Choosing a Real Estate Broker II

This is a continuation of the Choosing a Real Estate Broker series.

My broker wants me to sign an agreement

Almost all real estate firms will require a signed agreement from you stating that you are a client and what is expected of both parties. It’s important to read the agreement carefully and no matter how well your initial rapport was with the company, the agreement should be fair for both parties. The following are some points you should look out for:

  • Attached Schedules (Site Criteria)

After the first initial meeting and discussions with your broker’s team, information is compiled to form a site criteria schedule. The schedule summarizes the client’s requirements for space selection. Ensure the information is correct. This will include minimum and maximum square footage, maximum rental rate per square footage, desired locations and architectural, electrical and plumbing requirements.

  • Exclusivity

Your broker may insist in an exclusivity agreement whereby you are prohibited to speak to another brokerage firm about a location or sign with another firm to help secure a location. An exclusivity period may last three to six months from the day you sign. Any contract which locks you in for a specific period of time can cause immediate inconveniences and reduce flexibility. Therefore, you should negotiate to completely eliminate the exclusivity clause. By eliminating the exclusivity clause, one of two things can happen:

1) Your broker will work harder to prove his/her ability to aggressively find a desired location or

2) Your broker may not work as hard, but you will end of finding a spot on your own whereby you can either negotiate directly with the landlord or choose another broker firm.

Of course, the better scenario is number one and there is no guarantee that your broker will choose that route. However, as I mentioned earlier, you need to be persistent and aggressive in searching a location. The chances of you finding a location on your own are in fact quite high if you spend about 15% to 20% of your day searching. In the case in which your broker will only work on exclusivity terms, try and negotiate a shorter period of time. Another method that has worked well for me has been a unit by unit basis. For example, if there is a current space available, you would agree that there will be no other broker firms contacted in regards to that particular space for three months. This allows you to search for other space opportunities on your own.

  • Market Evaluation

This part of the agreement is more of what you expect the broker to do for you. Any broker will provide you current and future opportunities for the business. A good broker should also provide you of current trends, rental rates and going market rates for areas specified by you. In addition, a broker is responsible for arranging site tours and inspections.

  • Consulting and Reporting

A good broker will provide ongoing strategic consulting to secure the best possible property for the right price. You should indicate to your broker you would like a minimum weekly update of qualified locations. Whether there are new opportunities or not, it is important for you and your broker to keep in contact on a weekly basis. You want to make certain you are serious about the business.

  • Implementation

Again, this part of the agreement is what you expect from any broker. This section states your broker will negotiate on your behalf with agents, owners or landlords to develop a fair offer based on your needs, terms and conditions. Your broker will also help draft the lease in collaboration with your lawyer. Ongoing consultation throughout the term of the lease should also be provided.

  • Commission Fees

Almost all landlords will pay a broker’s commission fee. To protect yourself from paying unnecessary commission fees, you should ensure the contract includes a clause indicating the brokerage firm will agree to always make best efforts to negotiate the total commission fees to be paid by the landlord. Unless you are planning to lease a space within a residential condominium, hotel or office tower, more than likely you will be responsible for all commission fees. So be prepared if you are planning to choose this route. Ensure you have set sufficient investment aside.

Depending on the size and reputation of the brokerage firm and your actual broker, commission fees can vary. I have seen it range from ½ months net rent, 1 month net rent to a standard lump sum of $10,000 – $12,000. If you have extra capital to spend and your only concern is to secure a space as quick as possible, you may be willing to accept the stated commission fees. In the case your broker works based on a standard commission fee (i.e. $10,000), you may want to negotiate a capped amount such as $5,000. Therefore, if the landlord only agrees to pay a maximum of $7,000 of the $10,000, you only need to pay $2,000.

  • Independently Secured Location

In the event that through your own efforts you secure a building or site for lease not identified by the broker, a reduced amount of commission should be made payable to the broker by 50%. In all fairness, you should absolutely not sign an agreement if it requires you to pay 100% of the commission fees.

  • Termination of Agreement

An agreement can be terminated with an advance written notice by either party. Usually, a 30 day minimum is set, however I recommend negotiating for 15 which gives ample time to exit out earlier and provide advance written notice. There should also be a clause indicating you may terminate the agreement if you believe the broker’s duties and responsibilities has not been performed. The clause should also indicate that no fees are to be owed. However, if the broker has performed all duties and responsibilities, but for some reason you must terminate the agreement, you should not be required to pay full fees. Instead you should negotiate 50% of the commission fees will be owed.

Review the contract

Before signing any real estate agreement, you should carefully review the contract. If you are uncertain of any clause or believe you are being placed in a unfair position, ask for clarification. You may want to consult a lawyer or a trusted individual to assist you. The worst you can do is rush into something you are not ready to handle or prepared to do. Speak to current restaurant owners, friends and family who may be able to connect you with a trusted broker. Any referral is usually the best step in the right direction.

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