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McNellis: Bromancing the Deal

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McNellis Partners Palo Alto

Making it in Real Estate (Part Five): Bromancing the Deal

By John McNellis

McNellis Partners Palo Alto
McNellis
“I always act as our broker when we buy properties. That way I take the commission we save as my fee and it doesn’t cost my investors anything.” Except seeing good deals. In a dead heat with drunk-texting, this is among the worst mistakes a young principal can make. The problem with acting as your own broker is that it works beautifully on crap, thereby masking its insidious effect on good deals. If a broker had a listing on land in Chernobyl, she would gladly share her commission with you or Charles Manson or even Donald Trump to get rid of it. And toss in a closing dinner.

Good deals are another story.

In hot markets, great deals are as rare as good teeth in England. They’re scarce even after the bubble is blown. And if the brokerage community knows you’re representing yourself, you will swiftly discover where the Mafia learned its code of silence. The listing broker may begrudgingly send you his sales package, but will he share what else he knows about the property? Are you ever going to have a listing on which he will need your help? No. If instead of insisting on half of the commission, you allow yourself to be represented by another broker, you create two potential sources of future deals instead of one agent certain you screwed him out of a full commission. Buy three deals in a year and, in scenario one, you have three brokers who won’t return your calls or, in scenario two, six who think you’re a stand-up guy.

For anyone meant for the business, this should be obvious. The next rung on this ladder is almost as evident: in a competitive situation, always pay the listing broker the full commission. Even if this means paying your own broker on the side. It’s unlikely Einstein really said, “The most powerful force in the universe is compound interest”, but if he were given to monetary ruminations, he might have added, “It’s second only to the power of the financial incentive.” In a hot market, the listing broker may be presenting a half dozen offers to his seller. If the offers are close, which is he going to tout? Those in which he nets $50,000 or the one where he pockets $100,000? If your answer is anything but the latter, consider joining a Tibetan monastery.

On the other hand, money alone is not enough—it never is. Mirroring life itself, business is about relationships. In real estate, a bromance is your friendship with your broker (male or female), presumably platonic but deep nonetheless. Wise principals quality-time with their favored brokers. Why? Because they are truly friends and it doesn’t hurt when it comes to getting the “first call, last look” on deals.

The advice then is simple: work on your relationships, become friends with your brokers and treat them fairly. This is not to suggest, however, that you should accept any broker’s proposed commission schedule or listing agreement without first ascertaining what the going-rate is. And then fighting a bit. Tasmanian devils are hamsters compared to brokers arguing over their fees.

Beyond the basics of treating agents with respect, choosing the right one matters because the best are as specialized as the best principals. The major houses with their vast marketing networks are superb at extracting a buyer’s last nickel and thus brilliant if you’re a seller and not—unless you have a pathological need to overpay—all that useful to buyers. The small shops tend to be where the best buy-side deals are ferreted out, usually a result of determination and local knowledge.

In retail, the best buyers’ brokers are often not the investment sales guys, but leasing agents. This is intuitive: retail is about tenants, about delivering the right tenant to the right location and tenant reps know exactly where their clients want to open stores. Often enough, these agents encounter sites where the existing ownership is unwilling—or unable—to execute on development opportunities.

Once you’ve selected the right broker and are treating her the way you would wish to be treated, remember this: Disclose everything except your bottom line. While “You get in enough trouble being honest” is a great moral north star, one can suffer from being—if not too honest—then at least too forthcoming. Sharing too much information with your agent can be expensive. If you were to let even Gandhi know your absolute bottom line when signing his listing agreement, you would likely receive a spate of offers within a horseshoe-toss of that number, possibly depriving you of a higher price.

Trust your fellow man, but recognize the frailty of human nature.

John E. McNellis is a Principal at McNellis Partners in Palo Alto, Calif.