aenspire delivering developmentprofit.com

The listing agreement is the legal contract between real estate agent and developer. In many jurisdictions it is required by law before your project can be advertised by the real estate agent. There are three key points to negotiate on the listing agreement, commission, exclusivity and listing term.

Commission

Commission is the percentage of the sale value or the dollar amount you agree to pay the agent on a successful sale. The agent may offer to have a flat percentage fee, say 3%, or a graduated fee depending on the sale price, like 4% of the first $300,000 and 2.5% thereafter. If your market has co-broking arrangements then the fee may be higher (6%), split between agent and co-broking agents. A co-broking arrangement is where the agent markets to other agents to bring their ‘buyer’ clients to your project in return for a share of the commission. Commissions can be negotiated although the agent may have to confirm it with their agency’s corporate management and they may have internal restrictions on how far they are allowed to discount. Bear in mind though the idea is to sell your product at the best price in the best time and give the agent every incentive to do so. Until you are doing multiple projects and can leverage a volume relationship with agents it is recommended not to skimp on commission. You want the agent to focus on your product and not get diverted because they have other clients with better commission rates.

To help with your cash flow it is ideal to delay payment of all commission until settlement. However, to incentivise the agent, or even to get them involved in a market where they have other options, you may want to offer a portion of commission to be paid earlier. This can also be negotiated. A common arrangement is half is payable once the sales contract becomes unconditional and the other half on settlement. It is important the agent still has skin in the game right through until the purchase settles, as you will need the agents help if issues arise that affect settlement. Commission should not be held or automatically deducted from purchaser’s deposits or settlement proceeds by the agent’s firm. You should have your lawyer, escrow agent or independent entity administer deposits and settlements so there is no chance of a real estate agency controlling the money flow.[1]

Exclusivity

Every agent prefers a sole listing, where they are the only agent permitted to sell the project with the option to invite other agents on their own terms. The alternatives include: a general listing where you reserve the right to appoint other agents to sell and market; a master agency where you appoint an agent overall in charge but they ask other agencies to sell, sharing the commission; or any other combination where you define the sales channels you are allowed to use, without splitting commission. For development project marketing you should start off providing an exclusive listing to one agency. That gives them confidence to devote their time and resource. Although it is exclusive, the developer should always negotiate to retain the option to sell at least some properties themselves to ‘friends and family’ without agent involvement or commission payable. This should be carefully worded so the agent does not believe they are entitled to commission if the developer does sell some sections or homes.

Listing Term

The agent will request a term as long as possible to be listed on your project. They want the time to do their job, which is fair enough. However, don’t tie yourself into a long-term agreement that backfires if the agency doesn’t perform. Negotiate a sales performance clause into the listing term to help elicit the performance the agent promised when you selected them. The clause might read something like:

‘The exclusive listing period is 6 months from the date of this agreement provided a minimum of 2 sales per week from the attached price list is achieved. If the minimum number of sales is not achieved the vendor can terminate this agreement.’

Ironically you want your agent to be an expert negotiator so the confidence, humility and persuasion they display in their dealings with you to negotiate their listing agreement will often foreshadow their ability to close buyers on your product.

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[1] Your jurisdiction may have regulatory controls over exactly how this works.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

If you don’t provide a brief — and unfortunately even if you do — you may be disappointed in what many agents provide in the way of a marketing proposal. What you want to receive is a strategic sales and marketing plan specific to selling your development so you can compare and choose the agent who has the best ideas and most likely success in selling your development down. Large agencies with project marketing divisions are well versed in putting slick and targeted marketing proposals together. From others you may receive nothing more than a basic résumé, a listing agreement and an advertising budget. Some agents, especially in a busy market, either through arrogance (sometimes warranted) or incompetence, may not give you anything but words from their mouths.

Whomever you encounter encourage the agent to submit a proposal that describes:

• Their team’s experience relevant to your project including previous and current project campaigns and sales results for off the plan projects.
• Back office support resource.
• References from other developers.
• Recommendations of the appropriate mix of product and target market (remember you are talking to agents long before you have finished design).
• Indicative pricing ranges.
• Indicative sales velocity.
• How they intend to market the subdivision and what collateral is required.
• Their sales strategy and preferred method of sale.
• Strength of their internal ‘databases’ and investor/buyer networks.
• Publicity channels they understand how to mine (editorials, advertorials, interviews, social media, product placement).
• Advertising channels they will utilise, reinforced by results-based reasoning and evidence.
• Their listing agreement key points such as commission and listing period.

Ask the agent to present their proposal in person together with the team they are promoting to work on the project. Naturally some agents will be better at selling their proposal to you than it comes across on paper. You also want to make sure that you are not being ‘sold’ a lead agent who will delegate all the day to day sales to below par team members, so ask for them to be present so you can see if they stack up to expectations. Even if you find no one suitable in these first interviews the more interactions you have with various agents the more information you will capture that will help you understand your market and the better prepared for selling you will be.

