There’s something about sharing that commercial real estate brokers don’t like. It’s called splitting the commission.
Commission splitting is an everyday occurrence in residential real estate, but a Canadian commercial broker says he wants to bring that philosophy to the commercial world, where private listings are the norm and sharing information with competitors is almost taboo.
Derek Lobo, the founder of Rock Advisors Inc., which sells apartment buildings, says he’s about to unveil a deal for the exclusive rights to operate under the Sperry Van Ness International Corp. brand in Canada. With 190 offices, SVN is the sixth-largest firm in the U.S., and has long focused on the idea of co-operation among brokerages.
The problem with the commercial industry is it’s fragmented and dysfunctional,” said Lobo, whose new company will operate under the name SVN Canada Inc. and sell commercial property among multiple asset classes, such as office buildings and industrial land in addition to apartments.
He says the way the industry works today, most brokerages will try to sell a client’s property on their own stable of clients. “I don’t typically co-operate with other brokers,” Lobo said.
The problem with this scenario is that, with only one firm’s profit at stake, it might not produce the best price. For example, a firm selling a $10-million building might get a two per cent commission, or $200,000 in a typical transaction. That commission is split between the brokerage and the broker actually making the sell.
If the broker is able to sell that building for $11 million, Lobo says, he only collects $20,000 more — compared to the selling client, who would get $980,000 more. “Where is my incentive to you get $11 million?” he says. “Am I going to get you the best deal just showing (the building) to my 10 best clients?”
Lobo’s proposed new method for selling commercial property increases the incentive to raise the price by introducing more competition. It’s a system that’s old hat in the residential world. Commission structures differ by province, but in Ontario the average residential commission is about five per cent, split evenly between the selling broker and any agent who brings in a buyer. As Canadians have seen, a hot market brings multiple offers in the residential market and agents encourage people to come forward with their best offer, thereby increasing the price.
In the example of the $10-million building, the commission might remain at two per cent, but it would be split between the selling and buying brokers. A $10-million sale would therefore gain each broker $100,000 in commission, and the incentive to find more interested buyers to raise the price would increase.
Lobo says he wouldn’t create a system like the Multiple Listing Service system, where all listings are shared, but he will open his listings to any other broker who can bring in a buyer. For Lobo, the benefit will be increased volume. He hopes.
What am I looking for from a brokerage? I want them to know who the potential buyers (are) and to know what price I can get from those buyers
Critics of his plan suggest that for a large scale transaction worth, say, $100 million there are only a handful of buyers out there ready to make an offer, and one brokerage can track them all down. A private sale also offers a degree of anonymity a client might want because building sale can create problems with tenants.
Another key issue for sellers adapting to this type of system is the lack of information on the brokerage acting for the buyers. Brokers do major due diligence on a commercial property before listing it for sale, a brokerage acting for a buyer that knows nothing might not have the same standards.
“What am I looking for from a brokerage? I want them to know who the potential buyers (are) and to know what price I can get from those buyers,” says Paul Finkbeiner, chief executive of GWL Realty Advisors Inc. “They have to be in the market, talking to all my competitors and people looking to buy my assets.”
Kevin Maggiacomo, the chief executive of Boston-based Sperry Van Ness, said even in the United States, where his company has been in business since 1987, more than 80 per cent of investments worth more than US$2 million are not co-brokered.
“There is no way any broker can know who all the buyers for a property are, because most people come from out of state,” said Maggiacomo, about the need to share listings. “No matter how successful you are as an individual or how large a firm you work (at), you are simply not going to get listing information in front of all prospective buyers if you seek to identify the buyer on your own.”
He says the situation in Canada is not much different from the U.S. About 50 per cent of deals involve buyers coming from another city, meaning the selling broker probably can’t identify all potential buyers.
“The market is now truly global and it totals some US$1.1 trillion. You’ve got global trade routes, global investment,” said Maggiacomo, adding that sharing information has never been more important. “You could argue leaving half the fee on the table generates more revenue for us (in terms of volume). It also gives us (loyal) clients for life.”