The Broker’s Corner: Commissions
Updated: Feb 3
By Virgil Nethercott, CCIM
I have been fortunate enough to work with a great set of clients in my career that sees the value in the service that they receive. I equally value them as clients and helping them accomplish one step in the real estate empire.
Commission compensation can be a challenging subject for Brokers and consumers alike. Everyone knows the long-standing joke: real estate agents list a property on a couple of websites, fill out a few pieces of paperwork, and laugh all the way to the bank with thousands of commission checks in hand. I’ll admit that some transactions are almost that simple. However, it has taken me years to get to that level of confidence and transaction knowledge to make transactions that easy.
I want to go in-depth with you about the work that specialized brokers do in the background. Years of practice go into getting them to where they are today. I will also touch on how a cheaper real estate transaction can come back to haunt you long after the closing documents have been signed.
There is a common misconception that brokers and real estate agents don't have overhead expenses as a regular business does. For some agents, that is true, they work from their home office, and their only real cost is the laptop that they use.
However, with specialized brokers that is not the case. I won't go too much into detail and just focus on the surface level overhead expenses. I have an office space, with office staff on the payroll, and I pay quarterly taxes just like a regular business, many online subscription sites, and a multitude of insurance to protect transactions in the unlikely event of a problem.
When you decide to hire my team for acquisitions or dispositions, you are hiring an experienced broker with extensive knowledge of this asset class as well as other trends that are happening in the market regionally and nationally.
One of the most powerful tools I bring to your transaction is my comprehensive database. Within my organization, I maintain a database of all the MHC sales that transact on the market and off the market within my marketable region (including Idaho, Wyoming, Montana, North Dakota, and South Dakota.) Another data point of information that we collect on these properties is a lot of rental rates within the same marketable region I mentioned above. These sold properties can be anything from Broker-led sales to private sales, and even auctions.
Unfortunately, there is no effective central database for this niche that collects and maintains all of this data. So it often becomes lost, and even local and regional appraisers can't get a hold of this information without asking brokers in those markets. We work diligently to ensure that data isn't lost.
Having this arsenal of information I’ve collected, cataloged, and organized: when Buyers or Sellers ask me for a market analysis on a property to determine what the lot rent range is I can quickly provide that information for them to make informed decisions.
Market sales and lot rents are continually evolving pieces of information. We maintain our database diligently and frequently to keep up to date information. With that in mind, I can quickly determine a local market cap rate and value your property based on the financial performance that you have given me.
For example, imagine you value your asset and use information from a sale of a competing MHC in your market that sold four years ago for a 10% CAP rate. On the other hand, if I were to value your asset I bring the knowledge of the most up-to-date sale information to your transaction. Sometimes these CAPs can be as low as 6% to 7%... By hiring my firm for $60,000 at the closing commissions, I've saved you potentially $300,000 in new found value that you didn't think was originally there.
I stress this point because this is a real scenario that I run into multiple times a year, especially when the person purchased this mobile home community over ten years ago. CAP rates were completely different back then and not as competitive as we find them today.
The database that my firm maintains is an invaluable asset to my clients because it's a competitive edge in the sale of your asset.
In the event you are wanting to sell your community as a "For Sale by Owner," please reach out to me. I will gladly share comparable sales in your market. I'm never going to withhold information and risk someone losing $100,000 or more in value.
It is a great feeling when I can get someone an extra $300,000 on valuation than they initially thought. I feel that I bring substantial value to the transaction and therefore I charge a competitive and fair commission fee based on the final sale and paid at closing.
The next topic I would like to talk about is my advice on how not to handle broker's commissions. I want to give you an example of “How NOT to Handle Broker Commissions": Let's say your property is worth $1,000,000, and we both agree that is the value based on financial performance. You ask how much my firm will charge. Based on the talent and knowledge my firm brings to the transaction and the resources it will take I tell you an amount based on the amount of work and complexity I expect from the transaction.
Then you ask if I can do a better price. The answer will generally be no.
I am all about making a win-win situation for the Sellers, Buyers, and my firm. I must stress to you that each transaction has its complexities and with that comes the experience from said transactions. Beyond the market and experience knowledge, your sale is being provided with many resources behind the scenes that we have determined to be the most useful in these types of transactions.
A suggestion I would give to anyone in this situation is instead of looking to lower brokerage fees to look into the brokerage and the firm and review their successful transaction. Ask in-depth about their marketing strategy. The last and most important thing is to ask them for information they know on the market or region. This will be the backbone of every transaction.
My last point is that I would like to outline the value you get with paying a broker’s commission.
I'm not talking about the type of value that is standard with any real estate agent you choose. What I am talking about is the background work that no one talks about. Do you know what the number one reason people end up in a lawsuit in real estate transactions? Disclosure. Can an owner disclose pertinent information about a property in an unbiased manner when the property they are selling is their own? Of course. Do you necessarily know what should and shouldn't be disclosed? That's a small example of many elements to a transaction that brokers are involved in every day. To finish up that last part, let me go into a bit of explanation.
Material defects of the property have to be disclosed to a potential buying party anytime they are known by the Seller and/or the Broker. A broker who is well aware of the ebb and flow of specific deal transactions will understand your motivations and weaknesses. We understand the competing parties' goals and objectives. With all that information, when you ask a question about a transaction movement, we can advise you on different directions to take based on prior transaction accomplishments and failures.
On the other side of that argument, there is a saying that "you get what you pay for," which very much applies to brokers. Can you hire a real estate agent that
has sold houses their whole career? Technically, yes. They have a license to sell any real estate, and they will charge you half as much as a specialized broker will. Like any transaction with anyone, there is a possibility of an error made by the broker. For this reason, we carry Errors and Omissions insurance much like medical doctors do for malpractice. In the event that a lawsuit arises months or years after the transaction closing, you can rest assured that the E&O insurance has your transaction covered. Our firm has never had to make an E&O claim, but we carry the highest limit insurance premiums.
To conclude this 2nd part of 3 articles, I would like to touch on the couple of points that I have gone over. Although this is a compensation fee discussion coming from a Broker, I like to show clients the other side of the situation to make sure they are getting the best team behind their transaction, whether that be my firm or another firm.
Broker expenses might not be as well known and talked about. This is one reason specialized brokers will have higher expenses than a regular broker and the commission agreements are going to be larger in cost.
I discussed “How NOT to Handle Brokers Commissions,” and emphasized to look into the team’s methods and how they are earning that commission rather than the cost of it.
In addition to that, I explained the times that bringing a broker into the transaction can actually pay for the broker— plus some. Make sure you’re working with someone who has an abundance of market knowledge.
The last thing I mentioned is not a tangible value, but can most definitely save you a lot of headaches later down the line: disclosure. The transaction can be great and turn out fine, but a problem could resurface in 6 months in the form of a lawsuit from the buying party. Experienced Brokers can help eliminate anything through disclosure and paperwork. They can also give good advice on previous transactions and how those played out.
In the end, every broker conducts their business as they see fit, but there are many reasons why we are well worth employing to help you reach your investment goals.
This piece was written for our quarterly newsletter by Virgil Nethercott, CCIM
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