June 29, 2022 at 03:45 AM
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As much as 80% of investment sales transactions above $2 million are double ended, and clients are paying the price.
Investment sales brokerage is badly in need of modernization. According to data from CoStar, 80% of investment sales transactions above $2 million are double ended, meaning the listing broker also identifies and represents the buyer—and collects 100% of the commission. The common scheme is hampering asset values and ultimately hurting client returns. It’s a problem that needs to be addressed, says Kevin Maggiacomo, president and CEO of SVN Commercial Real Estate Advisors.
“This quiet marketing strategy results in buyers being overlooked and properties trading for less than fair market value more often than not.” In a recent whitepaper, SVN encouraged brokerage firms to adopt cooperative policies that create better transparency and competition among listed assets, which ultimately leads to a higher price.
Other industries are already operating on this type of cooperative structure, says Maggiacomo, pointing to stocks, residential real estate and even commercial leasing, all of which he calls “incredibly efficient” when it comes to transaction transparency. “Almost every industry is networked in a way where there is a centralized platform that provides total visibility of the marketplace,” he explains. “The fact that the leading industries in the economy, with the exception of the commercial real estate brokerage industry, are networked shows that the open and transparent nature of these markets provides for a fair and efficient way of selling products through the creation of organized competition. The result is the highest price that the market is willing to bear.”
The current CRE commission structure is at the heart of the problem. Brokers know that they can limit the listing to their internal database of prospective buyers to augment their personal profits, never mind the client’s return. “The commission program in investment sales is broken and misaligned with seller’s goals and objectives. The model incents listing brokers to double-end deals to earn 100% of the commission,” says Maggiacomo. “The incentive is powerful.”
It isn’t only the money. A broad marketing campaign is also more work. It means fielding more phone calls, emails and inquiries, and all of that work doesn’t return a higher profit for the broker. Still, even if brokers aren’t moving in this direction naturally, clients are beginning to demand it. There is more information and understanding about brokerage, and clients are no longer in the dark about what to expect.
Don’t expect the change to come swiftly, though. “It is going to be tough for the industry to operate in a different way, although there are powerful forces that will pull them toward a transparent and cooperative marketplace in the end,” says Maggiacomo. Achieving the goals will require three steps. First, there has to be a 50-50 commission split; it has to be required by company policy; and finally, it has to be organizationally leveraged, meaning that everyone has to do it all of the time.
Maggiacomo notes that SVN was founded on these principals, but the industry overall has been slow to adapt. He says that’s changing. “Brokers control relationships with buyers. The more brokers that are informed of the availability of a for-sale asset, and the more buyers that are reached means more offers and ultimately a higher sale price,” says Maggiacomo. “The broker of tomorrow is one that turns data that everyone has seen into information that no one else has. She is an advisor to the client.”
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