Agent Fees on CRE?

Question

Hello all-

I am looking at 10-25 unit properties.  I plan to avoid having an agent, since I feel comfortable with understanding valuations, and want to be able to provide a better value proposition to the Seller by avoiding the Buyer's Agent's commission.

I am assuming that the CRE market for Agent's fees is the same as residential RE: ~3% for Buyer's Agent, and ~3% for Seller's Agent, both paid out of the proceeds of the sale from Buyer.

If true, then on a $500,000 property, my bid is $15,000 more valuable to a Seller than another person's bid with the same purchase price.  (3% of $500k = $15k.)

Am I thinking about this right?  Or, am I making a bad assumption in translating residential RE to CRE?

Thanks!

-Drew

Account Closed · Answer

I agree with @Joel Owens  , though it depends on market convention.  Multifamily investors are expected to be savvy and educated investors so most buyers of multifamily will not use a buyers agent.  If you're looking to provide a competitive offer, the best way to do so is (1) to emphasis that if you make an offer you are 100% you will close the deal, and (2) which is in line with (1) show substantial proof of funds and ensure you have a good team to help you get through the transaction (debt provider), real estate attorney, property manager, etc... This way (2) will provide assurances that you will achieve (1).

Andrew Kniffin · Answer

Thanks Account Closed , I think that's helpful information.  I look forward to being in the market for 60+ unit!

I understand the metrics, math, and conventions used to value MF properties.  I've worked with a Buyer's agent before, and frankly did not find value in him.  If anything, communication became more difficult as I had to route comments through him.  In that instance, I did not see the value in Buyer's Agent.

Joel Owens · Answer

I think it comes down to the quality of broker you can command with what you are trying to do.

Brokers should carefully select buyers to work with for investments just like investors select properties to buy.

It should be a business decision and also if you gel together well and want that lifetime relationship.

When first entering commercial buyers start off generally with smaller properties. They typically barely qualify with liquidity to net worth and on top of that want some kind of owner finance on some of the note. They typically look strong to a residential lender but are weak by a commercial lenders standards. What I mean by this is maybe they own 10 houses so would be considered an experienced residential investor but in the commercial realm their assets look marginal because of the higher entry points and requirements.

There is a lot of heavy lifting on say a 1 to 2 million property. If I do heavy lifting I would prefer it be on a 10 or 20 million property. The payday is worth my time and effort.

I will work on smaller deals but buyers have to be ready and not waste my time. If buyers are all over the place I do not work with them. Deals are hard enough to get to closing when the buyers are laser focused and fully committed to the process.

For instance as an analysis if a buyer wants to buy a 60 unit for 20k a door I know that is 1,200,000 sales price and 36,000 in commission at 3%. I do not need a calculator. 40k a door is 2,400,000 and 72,000 at 3%. Likely in due diligence the price will drop and so will the commission before it closes because of a lower anticipated sales price off the 3% commission.

I know at 2,400,000 they will need 600,000 down payment at 25% down. They will also need 180,000 in reserves minimum. If they get a seller to hold a 10% second then 360,000 down. Net Worth needs to be close to purchase price although more emphasis is placed on liquidity. The lender would prefer you highly liquid and cash rich versus tons of equity and cash poor.

This is why I get buyers PFS before I jump on a call to determine if what they want to do is feasible or pie in the sky. If you as a buyer do not get highly qualified by that broker then you need to run from them.

Account Closed · Answer

@Andrew Kniffin

10-25 unit properties are pretty small, so I'm unsure if my comments apply to that size transaction.  My comments probably apply more to 60+ unit multifamily.

Andrew Kniffin · Answer

So, off-the-bat Seller's Agent gets 6%.  Is it fair to assume that it's the same on commercial transactions?

David Erjavec · Answer

If I were buying a commercial property I would want a agent that represents and stands up for my interest not being manipulated by the listing broker.

Joel Owens · Answer

Andrew why don't you give it a try with your capital and see how it works out for you??

I know some buyers that like to go it on their own and it's just their style. I wish them the best and let them have at it. There are tons of other clients who want help and want to land the deal.

My clients for example do not have a lot of time to do things for themselves nor do they want to. These clients have millions of dollars or higher so they want professional service. I can see on smaller commercial deals under 1 million where the buyers want to do most of it themselves.

Long term asking listing brokers directly that you want to take money out of their pocket will get you thrown to bottom of the barrel for opportunities.

I give the analogy that if everyone eats steak then we are all happy. If everyone is eating steak but someone is getting a stale cracker instead they will bite back........... : )

Steve Olafson · Answer

It really does sound good in theory.  I have dealt directly with sellers on a couple of occasions.  It was not pretty.  One fell out of contract and the other was filled with conflict.

From my experience any agent in the middle is working toward common ground.  The absolute truth may not always be passed along but that is what is often needed.

Wayne Brooks · Answer

Larger priced properties may, or may not, have a smaller % commission.  Having said that, going direct to the listing agent doesn't eliminate a buyer's agent altogether, it makes the listing agent both.  He still has some liability to you in the transaction, and still has to do coordination, etc. so don't expect the commission to be cut in half.

Agent Fees on CRE?

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