The Commercial Broker Cheat Sheet
By Peter Ciriello CCIM CBI
After years of witnessing unscrupulous brokers "dish" clients properties in various ways which violate fiduciary duties, I decided to make this CHEAT-SHEET for any Seller when choosing a broker. This applies to both Business Brokers and Commercial Real Estate Brokers.
The Cheat-Sheet is designed to help you determine the answer to one very important question - "are my needs going to be primary, even with, or secondary to the needs of the broker I hire?"
So without further adieu, here are some questions to ask broker's to help determine whether they will work for you, work with you, or work for themselves first.
The Cheat-Sheet is designed to help you determine the answer to one very important question - "are my needs going to be primary, even with, or secondary to the needs of the broker I hire?"
So without further adieu, here are some questions to ask broker's to help determine whether they will work for you, work with you, or work for themselves first.
1. How much Errors and Omissions insurance does a commercial real estate broker carry?
In Commercial Real Estate, almost every broker carries Error and Omissions (E&O) Insurance, in Business Brokerage however, many do not. Those that don't typically feel they become a target for lawsuits if they do. While considered a minor item in Business Brokerage - having $1MM per occurrence insurance policy in commercial real estate is a must. It protects the client against the agent (possibly the buyer's agent) making an error that would harm the Seller. Regardless, asking this question to a broker is often not thought of by clients, but it should be included in any interview. See, to make a claim against a broker's Errors & Omissions does not mean the client needs to sue the broker - they simple need to agree that if they are unhappy with something as a result of the broker's actions, that the broker will either pay to make it right or make a claim.
By carrying E&O and showing willingness to take responsibility for an agent's own actions, the agent shows that they are willing to work for you or with you. By not carrying it, or refusing to make good on their word OR promising you something and then voiding it via a clause in the listing or purchase agreement means they will put their needs first.
By carrying E&O and showing willingness to take responsibility for an agent's own actions, the agent shows that they are willing to work for you or with you. By not carrying it, or refusing to make good on their word OR promising you something and then voiding it via a clause in the listing or purchase agreement means they will put their needs first.
2. What access to forms does a Commercial Real Estate Agent Agent have?
California Association of Business Brokers (CABB) has forms for selling businesses, and one or two for selling real estate.
California Association of Realtors (CAR) has forms for selling real estate and one or two for selling businesses.
Neither are good for selling commercial real estate.
Whether principals know it or not, using forms protect them in transactions. Why? Because state-recognized forms are promulgated. Promulgation of forms means that the contracts used cover all the bases and make sure all parties are protected through the use of certain required forms. It also means that the forms are worded in an appropriate and fair manner to the parties.
If you agree to use a form from a specific broker (and not a state-promulgated form), you're essentially agreeing to believe that the broker has written a listing or purchase agreement in your best interest, not theirs. How many attorneys do you know draft documents for the benefit of parties they don't represent?
A good commercial broker not only has access to AIR forms, the standard in the industry, but has experience using them (especially when it comes to signing the Listing agreement). AIR forms are standardized commercial real estate forms that keep transactions fair for clients, and they protect them against having to pay legal fees.
By using promulgated forms, a broker shows that he works for you or with you. Using his own broker's attorney-drafted agreements means he puts his needs above yours.
California Association of Realtors (CAR) has forms for selling real estate and one or two for selling businesses.
Neither are good for selling commercial real estate.
Whether principals know it or not, using forms protect them in transactions. Why? Because state-recognized forms are promulgated. Promulgation of forms means that the contracts used cover all the bases and make sure all parties are protected through the use of certain required forms. It also means that the forms are worded in an appropriate and fair manner to the parties.
If you agree to use a form from a specific broker (and not a state-promulgated form), you're essentially agreeing to believe that the broker has written a listing or purchase agreement in your best interest, not theirs. How many attorneys do you know draft documents for the benefit of parties they don't represent?
A good commercial broker not only has access to AIR forms, the standard in the industry, but has experience using them (especially when it comes to signing the Listing agreement). AIR forms are standardized commercial real estate forms that keep transactions fair for clients, and they protect them against having to pay legal fees.
By using promulgated forms, a broker shows that he works for you or with you. Using his own broker's attorney-drafted agreements means he puts his needs above yours.
3. What access to Online Systems does a Commercial Real Estate broker have to market the property?
Unfortunately, these two industries are not the same when it comes to marketing assets. Access to online systems means your property gets marketed to the most investors. More investor eyeballs typically means a higher sale price.
In Business Brokerage, brokers only submit vague summaries of businesses for sale on websites like BizBuySell.com, BizBen.com, and BusinessBroker.net. The reason for this is that most business sales are HIGHLY CONFIDENTIAL so that employees and competitors are not aware of the sale. Also, most business brokers don't cooperate with other business brokers.
In Commercial Real Estate, investors want to understand the financial metrics of deals before they consider them. Therefore listings are more public and more expensive. The most popular websites for commercial brokers to list properties for sale on are CoStar.com, Loopnet.com, Crexi.com, Brevitas.com, Cityfeet.com, Showcase.com and some syndication companies like Catalyst.
CoStar: If the broker doesn't pay for access to CoStar, he's not a real commercial real estate broker. CoStar is the biggest commercial real estate data collection company in the world, and without good data, no broker can fully represent a client. This service costs $699/month on average. CoStar owns Loopnet, Cityfeet, and Showcase as well.
Loopnet: Premium Listing Access to Loopnet is a minimum.
