In last week’s column, we briefly discussed the nature of the investment sales market in New York City in 1984, when Paul Massey and I began selling investment properties. At that time, brokers rarely obtained an exclusive listing to sell a property. Since then, the market has become more sophisticated and exclusive listings have become more commonplace as sellers take advantage of the technologies available to today’s building-sales brokers. However, there is still a very significant segment of the market that operates very inefficiently and ineffectively.
One would think that from a seller’s perspective, retaining an exclusive agent would always be in the seller’s best interest. After all, intuitively, there is a simple formula that generates the maximum sales price for an investment property. Logic dictates that the more people that know a property is for sale, the more offers you receive; and the more offers you receive, the higher the final sales price.
Clearly, an exclusive listing arrangement provides several benefits to the seller, which results in maximum exposure for the property; a greater number of offers; and, ultimately, a higher price. It also provides the seller with a comfort level that the property was sold at its maximum price level.
Seems like a no-brainer, right?
Remarkably, only about 25 percent of all properties that are sold are handled by the top building-sales brokerage companies, and on an exclusive basis. Therefore, the majority of sale transactions are effectuated either by small brokerage shops or by sellers on a direct basis without the use of a broker. We can never understand why some sellers choose to market their property quietly and not fully expose the offering to the marketplace. We have seen, time and time again, sellers who choose this route, often leaving significant money on the table.
In 2009, the top 25 building-sales brokerage companies handled the sales of 387 properties out of a total of 1,436 properties sold in New York City that year. This reflects a surprisingly low rate of just 27 percent of the total. This figure was up from the 22 percent level achieved in 2008, when the top 25 brokerages handled 687 sales out of a total of 3,144.
If we consider a longer period of time, going back to the nine-year stretch from 2001 through 2009, the top 25 brokerage companies handled the sale of 5,644 properties out a total of 24,626 properties sold–a rate of 23 percent. If we expand the field of brokerages to include the top 50 firms, the number of sales increases to just 5,977, or 24 percent. (The figures for the top brokerages were based upon data collected by CoStar, the national real estate market research firm. The total number of sales per year was provided by Massey Knakal.)
This data begs the question, why do such a small percentage of sellers decide to retain top brokers to market properties for them? When we meet with potential sellers, we hear all types of objections, including sellers not wanting to feel “tied up” and misunderstandings about what the word “exclusive” means. Some feel as if retaining a broker may limit them in some way. Some had seen some interest in their property already and others say that they have “friends” in the industry who would be upset if they decided to go with only one firm. Regardless of the myriad excuses we have heard over the years, there seems to be no rational reason why a seller would not want to create maximum exposure for their property to ensure a higher sales price.
IT IS SURPRISING that so many sellers decide to market properties quietly through “off-market” transactions. What is not surprising is that an overwhelming majority of buyers in the marketplace specifically call our offices looking for these types of transactions. Buyers are very interested in buildings that are not widely marketed because they know they can achieve advantageous pricing if there is limited competition for the property. Why would a seller opt for limited competition?
It seems that in the overwhelming majority of cases when a seller attempts to market without a broker, the properties were not fully exposed properly to the marketplace. They achieve results that are far inferior to what could have been achieved through a traditional exclusive marketing program. Examples of these tragic seller mistakes are numerous. Over the years, some of these flubs really make you scratch your head.
For instance, many years ago, we were trying to meet with the seller of a small development site at 519 West 23rd Street. The seller would simply not return any of our numerous phone calls. We knew the property was on the market on an open-listing basis. But if the seller wasn’t returning our calls, he probably wasn’t returning calls from many other brokers, either. A few months later, one of our clients came into the office and explained that they had signed a contract for the property and wanted to know what we thought we could sell the property for. Within one month, we found a buyer willing to pay $3.4 million. Unfortunately for the seller, the contract vendee had a contract at $2.5 million, resulting in a foregone $900,000, or 36 percent of what could have been achieved.
Another example: I had been trying for months to speak with the owner of an apartment building located at 145 East 49th Street. After months of unreturned phone calls, messages and letters hand-delivered to the seller’s office, I finally was able to get the seller on the phone. He explained that he had been in the real estate business for 40 years and had sold dozens of properties without ever hiring an exclusive agent. “Why should I change what has worked for me for decades?” the seller asked me. I explained that I would like to put together a valuation, letting him know what I believed the property was worth, and also explaining, in detail, what our marketing program would consist of. The seller dismissed this out of hand and was subsequently greatly embarrassed when we obtained a price of $4.5 million for this property. This price was $2 million higher than the $2.5 million contract price that the seller had executed.
The sale of 353 East 61st Street was an even more glaring example of a seller who felt he knew more than active participants in the marketplace. This property was a five-story commercial building that had been owned for decades by a real estate family. This seller also failed to return calls and, when finally contacted, was unwilling to meet with us. He was another seller who would not retain an exclusive agent to market the property for them. Then, one morning, a client of ours came into the office explaining that he had signed a contract to purchase the property and wanted to know what price we thought we could flip the contract for. Amazingly, the seller did not realize that there were significant excess development rights attached to this property. We flipped this contract for $5.5 million, almost four times the $1.5 million price “Mr. Know-It-All” sold the property for.