Greed is Good? I Disagree!
by Bo Barron, CCIM
Most brokers love Gordon Gekko. How could you not? He swings for the fences and rarely misses. He lives on the edge, bends the rules, and does the deals. One word, though, is synonymous with Gordon Gekko, and that word is Greed. Brokers love Gordon Gekko because he made this phrase famous - “Greed is good.”
It’s not good, but commercial real estate has never gotten that message. Let me show you what I mean by illustration. Imagine Gekko’s boy is a commercial real estate broker going in for a listing. How does he sell that seller that he is the guy for the job? He says that he knows all the qualified buyers in this market. He touts the size, breadth, depth, and shoe shining capability of his database. He expounds on the virtues of pre-qualifying prospects with Confidentiality Agreements and registrations. He tells that seller that he already knows buyers that will want to see this property immediately. And most importantly, he promises that he will always act in the seller’s best interest.
But all of this is code for one thing: greed. Gekko’s boy doesn’t want to share. He wants to double-end this deal. Should he get this assignment, he is going to shop this property to all the buyers that he represents first without giving the market in general the ability to participate. He wants to capture the entire fee. If he can pull this off and close the deal, he looks like a hero and has come through on his promises - his legend grows.
The problem with this is the seller gets the shaft and the poor schmuck doesn’t even realize it. In reality, Gekko’s boy limits the potential buyer pool to just those that he controls. Why? He doesn’t want to split his fee. Brokers all the time are talking about how their database of active and pre-qualified buyers is the very best and biggest. What they are really saying is they hope that one of their people will be the buyer. So how does this serve the best interest of the seller when the entire market does not have the opportunity to participate in the offering? How can the seller ever feel certain that money was not left on the table? He can’t.
Let’s consider this from another angle? How do you get the best buy on a property? You find an off-market property with an owner that doesn’t understand the value or is in great distress, and then you negotiate in a silo where no other potential buyers are even aware anything is happening. The seller has no leverage and isn’t being represented by a professional with encyclopedic market knowledge, and he makes a bad deal - or a good deal for the opportunistic buyer.
What traditional CRE brokers do is convince the seller that this is the best way. Let’s not expose this property to the entire market so that competition can ensue. We don’t want multiple offers! We will only talk to our own vetted buyers. We especially won’t engage the entire brokerage community that represents a full 70% - that’s SEVENTY percent- of investors. Without explicitly saying it, they are claiming that they know every buyer in the market. When the largest 5 CRE firms are only doing 20% of the deals, and over 50% of deals are done by independent firms, this implicit claim is ridiculous.
Here are some personal examples of what I’ve gone through in representing buyers over the last 6 years. Often, I can’t get information on a property offering or it is made difficult. Three years ago, I received an email reply from a property inquiry stating that if I had my client sign a confidentiality agreement and disclose the client’s contact information, then the listing broker would send me the package. And, oh by the way, I would have to get my fee from the buyer. Eighteen months ago I was told by another competing firm that they traditionally never split their fees, but since the listing was in its final 60 days, they were willing to pay a buyer’s broker. How is the best interest of the seller being served by this model? It is not. The greed of the broker is being served.
My (least) favorite happened to me today. A shopping center is now for sale in my back yard. The seller is out-of-state and the listing brokerage is out-of-another-state. I was pleasantly surprised to see the property listed on a popular web portal. As I clicked the link to download the offering memorandum, I was re-directed to the brokerage website where I was required to register with the site, wait 30 minutes for my password to be emailed to me, only to logon and be hit with a confidentiality agreement. The process took 40 minutes. Shouldn’t we be making this as easy and quick as possible? Shouldn’t we want the most prospects possible to have good information at their finger tips? If I didn’t have an interested client who owns the center adjacent, I would have given up, and the seller of the property would have lost a local CRE professional that represents many of his most likely buyers.
There is a better way, but not if you are greedy. Advisors must literally put their money where their mouths are and place the best interests of their clients above their own. This means proactively offering half their fee as an incentive for the entire brokerage community to bring their buyers to the deal. There is no better way to expose an offering to the largest buyer pool possible. When that is accomplished, the seller can rest assured that he had the best chance to find not just “a buyer,” but the “best buyer.”
So instead of selling like you would try to buy a property, engage a market expert that can advise on value, market inclusively, and go for an auction environment of competing bids. I have even seen this happen in this down market. But this will never happen while brokers are greedy. To accomplish what I am suggesting, brokers must split their fees - even advertise the fee directly to their competition! Gekko was wrong. Good is serving the best interests of our clients.
What do you think?