McNellis: Sex, Lies and Off-Market Deals

By John McNellis

Jesus spent 40 days in the desert, eating nothing and resisting the devil’s temptations. Along a similar, if less biblical parallel, the Internal Revenue Service permits one 45 days to wander the wilderness in search of a 1031 exchange, all the while battling brokers’ blandishments.

We just emerged from that commercial Sahara and, while we may not have encountered the devil himself—in real estate, one can never be sure—we were sorely tempted by properties not worth a windshield inspection.

Like common wisdom, lies have a certain currency, but the more outrageous the lie, the shorter its longevity. “We’re from the government, we’re here to help” was so preposterous that it cannot have been uttered more than once before becoming a sad political joke. The more plausible falsehood, “It’s a reverse commute,” had a decent run some years back, and real estate’s perennial fabrication—“This property just needs a little hands-on management”—is seldom out of play.

The Methuselah of business lies, the one that just may endure forever, has been sung by nearly every guilty chief executive: “I had no idea my employees were robbing the company blind … on my behalf.” This absurdity coupled with the standard mea culpa—“I am guilty of trusting my team too much”—will no doubt persist until the last employee is thrown under the last bus.

Most lies, however, last only a bit longer than Christmas poinsettias no matter how much care they receive. Rapidly heading in that direction but still au courant is the claim, “It’s an off-market deal.” Over the last six weeks, we heard that more times than we can count, even with our shoes off. Apparently, never in the history of real estate have so many sellers decided that the best way to market their property is to feign indifference to its sale.

The appeal of the off-market pitch—at least to the ever-hopeful brokerage community—is that it is technically true. It is accurate that the off-market property isn’t publicly listed for sale. What is false is usually everything else, everything the optimistic broker wishes to imply from the seller’s refusal to sign a listing: namely, that the property’s apparent exclusivity is the buyer’s VIP pass, the chance to snare a great deal, a pirate’s treasure map.

A true off-market property may indeed be a worthy prize, but brokers are seldom involved because principals deal directly with principals. Yes, it happens occasionally that an experienced owner who knows what an asset is worth will permit a broker with whom he has a longstanding relationship to quietly offer it to a buyer with whom the broker, in turn, has a similar relationship.

But that is not what one is seeing. Today’s off-market deals are neither principal-to-principal nor the result of mature broker-client relationships; rather, they are the progeny of brokers desperate for product cold-calling coy sellers. The private offering thus obtained is a lot like a fake Times Square Rolex—a waste of time.

If compelled to pursue a private deal, one should bear in mind that the phrase “off-market deal” is now shorthand—like “SWF” in a personals ad—for “Conniving seller seeks gullible buyer to pay 20 percent more than fair market value, pay all commissions, accept nothing as an underwriting package and close as-is after seven-days.”

One might ask why any broker would bother chasing such a deal. Brokers are, by and large, at least as savvy as their clients and would surely understand the futility. Why would anyone live in Cleveland? Same answer to both questions: They have no choice.

Our six weeks in the desert revealed another unpleasant—and frankly, puzzling—development in the brokerage world. That is, the now nearly universal practice by the industry’s powerhouses to “cooperate” with outside brokers in every way except the one that matters—the commission. Today’s listing agent from [insert your favorite national firm] cheerfully sends his marketing package to an interested outside broker. The following conversation ensues:

“What’s the split on the commission?” asks the outsider.

“No split. We keep 100 percent of the commission, but you can put yourself in for whatever you think is reasonable on top of that.”

This sounds great…for a moment. “Wait a second. That means that if my client makes an offer that includes a 2 percent commission to me, the seller has to pay 2 percent more than he would on a direct deal, correct?”

“Exactly.”

“So my buyer is always in the hole by 2 percent compared to any one of your clients?”

“Unless you convince him to beat all my direct offers by 2 percent.”

“Once he understands that, my client will never make an offer.”

The small, independent buyer-oriented brokers are thus effectively shut out of the best public deals and forced to scrounge for off-market dross. The broker haves (well, OK, the have-mores) are pulling away from the have-nots.

The “we-keep-it-all” listing is a four-bagger for [insert your favorite national firm], but why would any seller go along with it? Isn’t it possible the small broker had the player with the hottest hand, the one that might actually have paid the most? How does this arrangement possibly benefit a seller?

Why are some brokers insisting on the no-share listing agreement beyond the fact that they make more money? (Short answer: because they can). And why are even some sophisticated sellers willing to accept it? Stay tuned.

For more about John McNellis or McNellis Partners, please visit mcnellis.com.

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