add in landscaping per new city code. Estimated cost: $50,000 to $75,000 Estimated time: three to four months.
  3. Sell the property and search for another property. Not an option. Time was of the essence and Frank would have to resign his existing lease.

Industry Lingo: Every purchase opportunity allows time for buyers to do homework to assure the property is fit for your business and meets your requirements. This homework period is called due diligence or feasibility period. A buyer can negotiate any amount of time to do their initial research on the property. Typically, this is 30 to 90 days depending on the circumstances.

Industry Lingo: The Schedule B is part of the title report itemizing property “exceptions’ which are tied to the property. These include any ownership disputes, liens, CC&R’s, easements, by-laws, leases and other items that remain of record and transfer with the property.

The Moral of the Story

Frank could have avoided some of this aggravation and cost by hiring a buyer rep. The buyer rep would help Frank with due diligence and discover the issues in advance, allowing Frank time to make an educated business decision, and possibly negotiate accordingly.  In the end, Frank paid an additional $100,000 for the water meter/lot split and thousands in lease holdover costs because his lease expired 4 months prior to his move-in date. This hardly turned out to be his smokin’ deal.

Costly Mistakes Averted

So, what does buyer representation cost? $0.00. Nothing, nada. Zero, zippo. The seller pays for your buyer rep, just like when purchasing residential property. It is baffling but let me explain.

A seller hires a listing broker to market and sell their building. This contract details the commission fee, an agreed upon percentage of the gross value of the sale price. Once there is a fully executed purchase contract on the subject property, the seller pays the agreed upon commission to the brokerage company.

Industry Lingo: A listing broker is a licensed real estate professional who obtains the contractual right to sell commercial property. Often in CRE, broker and agent are used interchangeably. AKA: listing agent, seller’s agent/broker.

Industry Lingo: A Purchase Contract defines the purchase of real property. Some see it as the ‘street map’ for the complete transaction.

If the listing broker is the only broker involved in the transaction, his or her firm receives the entire commission. When the buyer has representation, the gross commission is typically split 50-50 between the buyer rep’s brokerage house and the listing broker’s house.

Now it is clear why a listing broker is eager to assist the buyer who has no representation with the purchase. The listing broker makes twice the money.

Industry Lingo: Brokers often refer to a brokerage company as house. In-house is when brokers refer to their commercial brokerage company.

Insider note: Both brokers are paid a commission out of escrow once the property closes. The agreed upon percentage of the fee, up to 50 percent, goes to each commercial brokerage house. Neither broker receives 100 percent of the commission unless they are a solo designated broker. If either broker is part of a team of brokers, they must split the commission with their team. A $25,000 commission may net the lead broker as little as $5,000 based on in-house splits, after twelve months work.

Simply Own It, the American Dream, is scheduled for publication in late 2020.  It is the second in a series of commercial real estate books for companies and outlines the value of purchasing commercial real estate for your asset portfolio. SimpLEASEity™ , the first book, shares hundreds of leasing tips for business owners and can be purchased at www.amazon.com