One of the first courses I took freshman year at the Wharton School was Econ 101. One of the macroeconomic concepts introduced was Adam Smith’s paradox of value, often called “diamonds and water,” which explains the distinction between “value in use” and “value in exchange.” (Why diamonds cost a lot more than water, even though one is ornamental and the other is essential to life.) Another of my favorites was the classic production possibility curve most commonly illustrated by a “guns and butter” analogy, explaining the relationship between a nation’s investment in defense versus civilian goods.
But a more simple, and much more important, concept for commercial real estate market participants is the theory of efficient markets. This theory states that maximum pricing is achieved when information is available to the greatest number of people with the fewest barriers to entry. This is a concept that appears to be lost on a great number of investment property sellers in today’s booming investment sales market. With the volume of sales surging and values seemingly increasing on a weekly basis, many sellers are tempted to take an unsolicited offer thrown at them. After all, the offers seems too good to be true. It is significantly higher than the appraisal the owner received last year (or even a few months ago), or was much higher than the owner thought the property was worth.
Owners should not be tempted.
When a buyer says they want to buy a property “off-market”, they are simply saying they don’t want to pay the appropriate price for the property. They want a discount. Many of those buyers tie up assets and then simply flip the contract, making money on the seller’s actions without ever taking title to the property or even taking on much risk. Additionally, an overwhelming majority of buyers who claim to only purchase properties off-market actively participate in traditional bidding processes. They don’t like to because they will likely have to pay more, but if they are truly interested in the asset, they will bid.
Maximizing the exposure of an asset takes many forms. Directly reaching out to property owners in the immediate submarket of the subject property is always a good idea as well as contacting every buyer that has expressed interest in purchasing that type of property. Posting the property information on the websites of listing services is also a great way to get the word out. However, there is another way to maximize exposure that many commercial brokers amazingly do not utilize.
If you are a frequent reader of Concrete Thoughts, you know that one of the two most vivid trends in the investment sales market in 2014, and continuing into 2015, is the remarkable number of new first-time buyers that have entered the market. There is simply no way for any one broker to know all of these new entrants. Therefore, a willingness to co-broke exclusive listings with other brokers is more important than ever. Remarkably, most brokerages, including all of the global brands with the exception of Cushman & Wakefield, will not work with another broker. Or, if forced to by the seller, they will require outside brokers to get paid by the buyer. This simply takes money out of the seller’s pocket. Eventually, the market will adjust to this practice. After all, it is absolutely in the client’s best interest, and when something is in the client’s best interest, it has to gain traction. In many of our recent transactions, outside brokers have brought us first-time buyers who have paid substantially more than the usual suspects have been willing to pay. And our clients have been thrilled.
Sellers who sell properties without putting them on the open market, or who retain exclusive agents who do not work with outside brokers, leave an estimated 10 to 15 percent of their potential sale price on the table.
There’s no law that requires a seller to sell their property for the highest price. If someone wants to sell for less than their property is worth, they are certainly free to do so. But if a seller wants to maximize their price, they should maximize the exposure the property receives. There are no do-overs if the sale is not done right the first time. Utilizing the theory of efficient markets will increase the odds significantly that the highest possible price will be obtained.
Robert Knakal is the chairman of New York Investment Sales for Cushman & Wakefield and has brokered the sale of approximately 1,700 properties in his career having a market value in excess of $12.5 billion.
