One of my apartment syndication consulting clients is under contract to sell one of their apartment deals. They emailed me a few questions about the percentage of the sales prices their broker is asking for as a commission.
The sales price is approximately $42 million, and the broker is asking for a 0.8% commission.
My client asked “do you think this is fair compensation? Do you think we should cap the commission at a certain number? Any additional bonus structure?”
For those who are not in the multifamily investing niche, you may be saying “0.8% commission sounds amazing” since you are likely used to the 3% commission for traditional SFRs and two to four-unit deals. However, since larger apartments are sold for tens of millions of dollars, the approach for paying the broker is different.
The 0.8% commission “sounds a drop high for a deal that size. I always like to incentivize brokers to fight to push for the highest price but also create realistic expectations. If $42 million is the strike price, I would suggest your client tries to negotiate a 0.65% commission up to the strike price. Then, 5% for anything over the strike price. This way, the broker gets a fair commission if he/she hits expectations but can do much better if he/she delivers a great price.”
5% isn’t a typo either.
“In this case, you offer them what would be slightly below market. Market pricing would probably be around 0.75%. If the property sells for $44 million that means the commission would be $330,000 [$44 million X 0.75%]. By offering them a large incentive to get more than the strike price, it makes them fight for every last dollar. For example, if they sell the deal for $44 million, their commission would be $273,000 for the first $42 million plus $100,000 for the additional $2 million. The total commission would be $373,000 which means that the broker can do better as they do a better job getting a higher price.”
So, to answer my client’s question: the compensation structure that is most advantageous to both the seller and the broker is one where the commission percentage on the projected sales price is slightly below market rates and the commission percentage on the amount above the project sales price is significantly above market rates. With this structure, the broker can make more money by grinding for a higher sales price and the seller benefits from a higher sales price.
Do you have a question for an apartment syndication expert? Let us know in the comment section below or by emailing it to firstname.lastname@example.org.
Are you an accredited investor who is interested in learning more about passively investing in apartment communities? Click here for the only comprehensive resource for passive apartment investors.