How will the NAR Commission Settlement Affect Commercial Real Estate Brokers?
How will the NAR Commission Settlement Affect Commercial Real Estate Brokers?
Before we begin, please allow me to set a few parameters.
1. I’m just a dumb Commercial Real Estate Broker. I’m not a legal expert and every attorney I deal with reminds me of these facts. The purpose of this article is not to present a legal opinion, but to set forth how I believe the NAR Settlement will affect Commercial Brokers and commercial property sales.
2. I don’t use the word commission in by business. I use the word Brokerage Fee. I stopped using the “c-word” in 2017. My business is structured like a law firm. I drive revenue and fees but we have many, many, many expenses. So for the purposes of this article, you can assume brokerage fee means commission.
3. Each market is different. If you are reading this in a market other than Atlanta, your mileage may vary.
4. I work in a very specific part of the market. I only broker office buildings, medical buildings and industrial properties. Within those confines, the majority of my business is within two counties — Cobb and Fulton Counties in Atlanta. I do a little work in a few other counties (Dekalb, Gwinnett, Forsyth and Cherokee) but those are still within one MSA. If you are in the business of purchasing multi-family buildings, you may have a different experience.
Let us now give an example of how brokerage fees work when an owner wants to sell a building.
An owner, Tony, approaches me wanting to sell a building. I’ll prepare for Tony a Broker Opinion of Value, a marketing strategy, and a listing agreement. Essentially, here is where I believe the market will value your building, how I am going to find those buyers and what I’ll charge you for my services.
Tony may agree on the price and my brilliant (thanks Tony!) marketing strategy but question what I’m charging for my services.
I will tell him that in order to find the highest market price for his property, I need to broadly expose the property to the entire market and as such, I need to offer a fee to other brokerages who may have a buyer for his building. He is signing an agreement with me that he will at closing pay me a brokerage fee but I will share some of that fee with another brokerage (co-op fee is how the press writes it) if their client purchases the building. Now in my listing agreement, I have in there that I determine how much of that fee I share with the other broker.
The market will determine both what I can charge Tony for my services and how much, if any, of that fee I share with another brokerage. If it is an extreme seller’s market where we have multiple bids at our desired price, I may not offer a very high fee. The market is telling me I don’t need to offer a bounty for a buyer, there are plenty already interested. On the opposite end, I recently did a deal where the buyer’s broker made twice as much as I did! That brokerage received 65% of the total fee and I took 35%. The reason is simple, I did not have many buyers at our price (we were at the very tip top of the market) and I needed to incentive that broker to get his buyer all the way to closing.
Everything is a negotiation. Everything hinges on the simply, yet complex force of supply and demand.
So how does the NAR Settlement affect commercial brokers?
It doesn’t. No effect. It may cause questions to be asked during the listing negotiation and purchase negotiations, but we are and always have been in an industry that allows market forces to dictate the fees a broker can charge.
Commercial Brokerage and the MLS
I believe every property should have maximum exposure to the buyer pool most likely to close on the property. For many commercial properties, that buyer pool isn’t on the MLS. If they are on the MLS, they are also on more sophisticated platforms like CoStar, LoopNet, Crexi and CommercialSearch. If that buyer is only on the MLS, they aren’t likely to be able to pay maximum price and get the transaction closed.
However, because there is nuance in everything, I do believe commercial buildings under ~$500,000 should be listed on the MLS. A lot of the buyers for this type product hire residential agents to find them property and this is simply the sandbox they are used to. In these instances, CRE Brokers will have to explain to their housing brethren how the market dictates fees.
Are Commercial Brokers Realtors?
Commercial Brokers, myself included, hate being called Realtors. The funny thing is, I am a member of the Atlanta Commercial Board of Realtors and striving for my CCIM and SIOR designations, which are sister organizations within NAR but specific to commercial practitioners. AND — many of my contract forms I use are provided to me because of my NAR membership. But no, we aren’t Realtors. Crystal clear, right?
I hope this provides clarity. I have other opinions on the NAR Settlement but as those opinions aren’t related to commercial real estate, I’ll keep them to myself.
If you have any questions, please reach out.