The Pros of Exclusive Agents: The Baffling Habit Some Sellers Have of Not Maximizing Their Profits
Dan Duray Sept. 23, 2010, 11:12 a.m.
In last week’s column, we briefly discussed the nature of the investment sales market in New York City in 1984, when Paul Massey and I began selling investment properties. At that time, brokers rarely obtained an exclusive listing to sell a property. Since then, the market has become more sophisticated and exclusive listings have become more commonplace as sellers take advantage of the technologies available to today’s building-sales brokers. However, there is still a very significant segment of the market that operates very inefficiently and ineffectively.
One would think that from a seller’s perspective, retaining an exclusive agent would always be in the seller’s best interest. After all, intuitively, there is a simple formula that generates the maximum sales price for an investment property. Logic dictates that the more people that know a property is for sale, the more offers you receive; and the more offers you receive, the higher the final sales price.
Clearly, an exclusive listing arrangement provides several benefits to the seller, which results in maximum exposure for the property; a greater number of offers; and, ultimately, a higher price. It also provides the seller with a comfort level that the property was sold at its maximum price level.
Seems like a no-brainer, right?
Remarkably, only about 25 percent of all properties that are sold are handled by the top building-sales brokerage companies, and on an exclusive basis. Therefore, the majority of sale transactions are effectuated either by small brokerage shops or by sellers on a direct basis without the use of a broker. We can never understand why some sellers choose to market their property quietly and not fully expose the offering to the marketplace. We have seen, time and time again, sellers who choose this route, often leaving significant money on the table.
In 2009, the top 25 building-sales brokerage companies handled the sales of 387 properties out of a total of 1,436 properties sold in New York City that year. This reflects a surprisingly low rate of just 27 percent of the total. This figure was up from the 22 percent level achieved in 2008, when the top 25 brokerages handled 687 sales out of a total of 3,144.
If we consider a longer period of time, going back to the nine-year stretch from 2001 through 2009, the top 25 brokerage companies handled the sale of 5,644 properties out a total of 24,626 properties sold–a rate of 23 percent. If we expand the field of brokerages to include the top 50 firms, the number of sales increases to just 5,977, or 24 percent. (The figures for the top brokerages were based upon data collected by CoStar, the national real estate market research firm. The total number of sales per year was provided by Massey Knakal.)
This data begs the question, why do such a small percentage of sellers decide to retain top brokers to market properties for them? When we meet with potential sellers, we hear all types of objections, including sellers not wanting to feel “tied up” and misunderstandings about what the word “exclusive” means. Some feel as if retaining a broker may limit them in some way. Some had seen some interest in their property already and others say that they have “friends” in the industry who would be upset if they decided to go with only one firm. Regardless of the myriad excuses we have heard over the years, there seems to be no rational reason why a seller would not want to create maximum exposure for their property to ensure a higher sales price.
IT IS SURPRISING that so many sellers decide to market properties quietly through “off-market” transactions. What is not surprising is that an overwhelming majority of buyers in the marketplace specifically call our offices looking for these types of transactions. Buyers are very interested in buildings that are not widely marketed because they know they can achieve advantageous pricing if there is limited competition for the property. Why would a seller opt for limited competition?
It seems that in the overwhelming majority of cases when a seller attempts to market without a broker, the properties were not fully exposed properly to the marketplace. They achieve results that are far inferior to what could have been achieved through a traditional exclusive marketing program. Examples of these tragic seller mistakes are numerous. Over the years, some of these flubs really make you scratch your head.
For instance, many years ago, we were trying to meet with the seller of a small development site at 519 West 23rd Street. The seller would simply not return any of our numerous phone calls. We knew the property was on the market on an open-listing basis. But if the seller wasn’t returning our calls, he probably wasn’t returning calls from many other brokers, either. A few months later, one of our clients came into the office and explained that they had signed a contract for the property and wanted to know what we thought we could sell the property for. Within one month, we found a buyer willing to pay $3.4 million. Unfortunately for the seller, the contract vendee had a contract at $2.5 million, resulting in a foregone $900,000, or 36 percent of what could have been achieved.
Another example: I had been trying for months to speak with the owner of an apartment building located at 145 East 49th Street. After months of unreturned phone calls, messages and letters hand-delivered to the seller’s office, I finally was able to get the seller on the phone. He explained that he had been in the real estate business for 40 years and had sold dozens of properties without ever hiring an exclusive agent. “Why should I change what has worked for me for decades?” the seller asked me. I explained that I would like to put together a valuation, letting him know what I believed the property was worth, and also explaining, in detail, what our marketing program would consist of. The seller dismissed this out of hand and was subsequently greatly embarrassed when we obtained a price of $4.5 million for this property. This price was $2 million higher than the $2.5 million contract price that the seller had executed.
The sale of 353 East 61st Street was an even more glaring example of a seller who felt he knew more than active participants in the marketplace. This property was a five-story commercial building that had been owned for decades by a real estate family. This seller also failed to return calls and, when finally contacted, was unwilling to meet with us. He was another seller who would not retain an exclusive agent to market the property for them. Then, one morning, a client of ours came into the office explaining that he had signed a contract to purchase the property and wanted to know what price we thought we could flip the contract for. Amazingly, the seller did not realize that there were significant excess development rights attached to this property. We flipped this contract for $5.5 million, almost four times the $1.5 million price “Mr. Know-It-All” sold the property for.
THESE SELLER BLUNDERS are not only committed by relatively small, unsophisticated sellers. Sometimes we see sellers stumble who really should have known better.