The more access that an agent has to systems that will get the property out to others, the more interest a property will receive and it becomes more likely that the property (or business) will sell for a higher price.
In Business Brokerage, brokers only submit vague summaries of businesses for sale on websites like BizBuySell.com, BizBen.com, and BusinessBroker.net. The reason for this is that most business sales are HIGHLY CONFIDENTIAL so that employees and competitors are not aware of the sale. Also, most business brokers don't cooperate with other business brokers.
In Commercial Real Estate, investors want to understand the financial metrics of deals before they consider them. Therefore listings are more public and more expensive. The most popular websites for commercial brokers to list properties for sale on are CoStar.com, Loopnet.com, Crexi.com, Brevitas.com, Cityfeet.com, Showcase.com and some syndication companies like Catalyst.
CoStar: If the broker doesn't pay for access to CoStar, he's not a real commercial real estate broker. CoStar is the biggest commercial real estate data collection company in the world, and without good data, no broker can fully represent a client. This service costs $699/month on average. CoStar owns Loopnet, Cityfeet, and Showcase as well.
Loopnet: Premium Listing Access to Loopnet is a minimum.
The more access that an agent has to systems that will get the property out to others, the more interest a property will receive and it becomes more likely that the property (or business) will sell for a higher price.
4. How does a Commercial Real Estate Broker share my property and cooperate with other agents?
Most business brokers do not share their commission with other brokers. In commercial real estate, the difference between sharing and not sharing fee can lose the client the highest priced offer. Most business brokers do not understand this notion.
If a commercial broker does not market the property on sharing websites and does not cooperate and offer a cooperating fee, you can assume that they will put their needs above yours. When an agent decides who should be able to purchase the property based on how much fee will be delivered to him, he is doing his client a dis-service. That said, most commercial brokers intentionally hide this fact, and they show their clients postings on MLS websites, but they don't tell the client what they say when another broker calls on the listing. Most commercial brokers either don't return the calls, or they tell the agent there is no co-op fee.
If a commercial broker does not market the property on sharing websites and does not cooperate and offer a cooperating fee, you can assume that they will put their needs above yours. When an agent decides who should be able to purchase the property based on how much fee will be delivered to him, he is doing his client a dis-service. That said, most commercial brokers intentionally hide this fact, and they show their clients postings on MLS websites, but they don't tell the client what they say when another broker calls on the listing. Most commercial brokers either don't return the calls, or they tell the agent there is no co-op fee.
5. What to Know about Commercial Real Estate and Business Listing agreements.
- The real estate listing and the business listing should be separate - even if they are being sold together
- Listing Agreements should be form-based. In general, listing agreements are not cancell-able once they are signed. But when multi-million dollar assets are at stake, all clients should look for clauses that are not in their best interest. Finding clauses in forms are easy, finding them in attorney drafted legal agreements can be tricky and costly.
- Commercial real estate listing agreements should be no longer than 180 days with an option for the Seller to cancel with written notice. Businesses take longer to sell, they should not exceed 360 days. This protects the listings from becoming stale and protects the Seller.
- In commercial real estate, the listing agreement should be unilaterally cancel-able by the Seller for any reason up until the execution of the Purchase and Sale Agreement. That said, all parties that come in through the Agents marketing should be protected for 180 days. This protects the Seller from hiring a deadbeat broker. Unfortunately business brokerage is a different animal and this rule does not apply.
- In Business Brokerage, any succession clauses in the transaction should be in writing with consequences. Most commercial real estate investors will promise the world, then bankrupt the business and fire everyone the day after escrow closes, just to get their hands on the real estate. Don't listen to promises made that are not on paper.
- Listings should be marketed online within 24 hours of listing agreement execution. One sneaky way for a broker to get a Seller to come down on price is to hold the listing (either by not marketing it, OR by requiring the interested party or agent to sign a Non-disclosure agreement with hidden clauses prior to seeing the deal) then claim to the Seller, no one is interested at this price - get a price reduction and then dish the property to the Agent's best client. This happens more than you will want to believe.
- Understand which documents will be used in a transaction before you list. Unless you like paying attorneys fees, make sure the documents to be used are promulgated and not "legalese."
- Additional terms to add to the Purchase and Sale Agreement should be added by the broker. To be sure whether your broker knows these terms, ask them before signing the listing.
- Ask the broker to track his marketing efforts and report them in weekly or monthly reports. If you care about having a broker work for you, make sure to require the broker to send reports on his marketing activities.
- In commercial real estate, when a broker represents both Buyer and Seller in a transaction, it's called "double-ending" or "dual representation." When this happens, the broker's responsibility to the parties in the transaction is actually lessened, therefore, the Seller, should be entitled to a reduction in the total commission. This should be a clause in the listing agreement.
6. Final Thoughts on Commercial Real Estate listing
Commercial Real Estate Investors are ruthless. If you are not represented by an experienced commercial real estate broker your taking a risk most wouldn't. Many investors believe in the strategy "just tie it up." Using this strategy, an investor looks like he's willing to pay "top dollar" for any asset, but as soon as it comes time to remove contingencies, the Buyer is no where to be found, wants more time, or needs to do something that has not been done. To the Seller's dismay, the Buyer was never real unless there was a bargain to be had. The Buyer's strategy was to get the deal under contract before reviewing it and to hold on to position in a deal while negotiating for a better price. A good broker in business or real estate will understand this and keep an eye out for these buyers.
