McNellis: Do As I Say, Not As I Do

By John McNellis

Our last column ended with questions: Why would a seller ever permit a listing broker to keep 100 percent of a sales commission? Why let a broker eliminate a whole class of potential buyers: those who would never consider a property unless a trusted outside agent had been pitched it? Is it not possible that an outside buyer would pay the most for the property? Random research resulted in some explanations, if not altogether satisfactory answers.

Starting with the big leagues—deals in excess of $100 million—the broker justification for keeping it all has a certain snob appeal: “There are only 200 buyers in the whole country who can do a $100 million deal and 150 of them don’t have any money,” explained a managing partner at one of the nation’s top real estate investment banks, only half joking. “We personally know every player who can write the check. Adding an outside broker adds nothing but confusion.”

But what about some unknown buyer—someone who just won the lottery or inherited $1 billion offshore? Someone controlled by a broker who will never present your deals if there’s nothing in it for him? “Never happens.”

But it could.

Asked if he cared whether his brokers split their commissions with outsiders, a big-league institutional seller insouciantly replied, “Nope.” Why not? “I’m not worried about finding buyers in a haystack—our listings get plenty of exposure.”

Maybe that works in the Bigs. But what about in Double A ball, the $5 million to $20 million range? Just as there are only about a thousand billionaires in the entire world, but more than $10 million individual millionaires, there are thousands of players in the minor leagues; no single firm can have meaningful contacts with even a plurality. But that doesn’t stop the nationals—hell, even the little brokers—from going for the whole commission.

The surprise is that some sellers, even sophisticated ones, permit it.

We encountered one such seller—a notoriously difficult REIT—in the $15 million sales range. According to the brokers, this seller had squeezed all the juice out of the commission in the first place—leaving nothing to share—and didn’t care about (more likely, never considered) the limiting effect that might have on the buyer pool. Maybe that nasty maneuver works; maybe the percent or two the seller saved by screwing its own brokers offset the lost opportunity of an outside buyer.

Maybe.

A very senior brokerage executive laughed incredulously at my question, as if it were about the right cookies to leave Santa on Christmas Eve. “No one ever cooperates. Most agents won’t even cooperate within their own firms—they hide their listings from everyone, even their own mothers. We at least force our brokers to cooperate within the company—an agent is fired immediately if he doesn’t post his new listing on the company server within 24 hours. A seller always gets nationwide exposure with us.”

As mentioned in previous columns, we are all brokers of one stripe or another. We are all selling something to someone all of the time. Might it be too much to expect of any of us not born in Bethlehem to ignore the following math? A $10 million deal sold directly with a 2.5 percent commission nets the broker $250,000. Flogging the same deal farther and wider and cooperating fully might—just might—bump the price to $10.1 million. This would net the seller an extra $97,500, but reduce the listing broker’s commission by $123,750.

With that overwhelming financial incentive as backdrop, any knowledgeable owner should probably reject outright a broker seeking a listing who fails to ask for a keep-it-all clause. If the broker doesn’t have the sense to at least ask for it, how competent can he be? It’s the owner who needs to represent herself on this issue, who must understand the wide divergence of her interests and those of her broker.

If you do find yourself thinking about the right cookies for Santa or wondering whether brokers, if left to their own devices, will battle to wrest the last dollar for an owner to their own economic detriment, you might consider perusing the section on residential brokers in “Freakonomics” by Steven Levitt and Stephen Dubner. Their study of 100,000 residential brokers in the Chicago area proves statistically what we already know intuitively: Brokers are best at representing themselves.

I asked that senior-most brokerage executive if he, acting as a principal, would ever sign a listing agreement in which the broker had no obligation to cooperate.

“Never.”

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