When you have interviewed enough to make a decision on your preferred agent you will contractually engage them via their listing agreement.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

When it comes to selecting an agent, you are really selecting a lead Real Estate agent and the brokerage they work for. Depending on the number of sales required and how the agent operates they may also have partners or even a team of agents that will work on your project. Usually the agent is more important than the branded agency except where your development is boutique or in the luxury bracket. In that case the caché and reputation of the agency may also be very important.

Ideally the agent you select should have extensive experience with your product type, be a notable and respected figure in your effective real estate neighbourhood, have personal and agency branding that compliments your target market, have completed a tonne of sales in recent months, and not already involved with every one of your competitors so they can focus on your project![1]

Ask for referrals from your contacts and look through the local online and published real estate listings and find those agents that stand out. Typically they are the ones selling similar developments or have the most listings comparable in price, product and location to your project. The top contenders in any market will become obvious very quickly. Remember your market is your effective real estate neighbourhood, so geographically the most appropriate agents may not have current listings near your site’s location. Make contact and interview at least five agents, both to see if they are an appropriate fit that you can work with hand in hand (during design and pricing) and to ascertain if they have what it takes to sell your product (although this takes time to figure out). Ask the agents to follow you up with further information. How they follow up will give an indication of how good they will be at communicating if you do decide to engage them. Make a shortlist of the best two or three and have them submit proposals to market your development. 

Whilst you are selecting an agent, the agent is also selecting you as a potential developer client, so you are both selling to each other. Agents don’t typically get paid all their commission until your project is real and construction is complete. This can be years after they first start selling and no agent wants to embark on a long voyage with a developer whose project (and therefore commission) never eventuates. You should also be selecting your agent very early into the development process so you can leverage their input into the design and pricing for your feasibility. Achieving commitment from the best agents — who are well experienced with developers — when your project is just a concept, may initially be challenging. It is up to you as developer to cultivate the long-term relationships necessary. You may find the best chance on your first project is to engage an agent who is enthusiastic and talented with some experience (but not so much that they are already too busy with other developers) and still has access to the experience and mentorship of some old hands in their agency. 

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[1] Of course they are not mutually exclusive, the good agents will already be involved with the active developers.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

In boom times almost anyone will do, properties will pretty much sell themselves. During a bust no agent will be any good. It is every other time where the value of your agent comes into play, especially at the fringes of a changing market. They can be instrumental in launching your development in the early stages of a rising market or completing those final sales that deliver you a profit during the flattening inevitable before a downturn.

Developers in small scale house and land developments typically engage the services of a professional real estate agency. Some smaller agencies will have agents that primarily deal with new subdivisions. Larger agencies often have dedicated project marketing teams focusing exclusively on new subdivision projects.

Experienced developers with a pipeline of projects often bring real estate sales people in-house. The reasons for in-housing agency is to reduce total commission payable and have more control over the selling process. The individual agent may end up getting the same per property commission, but there will be no agent head office brokerage fee payable which ranges from 30–50% of total commission. Control is about brand exposure, brand protection and marketing consistency — elements more important for large developers and large projects.

I advocate to maximise profitability, focus on generating the highest income rather than shortcutting sales costs. At least for your first few projects you should use a professional real estate agency and harness their experience, exposure and branding to sell down your development. If are a real estate agent come developer then don’t underestimate everything else you have to do besides selling, and go hire someone else to do the selling.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

“To my real estate agent, Chernobyl is a fixer-upper.”

Yakov Smirnoff

Income represents just a few lines on our financial feasibility but unless you can sell your product and generate the income you won’t have a project nor any profit. Selling a new house and land development is quite different from selling existing real estate. Most likely you will want (need) to sell sections or house and land packages in advance of completing construction to secure funding. With these pre-sales you are expecting people to buy before they can touch. That can both help or hinder sales. On one hand people are not sure on the details and may be hesitant whilst on the other you may sell them into a vision they simply can’t wait to buy into. The alternative is when you speculatively develop houses or sections with the intention of selling them once you have completed construction. This can put your product in an attractive position to sell (as you will be brand new compared to existing homes), but exposes you to significantly more timing and funding risk.

You have to determine who will be doing the selling. This will most likely be a real estate agent. With the help of your agent you need to arm yourself with a sales strategy to penetrate the market. Plan to be successful rather than just list and hope. Your real estate agent may have success in a certain type of sales strategy or have experience in tailoring custom strategies for different market circumstances. The sales strategy will be influenced by the target market you identified, the product you designed and how you are to maximise project profitability. For your project there may be many strategic options to choose from, each with positives and negatives. Alternatively, your product may lend itself to a sole particular selling strategy. The sales strategy is your plan to sell down your development to purchasers by addressing three fundamental questions:

1. What are you going to sell?
2. When are you going to sell?
3. How are you going to sell?

Once you have sold your product, you have now inherited a group of purchasers. They need to be managed (loved) throughout the development period, on settlement and post settlement.

In the next part of this series, let’s look at selling your house and development in more detail……

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com