Chris Stephens: Brokers are compensated well but bear risk that deal won't close

Chris Stephens

I was talking recently with a seller who thought his broker was being paid too much money. I'm sure he wasn't the first seller to have that thought.

While I'm biased, there are logical reasons why brokers are compensated the way they are. Commission compensation means the broker only makes money when a transaction succeeds. That's why it's sometimes called a "success fee." No matter how much time and effort the broker puts into a transaction, if the deal doesn't close, the broker doesn't get paid.

Brokers gamble that enough transactions will close with enough compensation to cover their ongoing operating costs and personal living expenses. Transactions that do close in effect pay for the work on transactions that don't.

This is in contrast to every other professional service provided in real estate: lawyers, appraisers, title companies, accountants, engineers, surveyors and so forth. They get paid for the work they do, regardless of whether a sale or lease goes through.

While compensation can be large, it's still a small fraction of the transaction amount. A large commission accompanies a large deal, yet by percentage the commission is small, much less than 5 percent or 6 percent.

Large transactions are rare and complicated. They take a lot of expertise, skill and time, and they have a high failure rate. Still, working on large transactions can be thrilling -- with the possibility of a healthy payday, if they close.

A broker's key resource is time. Once spent, the time is gone, so brokers have to be careful to whom and to what projects they give their time. Putting a lot of time into a failed transaction hurts a broker in two ways. First, no pay for the work. Plus, the time put into the failed transaction was time that could have been spent on successful transactions that would have closed and brought in money.

This is why brokers value loyalty. They need loyal clients so they know they will eventually be paid. The client receives needed brokerage services, and the broker has incentive to provide his time. That's fair to both.

I know a broker who has worked with a national retailer for more than three years to obtain a building site, yet has not closed or been paid for his services. This is longer than most but not that unusual.

The most successful brokers are talented people who would push themselves to succeed at whatever profession they chose. They settled on commercial brokerage for many reasons, including the opportunity to be highly paid.

For that, they put up with all the frustrations inherent in the business, risking irregular cash flow with the possibility of going broke. If not for the opportunity of high pay, they would do something else. To have highly talented brokers, a big incentive is needed.

Once, when hiring a new broker for my firm, I told him being a broker was hard work but also offered the opportunity for high pay. After his first year in the business, he told me I didn't get it quite right. He said the reality was hard work and the opportunity for low pay.

But he stuck with it, and became a talented and financially successful broker.

Chris Stephens, CCIM, is a local associate broker specializing in commercial and investment real estate. His column appears every month in the Daily News.

Chris Stephens