How Commercial Real Estate Agents Can Increase Their Income by Working Less
What if I told you that as a full time commercial real estate agent you could work for just a third of the time, yet still have the same amount of closed transactions and commissions? Sounds incredible doesn’t it? It’s actually quite simple to do, and over 90% of agents don’t do this.
Did you know that some studies show that over 50% of all commercial real estate transactions fall apart or fail to reach the closing table, typically breaking down during the due diligence phase. Now, what if I told you my closing ratio was closer to 95% of all deals that I put under contract, and that any agent can achieve this rate because there isn’t anything secret, special, or difficult that I do to achieve this?
The answer isn't necessarily more prospecting, more cold calls, or working longer hours. One of the most overlooked opportunities is improving what happens before and immediately after an offer is submitted.
The concept is simple: identify problems earlier, structure transactions more intelligently, and manage the process from contract to closing. The result will be fewer wasted hours, fewer failed transactions, and more time available to generate new business.
The Problem: Too Much Time Is Spent on Deals That Were Never Ready to Close
Commercial real estate transactions are complicated. Financing, title, environmental conditions, leases, zoning, physical condition, financial performance, tenant issues and buyer qualifications can all affect whether a transaction ultimately closes.
The lesson isn't that every broker should expect a particular failure rate. The lesson is that a significant amount of deal fallout can occur after an agent has already invested substantial time and resources, and this can and should be mitigated by the agent. This is where better preparation can create a competitive advantage.
Four Ways to Increase Your Closing Ratio—and Reduce Wasted Time
1. Vet the Client Before You Invest Significant Time
One of the biggest mistakes an agent can make is assuming that every prospect is equally capable of completing a transaction. Before spending weeks analyzing properties, preparing offers and negotiating terms, determine whether the client is actually prepared to transact. Also, don’t forget to have an understanding of what their ultimate goals are, so that you can keep “their eye on the ball” during the negotiations and due diligence process.
For buyers, ask:
1) What is your acquisition budget?
2) How much capital is available for the purchase?
3) Will the acquisition be financed, or will you be paying cash?
4) Are the acquisition funds readily available?
5) Have you spoken with a lender?
6) What are your investment criteria? (this is where you really want to delve into the client, don’t accept the standard: “a good return”, get specific investment criteria they are looking for, or back it out, by asking about their investment goals)
7) How quickly can you make a decision, and close?
8) Are you the only person who will be approving the acquisition, or are their other partners or investors?
9) Have you completed a commercial acquisition before, if so, can you send over your recent acquisitions/portfolio?
For tenants, the questions may include:
1) What is the approved occupancy budget?
2) Who makes the final decision?
3) Is financing or corporate approval required?
4) What is the desired move-in date?
5) Has a lease budget been approved?
6) What improvements will you need, and do you have a TI budget, and how much you can contribute to it?
7) Are there existing lease obligations we need to work around?
For sellers and landlords, determine:
1) Who actually controls the property?
2) What are the seller's objectives?
3) Is there an existing loan?
4) Are there ownership or partnership issues?
5) What price expectations exist?
6) Are there tax or exchange considerations?
7) What documentation (Due Diligence deliverables) is readily available?
Remember though; the goal isn't to interrogate the client, it is to understand their motivation, needs, ability and timing to determine the probability of a transaction before committing significant resources to it.
A qualified client is not necessarily the client with the most money. It is the client who is financially, strategically and emotionally prepared to complete the transaction.
2. Do More Due Diligence Before Writing the Offer
This may be the single biggest opportunity for a CRE agent to save time. Many agents approach due diligence as something that happens after the property goes under contract. The better approach is to conduct as much preliminary investigation as possible before submitting the offer.
Obviously, an agent cannot complete every element of formal buyer due diligence before a contract is signed. Certain inspections, reports, title work and investigations require access, seller cooperation or formal authorization. But that doesn't mean the broker should submit an offer blindly.
Before writing an offer, investigate the Property for:
1) Ownership
2) Property taxes (if delinquent, and assessment history)
3) Assessor information
4) General Zoning
5) Existing use
6) General overall physical condition/appearance (formal inspections to take place during the due diligence period of escrow)
7) Noticeable deferred maintenance
8) Potential environmental concerns
9) Access and Parking
An investor buying a property, will want to determine the following to be able to submit a realistic offer:
1) Lease expirations/WALT
2) Major tenants, and credit
3) Options and Renewal rights
4) Exclusive-use provisions;
5) Early termination rights
6) Unfulfilled landlord obligations
7) Concessions given and/or due and
8) Known tenant problems.
You will also want to understand the current market conditions:
1) Comparable sales
2) Comparable leases and current market rental rates/concessions
3) BATNA (Best Alternative To a Negotiated Agreement), understand the competing properties in the area, what they offer, and where they are in competition to the property you are looking to acquire,
4) Vacancy and Supply/Demand trends and
5) Recent comparable transactions.
