Why building trust and loyalty with passive investors is at the crux of real estate investing
December 1, 2022
Real estate brokers have a uniquely impactful profession. One that allows individuals the opportunity to form bonds and build relationships between buyers and sellers. However, when it comes to syndications, things get a bit more complex. In this article, we discuss broker relationships with real estate syndicators.
While it is undoubtedly possible for brokers to become partners in syndications (and some do pretty well), we should understand that there is no symbiotic incentive structure between the broker and the real esate syndicator.
We do not mean to disparage any well-meaning, successful brokers; it’s simply a statement of fact. On one side, you have motivated sellers and their agents who want to maximize deal flow. On the other side, you have encouraged buyers (the syndicator) who want to close the deal as fast as possible, to start raising capital and maximize return.
While the motivations of these two groups are disparate, they both share an interest in maximizing deal value (and minimizing risk). Because sellers will generally listen to offers from any buyer that can make their bid more compelling than their competition, sellers also understand that syndicators require a profit motive to succeed. After all, they’re simply interested in receiving an attractive offer for their property.
Likewise, syndicators want deals with high value to maximize their returns. They want to fund profitable deals, but they also need the sellers to be motivated enough to accept their offer. So knowing how to make an offer for a multifamily deal is essential.
Why are brokers important in the syndication process? The answer is simple: to syndicate winning multifamily deals you need to have access to motivated sellers and brokers provide opportunities for syndicators to access them.
When it comes to acquiring real estate, nobody is more qualified than a broker who has built their business by cultivating relationships within their community.
However, while the broker may provide access to seller opportunities that would otherwise not exist (or remain off-market), they are often privy to additional layers of information that can assist buyers in making more informed decisions.
This information could include details known by the seller, which they did not disclose upfront—for example, impending litigation or other environmental risks associated with the property currently on offer. So you need to conduct your due diligence regardless of the information you’ve got from the broker.
Usually, brokers get paid when they perform a service for their client; this could include contract negotiation, introductions, etc., which ultimately lead to an executed agreement between buyer and seller.
However, in the context of syndications, brokers are often paid by their client (i.e., seller) for introducing them to a buyer who has agreed to pay a finder’s fee upon closing the transaction. We cannot overlook this aspect when talking about broker relationships in the deal-closing process.
The key takeaway is that brokers get incentives from introducing motivated sellers to buyers who will compensate them for their services. While this may seem like bad news for traditional real estate investing (which values low fees and discount commission structures), it does not necessarily mean anything wrong with this approach per se’.
So long as both sides agree on and sign off on it upfront, it’s not a problem. The key is that all parties understand their role in the transaction and what they expect to receive for their services going forward.
While there is nothing legally wrong with paying a finder’s fee, one of the crucial functions of the broker during this process is understanding where their loyalty lies. In some cases, brokers may be asked to solicit something from the seller which exceeds their ethical scope as an agent (e.g., special terms outside of a regular listing agreement).
The brokerage community is dynamic, and many different business models exist under its umbrella. They range from large corporate brokerages incentivized with ownership interests to apathetic mom-and-pop shops that don’t see themselves as real estate professionals.
It’s safe to say that brokers play a vital role in the syndication process – but not every broker will help voluntarily without being compensated for their work. Some brokers may be reluctant to introduce parties they might not know well and trust.
So meeting the kind of people you wish to do more business with can sometimes require a little bit of elbow grease on your part. You need to attend public events, be active in social gatherings, or even cold-call people who might have something interesting to offer your business.
Of course, different marketplaces have their dynamics, so you need to find the ones that suit your requirements while maintaining a healthy respect for any ethical boundaries brokers might establish along the way.
While paying customers is one thing, rewarding customers with additional perks is another matter. Syndicators can entice brokers into working with them by offering certain incentives that other competitors in the marketplace can’t match (e.g., monetary bonus, contract negotiation assistance). So think of brokers as a medium between yourself and your customer rather than just another cog in the wheel of real estate transactions.
Consider brokers to be more than just an extension of your team – but instead, someone integral to your growth as a company. Think about how you can integrate this person into your business plan, so they have a reason to continue helping you build deals.
Sometimes knowing what others want makes them more likely to come around when you need them (and vice versa). While there is nothing wrong with wanting something for yourself (e.g., a finder’s fee, commission check), it may be beneficial to think of more subtle ways brokers can help you get what you want.
For example, many brokers offer unique types of deals that are not available on the open market. These might include lease options, seller financing, or other creative options not typically offered in standard brokerage transactions.
As a result, brokers who know how to navigate these more complex agreements are very valuable because they might be able to close transactions faster, saving both parties time and money.
On top of this, some property owners will only do business with people who have excellent reputations within the industry itself (i.e., an established record for closing good deals). By working with brokers who know how to work with these types of individuals, you might be able to close more deals faster.
Finally, many syndicators possess high net worth and can afford to pay top dollar for services rendered (e.g., finders fees, kickbacks). So some brokers will place a premium on establishing good rapport early because it will mean they’ll come out ahead if/when the ultimate transaction is awarded to them.
It takes a long time for most brokers to establish a good rapport with property owners. They cultivate these kinds of relationships over several years, translating them into more deals and greater business opportunities as time goes on.
So working hard on building solid networks is an integral part of many real estate transactions. While it is daunting at first, keep in mind that you don’t have to work with every broker who might be willing to walk a mile or two down your road.
First, connect with those people who specialize in a particular sector or market you’re trying to target. They might include other syndicators, property managers, brokers, real estate industry professionals, or even those who have experience buying and selling a specific type of asset.
Those at the top level of the food chain need to see your value as a trustworthy person and a great marketer – not just another cog in the wheel.
If you want to have a successful relationship with your broker, it’s essential to understand their side of the equation. Brokers are more likely to be interested in helping those who can ultimately close deals – often referred to as having “…clout” by many industry insiders.
Having clout means you don’t necessarily need to pay top dollar for services rendered (although this works for some). Instead, token fees and even other forms of compensation might suffice. For example:
It is not always about how much money brokers make, but whether they feel like they can trust you. So you need to work on building mutually beneficial relationships based on trust and integrity.
It takes a long time to build the foundation for thriving brokerage business. Brokers need to have solid connections with wealthy individuals and/or other companies who are willing to do business with you on an ongoing basis.
Developing solid relationships with brokers can help you win deals at all stages of the game – that’s why it’s essential to make sure any broker you work with understands your goals and you know theirs.
Every potential deal has several people involved; therefore, it’s vital for those who plan on succeeding in real estate syndication to understand how to work within their particular environment. If you know everyone’s goals and act with integrity, you’ll be able to create mutually beneficial working relationships with partners who will ultimately help you win deals down the road.