Dear Monty: Four steps to a tough stance in a commercial real estate sale
By Richard Montgomery
Reader Question: A real estate agent approached us with a commercial client who would like to buy our property. The agent wants to list our property to get the process started. Why would we need to list the property if she already has the buyer? And what should we pay for commissions on this type of transaction? I wouldn’t expect to pay the typical fee since the property was not for sale.
Monty’s Answer: The listing agreement the agent is seeking is an employment contract. This agreement is between you and the agent’s broker. The law dictates a real estate agent must have a written consent.
The commission is a negotiation. Some brokers do not allow the agent to negotiate, while some brokers give the agents some flexibility on the fees. There is no typical fee in commercial real estate.
There are several options for approaching the situation you have described. The following approach increases the odds you will receive a fair price for the property and position you to obtain a favorable commission arrangement:
- Qualify the agent’s role in the transaction. One possibility when an agent has a “client” for a property that is not on the market is a relationship exists between the agent and the buyer. Is she a buyer-agent? Could the company seeking the property employ her? Are they related, tennis buddies, or served in the military together. A “customer” relationship is also possible when the buyer picked this agent after searching for a property with different agents and no agency relationship exists. How did the agent find you? Do you have the property for sale on your own? Are they talking with your neighbors as well? You need to understand the nature of the relationship to advance your interests.
- Ask the agent what type of listing they propose to utilize. Many states have different types of listing arrangements. For example, exclusive seller representation, exclusive buyer representation, limited service contracts, and transaction agreements are common. These choices may affect both the broker’s fee and the representation of your interests. Most states require the agent to treat all parties to a transaction fairly and to put the client’s interest ahead of their own. Unfortunately, while there are many honest, efficient, and knowledgeable agents practicing real estate in the US, there are also many agents who are either unethical or unqualified to grasp the legal nuances. The problem for consumers is, it takes effort on their part to minimize the risk, because many not-so-good agents look, act, and talk just like the qualified agents. Here is one example from the State of Colorado regarding agency.
- You know the property’s history. What is the highest price you could expect and the lowest price you should expect? Dear Monty recommends that every seller interview three pre-qualified agents. The reason for this is if you sought three opinions of value, each would be different. Which of the three is likely the most accurate. Here are two articles from the DearMonty.com website that address these questions. This article shows you how to determine if the opinions are valid. This article discusses the process of picking an agent. Going through this process is the best way to get comfortable with the range of value.
- Now you have more information to negotiate on the value of your property with the buyer and the commission structure with the broker. How much work will the agent be performing? Will the agent furnish their opinion of market value, called a broker price opinion (BPO)? Depending on the type of commercial property you own, a zoning change may affect the value. Will the agent be representing you with re-zoning efforts, and if that is necessary, what exactly will the agent be doing? An example of the work is many appearances at the zoning board/council meetings.
Consider focusing on the range of value for which you are selling the property as opposed to the fee. What if you negotiate a minimal fee, but sell at, or under, the low end of the range of value?
The tactics suggested here assume you would be willing to test the market with another broker. If you have to sell, this is not the best strategy. When this buyer is the only person in the room, they may be the best buyer, but you will never know if there is someone out there that will pay more.
“Richard Montgomery gives no nonsense real estate advice to readers most pressing questions. He is a real estate industry veteran who has championed industry reform for over a quarter century. Send him questions at DearMonty.com.”