The objective is not to eliminate all risk. The objective is to identify obvious deal-killers before your client spends weeks pursuing the transaction, or identify potential road-blocks BEFORE they become deal-killers so that you can take action to prevent it, vs. react to it.
3. Structure the Offer and PSA to Protect the Transaction
A good price does not necessarily produce a good deal, and many times surety beats out pricing. In fact, the structure of the transaction can be just as important as the purchase price. A poorly structured PSA can create unnecessary uncertainty, while a well-structured agreement establishes a clear process for resolving issues.
Important considerations and areas to negotiate/focus on may include:
1) Due diligence period
2) Financing contingency
3) Deposit structure 4) Closing timeline
5) Required seller documents/deliverables/disclosures
6) Inspection/Access rights
7) Title and survey requirements;
8) Environmental investigations (including any previous ones done)
9) Lease review and Estoppel requirements
10) Seller representations
11) Closing conditions
12) Extension rights and
13) Remedies for failure to perform.
The specific language should always be developed and reviewed by the appropriate real estate attorney and other professionals.
The broker's role is to recognize the business issues that need to be addressed and make sure they are discussed early on before they become issues. One of the biggest mistakes is waiting until the end of the transaction to discover that the buyer, seller, lender or attorney has a completely different interpretation of an important issue. Think of the PSA as the roadmap to a successful closing. The more clearly the transaction's major milestones and responsibilities are established, the less likely the parties are to be surprised later.
4. Manage the Escrow—Don't Just Monitor It
Getting a deal under contract is not the finish line. It is the beginning of the most important part of the transaction. A broker who simply waits for the buyer, seller, lender, title company, attorneys and inspectors to complete their respective tasks is giving up an opportunity to control the process. Instead, establish a transaction timeline immediately. Also, make yourself the main point of contact, by having the parties of the transaction go just through you, you have a clearer understanding of what is needed and who needs to get it done.
Conduct your due diligence all at once. To often a client (or lender) may want to conduct their due diligence in a linear fashion, ie: ordering the appraisal, or survey after the phase 1 comes back clean or waiting to order the appraisal after the buyer/property has been approved by the lender. The problem with this, is that the transactions are rarely ever structured this way, and all to often the client finds themselves without the investigations they or the lender needs, but don’t have any more time to conduct further inspections. If they can’t negotiate an extension, they have to make a decision to either cancel the escrow, or move forward and risk losing their earnest money deposit.
A simple transaction checklist can prevent small issues from becoming major problems. This is particularly important because larger commercial transactions can involve numerous parties and deadlines. A key to an agent’s success is managing expectations and keeping participants accountable throughout complex transactions.
The Real Secret to Working Less
The goal isn't actually to work less, it is to spend more of your time on activities that produce revenue.
Consider two agents. The first agent takes on every potential client; they write offers quickly doing little or no preliminary research; Spends weeks managing inspections, financing, attorneys and negotiations, and wonders why the deal fell apart at the last minute or once they receive their first due diligence deliverables from the seller.
The second agent, qualifies clients carefully; performs preliminary property research; Identifies potential deal problems before writing an offer, and incorporates a strategy to overcome the problems by structuring the transaction around the known risks; creates a detailed transaction timeline; communicates constantly with the parties.
The second agent may actually write fewer offers, yet potentially close more transactions. That's the difference between being busy and being productive.
In Summary: Your Closing Ratio Starts Before the Offer
Here is the 4-Step CRE Deal Efficiency Formula to Increase Your Closing Ratio. If you want to increase your productivity without simply working more hours, focus on four areas:
1. Qualify the client
Determine whether the client has the financial capability, decision-making authority and motivation to complete a transaction.
2. Investigate the property
Identify as many potential problems as possible before submitting the offer.
3. Structure the transaction
Use the offer and PSA process to establish realistic timelines, contingencies and responsibilities.
4. Control the process
Once under contract, actively manage deadlines, communication and outstanding issues. The result is not necessarily fewer transactions, it is better transactions. And better transactions will mean more closings, fewer wasted hours and more time available to prospect for the next client.
The Bottom Line
Commercial real estate agents often assume that increasing income requires increasing activity, and sometimes it does. But another path is to increase the percentage of your activity that actually produces a closing.
If you can identify bad deals sooner, identify good deals faster and manage transactions more effectively, you can potentially spend less time fighting fires and more time generating revenue.
In commercial real estate, the best deal isn't necessarily the one you get under contract. It's the one you get to the closing table. If you’re looking for an agent that will assist you in finding, negotiating and acquiring the best property to fit all of your investment goals, please reach out to info@cbicommercial.com.