“Which is a better listing?
A) a $15M building for sale or B) a $5M building for sale?
On the surface it would seem that the answer is clearly A. Probability brokerage is about looking deeper and doing a quick calculation to really understand each of these listings.
Let’s make the following assumptions:
$15M Office Building
• The $15M building is institutionally owned;
• The owner has asked 5 brokerage companies to compete and they will only pay a 1% fee to your firm and a 1% fee to a co-broker, if there is one;
• The building is 100% occupied, but a tenant occupying 30% of the building has a lease coming due in 18 months;
• The building is in a trade area with 15% vacancy and the market has not been improving.
• Based upon these factors, you think that you and the broker that brought you in on the deal have a 50% probability of selling the deal during the next 12 months.
Let’s do the math: $15M x 1% = $150,000. $75,000 would go to you and $75,000 to your partner, but there is only a 50% probability of collecting this fee so your “probability fee” is equal to $37,500.
• The $5M building is owned by a private individual that has substantial motivation to sell;
• You have been calling on this owner for 3 years and because they know you are the expert in the market you did not compete for the listing. The owner will pay a 4% fee regardless of whether you co-broker the deal or there is a co-operating broker.
• The building is 85% occupied by a diverse group of tenants with leases at market;
• The building is in a popular trade area for investors.
• Based upon these factors, you think that you have an 80% probability of closing this deal in the next 12 months.
Let’s do the math on this deal: $5M x 4% = $200,000. There is no partner so you don’t need to split it. Although let’s assume that there is a 50% probability that you will co-broker the deal. So the list side is $100K and the co-broker side is $100K. If there is a 50% probability of co-brokering the deal then you multiply the co-broker fee by 50% and you get $50K. Therefore, probability says that you can expect to receive $150,000 from this deal upon a sale. If there is an 80% probability of receiving this fee, then you multiple $150,000 x 80% which equals $120,000.
$120,000 is a lot better fee than $37,500.
Now there are other factors you must always consider. For example, if you are successful at selling the property for the institutional seller, there could be a lot more business down the road. Or maybe the broker who brought you in on the $15M deal is someone whom you really want to work with. There could also be some glory from the $15M deal because it might be the largest deal sold in your market.
The purpose of this exercise is to make sure you are not fooling yourself into believing the $15M deal is a much better deal for you just because it is $15m.
This exact same exercise can be applied to leasing. In leasing it is more complicated because each property has so many spaces and because the leasing of the property is usually spread out over a much greater period of time. If your business plan involves leasing in addition to sales, I encourage you to apply a similar model to leasing. My experience has been when brokers apply the “probability brokerage formula” to leasing they frequently realize they do not have enough quality product listed to achieve their goals.
Value Added Brokers know that time and knowledge are their primary resources and they use “the probability brokerage formula” to maximize the use of these precious commodities (credit b. umansky