Attn Commercial Brokers: Rolling Commissions?

Question

I recently had the pleasure of speaking with a best selling real estate author. I never thought I would have a chance to speak with that person but after calling their office they agreed to have a 15 minute call with me...the cool story of getting to pick the brain of a best selling author and multi millionaire real estate entrepreneur is a story for a different day though...

Among the things I asked that person was what is the best way to transition from just being a broker on large multifamily deals to actually buying multifamily units. One part of his answer included "rolling commissions" into your deals. I assume it would work like this:

A multifamily property is going to be sold for $5,000,000. A 2% commission would be $100,000 on this deal. Let's assume I split that $100k evenly with my company. I could instead ask the buyer to cut me in on the deal and give me a $50,000 equity stake in the property. In return, the seller will lower the price to $4,950,000 because he now does not have to pay me a commission, only pay my company's share of the commission.

I think that is the basic idea of how that works. Does anyone have any experience with this? Is that how it works? What is the upside and downside of doing this?

I assume a downside would be that you would just be a limited partner and would not have much say in decisions. Anything else?

Thanks in advance for your help!

Steve L. · Answer

I think you need to think more about your value add story versus just "throwing in the commission."

On that 5 million dollar deal the Buyer would be putting down at least 25%.  That is 1,250,000.  They have you along the ride for 4% of the total investment capital required... not very compelling to me, now you want monthly reporting, tax K1, have a different long-term vision.

Now let's say you could identify a deal that is worth 5 million, but needs 500,000 of re-positioning and because the Seller is distressed they are willing to sell it for 3 million.  Using your expertise as a Broker you would:

1. Identify the property
2. Identify the value add items required
3. Identify the exit strategy (stabilize and refinance,  stabilize and sell, etc).
4. Identify the lenders that are players on this type of property
5. Help with the value add items

So essentially you are doing things in reverse.  You have the deal identified and now you are shopping for the right Buyer for it.  That Buyer will see value in you because you have done all the qualification and heavy lifting already.  This could warrant a 10%-30% stake with you putting in time and commission versus a 4% stake.  You have a very compelling story and should have the same long-term vision as it has been identified.

Bill Gulley · Answer

Yes, that's one way, buying into the deals, if you get to participate, I'd rather pay the commission have it in the basis, deduct it and while your involvement is depreciated my portion appreciates.

Rolling commissions is also setting up a series of sales, to me, where you may spin off other properties to leverage other transactions, listing agent on one, selling on another, and you could go further with Multi-s as receiving commissions on an ongoing basis with the PM for years of management, now that rolls.

Active investors are a Realtor's best friend, turning inventories over on a schedule of say 7 to 12 years as the tax benefits begin to carry less value. An investor with 50 properties can be 5 sales a year when you get rolling.

While such aspects sound good in books, reality is that if you have a larger investor, they will have a broker on staff, salary and perhaps a small bonus. I can buy a broker for less than 50K and they will follow instructions.

You secret author might have been more specific.  :)

Fernando Crisantos · Answer

What kind of entity should I use to go in on a property after it has been purchased?

The group recorded the property under their LLC, but want to cut me in, should I form an LLC or go in as an individual? They have agreed to let my name appear on title (this is a win-win situation because I will be able to source more deals by owner

Also, is there a boiler plate "operational agreement" if I were to go in on it as an individual? To outline liability, rights, duties, etc?

Anthony Palmiotto · Answer

Still interested in hearing anyone else's experience with this!

Bill Gulley · Answer

We assume, as a buyer, that the commission is in the sales price, therfore, as a buyer in the deal I provide the funds to pay the commission. The price is my basis, to carry. Now, I could do a deal at a lower price without a Realtor. While the seller pays the commission, it costs the buyer.  :)

Anthony Palmiotto · Answer

Bill Gulley thank you for your reply. In my area of the country (central and northern NJ) there are certainly institutional investors but there are also many local owners who always use brokers which I guess works to my advantage.

Can you further explain your first paragraph as I am a little confused? Rather than the seller paying me a commission, you as the buyer, would pay my commission by giving me an equity stake? Am I understanding that correctly? How would that make you better off?

I think I am missing something.

Attn Commercial Brokers: Rolling Commissions?

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