How to work with a commercial broker

Commercial broker is often going to be the best source of deal flow for an apartment investor.  Unlike residential properties, most of the commercial deals are done off market.  So if a deal makes it to the MLS or Loopnet(Commercial version of Redfin/Zillow), it is often a leftover deal that others passed on.  The commercial broker builds relationships with various owners, and when the owner is ready to sell, the broker brings a qualified buyer and an off -market deal is consummated.  For years, the broker cultivates relationships with as many owners as they can, and as investors, we can leverage on their network. 

Unlike residential deals, the broker represents both the buying and selling sides of the transaction, so he/she gets to keep a bigger portion of the commission.  They will typically get paid 3-5% of the sale price from the seller.  These create dynamics that are very different from the residential transactions.  The investor needs to know how to approach and work with competent commercial brokers, and also understand some nuances of a commercial deal to protect his/her best interests.

The brokers are the gatekeepers to the deals because they have established relationships with the owners(at least the good ones do) and we likely won’t find a good deal on Loopnet.  It may seem pretty simple to just call every broker and ask them to send deals, but it almost never works.  You see, the broker will be qualifying the investor as much as the investor is qualifying the broker.  This may seem strange compared to residential agents who are eager to bring all the deals to anyone. 

The broker wants to know if the investor is a qualified buyer, meaning is she serious?  Does she have the money?  Does she know what she is doing? If we consider the dynamics of a commercial deal, the broker brings together the buyer and the seller privately for an off-market transaction.  Imagine what happens if the buyer doesn’t really understand the process of doing the due diligence, applying/qualifying for the loan, getting timely inspections done, and doing a proper financial analysis.  Or the buyer doesn’t have enough down payment and/or liquidity to qualify for the loan.  Perhaps the buyer is very indecisive and can’t pull the trigger even though he/she has all the necessary information.  It’s not hard to imagine how upset the seller might be for wasting his/her time and the broker will lose credibility.  This is why it’s critical that the broker trusts the buyer to be a qualified investor before he brings good off-market deals.

When we reach out to the brokers, we need to communicate our experience, competence and confidence. This means being able to demonstrate some knowledge of the market, our strategy, and our specific buying criteria.  Nothing screams rookie like lacking a solid buying criteria. The competent investor will know exactly what type of property she wants, in what neighborhood, with specific size and price range in mind.  “Any deal that is good,” is about the worst answer to give when the broker asks what type of properties we are looking for.  Mentioning that one is working with a local lender or a property management company also demonstrates seriousness.  The investor should be very familiar with all the common terms like cap rate, NOI, capex, expense ratio, etc.

Once the initial criteria are defined, it’s time to look for the top brokers in town.  There are several methods.  One is by asking around; other investors, bankers, property managers, lawyers, etc.  Ask them who is the broker that is doing the most deals for the type of property that we are looking for.  The other way is to look for them on Google or the large brokerage websites.  One of my favorite methods to finding active brokers is to browse through Loopnet.  We are not likely to find good deals on the platform, but we can find brokers.  See who has many properties listed, look at their deals, reach out and ask for a call to discuss more about their property.  Get them on the phone and get to know them by asking some thoughtful questions about their deals.  We can follow up with a couple subsequent emails, and then intelligently explain why this deal isn’t quite what we are looking for, but if the broker can find a deal that meets our criteria, we’d be happy to buy one. 

It is worth mentioning that working with top brokers is very important.  There is 80/20 rule where 20% of the people enjoy 80% of the success.  In the commercial broker world, that number could be even more unbalanced.  The top brokers are always calling the owners and cultivating relationships.  They are keeping in touch on a regular basis, and the owners trust/like them.  The rest of the brokers don’t have much of a network, and they primarily rely on the MLS to find deals.  The weak brokers only send market deals.   

When interviewing brokers, we want to ask them a few questions; What are the types of deals that they do the most?  Apartments?  Offices?  Land?  Number of units and price range?  Typical class of building – A/B/C?  How many did they close in the past 12 months?  How do they source off-market deals? 

We also want to be prepared to answer a few questions, as the broker will also try to size us up.  “What type of property are you looking for?” “How many deals have you done?”  “What was the purchase price?  How many units?  Where?”  “What is the total number of buildings and units under ownership?”  “Who is your lender? Property manager?” “Why did you choose this market?”  “What is your planned hold period?”  The broker may also ask if the investor can provide proof of funds. 

It is important to note that relationship takes time to develop.  Brokers will rarely start sending good deals to the investor after the first meeting.  They usually will have a list of proven buyers and they will be shown the deals first.  When we first reach out, they don’t know us, and there is no established trust.  It is up to us to cultivate the relationship and keep us in the forefront of the broker’s mind.  Some of the easiest ways to do this is to respond immediately when they send us a deal.  Underwrite the deal quickly and respond within 24 hours why the deal would or wouldn’t work.  If the numbers are close, let the broker know what the offer price is.  And try to call them rather than just emailing.  Another thing is to call and/or email periodically(every two weeks or so).  When contacting, attempt to have a good reason for reaching out.  It could be a relevant article that we found about the industry, or some intelligent question about their deals and/or the industry, or perhaps in regards to some common personal interest that we might’ve found on the initial conversation.  Also, if investing out of town, it shows a lot of commitment if we travel to meet them at some point.  We can line up several meetings with different brokers, lenders, and property managers to make the most out of the trip.  Offer to treat the broker to a lunch or dinner, and get to know them personally.

Some brokers may ask for an exclusivity agreement.  This means that the broker becomes the exclusive representative for the buyer, and he/she is due commission for any transaction the investor engages in.  This is generally very unfavorable for the buyer.  If another broker brings a deal, the investor still has to pay commission to the broker that he signed the exclusivity contract with. This limits the investor’s deal flow. What we can offer instead, is property-specific exclusivity where if the broker brings a particular deal, we will be committed to dealing only with him and owing commission on the transaction of that property to him.  If the broker insists on general exclusivity agreement, the investor has to make a decision, but generally competent brokers won’t ask for one.

Another thing to consider is that unlike residential agents, the commercial broker represents both the buyer and the seller, so the buyer must make sure that his/her own needs are met and that the terms are fair and acceptable.  The broker is not going to babysit the investor and make sure that everything he/she wants is covered in the contract.  It is advisable to have a good lawyer review the contract and make sure that the seller is being reasonable in their demands and that there are no hidden surprises in the contract.

The broker/investor relationship takes on a much different nuance than the agent/buyer relationship when hunting for a house.  The agent/buyer relationship is more of a customer/salesman dynamic whereas the broker and the investor are more like partners.  The broker needs to bring together the buyer and the seller, and bankers, title, lawyers, appraisers, insurance agents, and inspectors all play a part in consummating the deal.  The investor also has the same members on his/her team, and each play an important role.  The broker is one of the very important members of the team for the investor, so it’s crucial to learn how to find, reach out, and work with top notch brokers. 

By: Ki Lee