Brokerage

Buy in to Buyers Brokerage

Agreements to Represent Buyers Can Pay Off for Brokers.

Twenty years ago, investment brokers accepted open listings as the standard way to sell property. Today, few commercial investment real estate professionals draw most of their income this way.

However, a broker representing a buyer often works the buyer like an open listing. For instance, a buyer may say, "Bring me a good deal and you can represent me." After the broker finds the deal, maybe the buyer will decide to use the broker — or maybe the buyer suddenly remembers a cousin who has a real estate license and jumps ship.

Brokers can turn such tenuous possibilities into profitable deals by employing buyers brokerage agreements. Simply put, they are business arrangements: A broker agrees to represent a buyer who agrees to use the broker’s services exclusively during a specified time period. Instead of listing a property, a buyers broker, in effect, lists the buyer’s cash.

Buyers brokerage recognizes that a great deal of time and work goes into finding appropriate investment properties and that brokers should be paid for this work. It works as a screening tool, rationing time and involvement by investing in a few key clients who are willing to pay for a broker’s expertise.

Advantages
Like other fee-based services, buyers brokerage can benefit both brokers and clients. While residential agents have embraced the idea more widely, commercial brokers will find advantages to it as well, including:

  • assurance of being paid full commissions and wasting less time with people who are not serious buyers;
  • closing more and/or larger transactions; and
  • providing a service that investors need even more in the electronic age, including interpreting online data.

The buyer’s advantages may include:

  • the opportunity to see more and better properties;
  • skilled and better-informed decision making and negotiating; and
  • the assurance that the agent is working in the buyer’s best interest.

Obstacles
Despite the advantages, buyers brokerage may present the following challenges.

Unfamiliarity. Because the practice is not yet the industry standard, a buyers broker may be a pioneer in the local investment market. Some agents may perceive a buyers broker as a threat; they may want to keep the full fee from the listing agreement in hopes that the buyer will pay the buyers broker’s fee. But offers submitted through a buyers broker will specify that the fee will be paid from the transaction. Thus, sellers can decide what is in their best interest.

Risk of Lost Business. Insisting on signed buyer-representation agreements will be a challenge. Not everyone will sign. If a client is interested but balks at signing an agreement for six months, a broker should offer a one-month or even a one-week agreement. Brokers may be better off with a few qualified clients willing to pledge their loyalty in a written agreement than gambling time and effort on unlisted buyers.

Switching Gears. Typically, brokers prepare a full marketing proposal for every principal they want to represent, which often requires a lengthy analysis of the seller’s property. Buyers brokerage presentations are simpler, shorter than property listing presentations, and follow a fairly standard format. Brokers are selling services, regardless of the type of property the buyer seeks, and those services do not change. No special work is done until the client has hired the broker.

Compensation
After the broker and client agree on compensation, it becomes a non-negotiable point. In most cases, the broker’s fee is the same as the standard arrangement — half of the most common listing fee in a given community — which is what the seller would expect to pay the agent representing the buyer.

By signing the broker’s agreement, the buyer becomes the back-up payment source, agreeing to cover whatever part of the commission the seller does not. However, in most buyers broker transactions, the buyer does not pay any part of the fee.

Becoming a Buyers Broker
To convince investors who never have hired a buyers agent before to do so, brokers must show them why this system is in their best interest. To make sure they understand the process, brokers can take classes or seminars on buyer representation.

The Real Estate Buyer’s Agent Council of the National Association of Realtors offers the Accredited Buyer Representative designation (http://www.rebac.net). Although directed toward residential agents, REBAC may prove helpful to commercial brokers interested in buyers brokerage.

Becoming a skilled, efficient buyers agent takes time, but it leverages much of the same knowledge that commercial real estate professionals already possess. Commercial brokers can rely on their expertise in the following areas to expand into buyers brokerage.

Self-Promotion. Brokers can use familiar tactics to get the word out that a buyers broker is the expert that buyers need. They can contact past clients, advertise in the newspaper, mail postcards, use the Internet, cold call, give speeches or seminars, or write articles. The idea is to make buyers want to hire brokers — in writing — before going to work for them.

Market Knowledge. Brokers already should have the requisite familiarity with standard information such as a market’s rents, vacancy rates, expenses, cap rates, financing, and local protocol.

Understanding the Client. Buyers brokers help investors make informed decisions based on market realities, yet they also must be aware of the emotions affecting buyers’ decisions. Investors want someone who knows them and understands their needs — which may be different from their wants. While investors may not always understand that, it is to a broker’s advantage to perceive and articulate these differences.

Setting Realistic Expectations. Investing time in improving the buyer-broker relationship — private, customized counseling — is the single most important aspect of being a successful buyers broker. Brokers should take the time needed to educate buyers about what is achievable, because unrealistic expectations are the main reason that most potential buyers do not close deals.

To minimize difficulties when problems occur, brokers also should warn clients about possible obstacles. Transactions rarely go smoothly: During negotiations, due diligence, financing, or closing, clients may encounter unpleasant surprises and freeze. Make sure to remember that brokers get paid when clients close, not when they balk.

Provide Needed Data. Develop information sources about available property, such as listing brokers, newspaper advertisements, and the Internet. Keep tabs on properties that were marketed unsuccessfully.

Evaluate a Buyer’s Alternatives. Many investors need help understanding the consequences of various alternatives. Assist buyers by estimating income and expenses and running projections so they can make informed choices. Consider conducting rent surveys and line-by-line expense analyses so that clients can see alternatives using major decision criteria, such as cash flow, internal rate of return, net present value, and future wealth.

The Way of the Future?
The commercial real estate industry is changing rapidly, and brokers should consider opportunities that allow them to "work smarter." Buyers brokerage offers a service-based approach that guarantees payment upon a client’s purchase. Be prepared: In 10 years, buyers brokerage could be the norm in most markets.

Terry Moore, CCIM

Terry Moore, CCIM, is director of ACI Commercial in San Diego. He has closed more than 100 income property escrows in less than five years. Contact him at (619) 299-3000 or tmoore@ccim.net.

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