Years ago, we became aware that a major developer in New York City was considering the sale of a development site in Coney Island. We tried several different methods of getting in touch with this seller to try to convey the benefits of an exclusive marketing program, without success. The seller here, who had developed millions of square feet of new properties in the city, contracted to sell the piece of land for about $3.5 million. We were retained by the contract vendee to sell the contract, which we did within 40 days for a price of $5.5 million, representing a 57 percent increase in the realized price.
We’ve also seen these mistakes impact larger transactions as well. A family owned a prewar, multifamily apartment building for decades on lower Fifth Avenue. The family members controlling the property were not active participants in the real estate industry. When it was determined that they wanted to sell, they spoke to their managing agent, a third-party manager, which offered to purchase the property for $17.5 million. Without having any appraisal done, the sellers were surprised at the high level of this offer given the then-present cash flow the property was generating.
When another offer randomly came in for $24 million, the sellers decided to jump all over it. They called up an attorney they had been using for many years and asked the attorney to draft a contract at the $24 million price. Fortunately for the sellers, the attorney asked how extensively the property had been marketed and suggested that they give me a call to make sure that they were selling at the right price. After we met with the sellers, it became apparent that they were not aware of the building’s condominium-conversion potential. The sellers decided to retain us exclusively, and within two weeks, we had 41 offers on the property, and signed a contract at $46 million, nearly twice what the sellers had been prepared to accept.
A few years ago, a family that had for decades owned a significant portfolio of apartment buildings in northern Manhattan and the Bronx decided that it was time to sell. Most property owners are contacted regularly by brokers representing buyers, or by buyers themselves, who are interested in purchasing property directly from sellers without a broker’s involvement. When this family decided it was time to sell, they let a few people know, and soon they had six offers. The highest offer was for $84 million, and the family was prepared to sell at this level. Fortunately, through their attorney, we were able to obtain a meeting and let the sellers know that we felt this portfolio was worth at least $100 million. Within 30 days of being exclusively retained, we had 77 offers, seven of which were in excess of $100 million. Ultimately, we sold this portfolio for $109 million, $25 million more than the seller would have been willing to accept.
THESE ARE JUST a few examples of the many situations in which sellers inexplicably opt–or come close to opting–not to fully maximize the exposure of their property for sale, leading to lower sales prices than could have been obtained. It is amazing to us that a seller would elect not to maximize the exposure a property gets. After all, you can only sell a property once.
There are many advantages to hiring an exclusive agent. An exclusive agents is directly accountable to the seller. They prepare comprehensive state-of-the-art marketing materials. The costs associated with these materials would never be absorbed by an agent who does not have an exclusive agreement with the seller. The exclusive agent provides the seller with a single point of contact to streamline the sales process. The exclusive agent provides accurate information to the marketplace directly from reliable sources. The exclusive agent allows for the implementation of a negotiating process that is accompanied by the orchestration of a comprehensive bidding strategy.
Most importantly, the exclusive agent is motivated to maximize the exposure the property receives in the marketplace. The exclusive agent contacts all potential buyers, not just those that he or she has good relationships with. The agent also has incentive to broadcast the listing to all active building sales brokers and to work with them on a cooperating basis.
To illustrate the difference between the exposure an exclusive listing receives versus that for an openly listed property, consider the following hypothetical. Assume two brokers are attending a real estate luncheon, where they are sitting at a table with real estate investors. Each broker has a property to sell and each only knows one of the eight investors at their table well. The six other unknown investors at the table are relatively new to the market or they have simply just never crossed paths with either of the brokers.
Let’s assume that “Broker A” has an exclusive listing and “Broker B” is working on an openly listed property. Broker B will simply whisper in the ear of the one investor he knows well that he has a building for sale, and wants to represent that investor as a buyer’s broker.
Broker B does not want to say anything about his property to the other seven investors for two significant reasons: If Broker B announces to the entire table that he has a property for sale, it will alienate the investor he has a good relationship with. Buyers don’t want “their” broker offering the property to other buyers who will drive the price up through competition. Additionally, if Broker B tells people about his listing and he does not know them very well, the buyers may call the seller directly, leaving Broker B out of the transaction completely. Broker B will simply not take that chance.
At the same time, Broker A, who has an exclusive agreement, announces to the entire table that she has a building for sale, and proceeds to discuss the property details. She wants everyone to know about her property. She wants to maximize the property’s exposure.
Which broker is more likely to get multiple offers and to achieve the highest price for their seller?
This may all seem like such common sense; however, we still see reluctance on behalf of sellers to maximize their exposure and to use the services of exclusive agents. This is clearly evident in the statistics presented at the beginning of this week’s column. This is true for not only discretionary sellers, but for lenders and special servicers as well, who are attempting to market distressed assets today. Every bank and every special servicer is being contacted by dozens of investors each week. Clearly, these buyers would like to purchase assets directly from the seller without a broker’s involvement, knowing that the price they will pay is likely to be less than they would pay if the property was widely marketed.
It is amazing that in an age of such technology and sophistication, sellers still believe that having only a few offers is good enough to provide the comfort of knowing that a maximum price has been achieved. Demand far exceeds supply, and sellers should relish the opportunity to access that massive and overwhelming demand.
As I have said for years, there is no law that says a seller must sell for a maximum price. However, why would a seller trade an asset for less than what would have been possible if only an exclusive agent had been retained?
Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,075 properties, having a market value in excess of $6.5 billion.