Failures of real estate agencies

The real estate market has two major parties to all operations: those who demand space, and those who offer space. The party offering the space, in other words, the owner, can be a patrimonial company, or a company, an end user, that has a property. The difference is important: the business of the patrimonial company is exploiting its patrimonial estate, the business of the end user is another and the property is only the space where it produces goods or a service. Most commonly the owner is a patrimonial ownership, meaning a company whose business is to exploit their properties.

Normally, realtors represent patrimonial ownerships and generally do a good job representing them. It is what they are paid for, and it is not an easy job. However, end users and businesses should not be surprised to find that the advice usually given by the agents representing the patrimonial ownerships do not serve their interests. Here are 8 of the worst tips normally given by a dedicated real estate agent representing properties:

1. “We can get the best deal for you because we know the market.”

The real estate market is transparent. Usually, patrimonial ownerships or agencies report the availability, characteristics and economic conditions. However, knowing the market in this sense does not add value. What adds value, among other details, is to provide information about the state of the building premises, building services and management efficiency, not only for a property that the agency represents, but for all properties, regardless of who represents it.

Normally, leases go wrong because costs rise more than expected, mainly because the contracts do not provide adequate standards of operation and ownership responsibilities in areas such as heating, ventilation, air conditioning, electricity, and others.

A poorly negotiated lease often turns a “great space” in a bad deal.

2. “We can get a good deal for you through our relationship with the owner.”

If the solvency of your company suggests that it can meet its contractual obligations, then the owner will be delighted to have you as a tenant. The idea that your company needs some kind of “help” to make a deal is ridiculous. The business of patrimonial ownerships is to have tenants pay.

What your company really needs is a real estate consultant, an advisor, that truly represents their interests, not the interests of any patrimonial ownership which it has a relationship (or hopes to have) with. The contracts proposed by owners are comprised of blatantly anti-tenant clauses. In fact, some buildings have a high level of unsatisfied tenants, there are owners with financial problems that could impair their ability to comply with their contractual obligations.

When a real estate agent says he has a special relationship with the owner that may benefit you, you should ask yourself whether their relationship is the obligation to represent their interests. Do you really think that this agent has total freedom and independence to explain all costs on a proposed lease? And do you really think that this agent will be transparent about the issues that might affect you in a lease? Do you think that an agent will negotiate strongly representing your interests if it means opposing the owners that they are expecting to charge a commission and establish a relationship for the future for their business?

Obviously, you are interested that contract negotiations will be conducted amicably, but this means insisting on a professional approach to negotiation, not goodwill buying.

3. “We can provide a great service because we have branches in many cities.”

No need to be in many places to meet your needs in other cities. Primarily, because patrimonial ownerships offer their availability through agent networks and databases.

If having offices in many places serves owners, then the agents with offices in many places have a serious conflict of interests to protect the interests of an end user.

Each owner is a potential customer for a realtor, and assiduously protecting the interests of a tenant could jeopardize potential realtor business with the owner.

The key to signing a good lease is to make a good analysis of the place, the building, the contract and a good negotiation and follow-up, and this depends on the expertise and real estate consulting model representing the tenant, not the number of offices they have.
4. “Do not break the negotiation, nor anger the owner.”

Most commonly, agents representing the owners advise tenants not to negotiate aggressively, not ask the owners to fulfil their contractual obligations and, after signing the contract, not insist on the rights that the contract can offer. However, according to our experience, an owner respects renters who know their rights and pursue the interests for their business.

It is true that a tenant often requires of cooperation of the owner, and it is also true that an owner needs their tenants to remain satisfied in their property, since it is generally cheaper to keep tenants happy than to incur the cost and the possibility of losing income resulting from a tenant leaving.

5. “Hurry up and close the deal.”

Normally, agents put pressure on tenants to close the deal. These agents tell tenants that if they do not act fast, someone will come and take their place. Such pressure is especially intense in a market that favours the owners.

Rushing to sign an agreement risks making the due diligence careless, increasing the possibility of raising implementation costs in a building where the risks and total costs proposed by the owner are not adequately analysed. Signing an agreement can become a serious liability for your company.

6. “Since you are a large tenant, you have few alternatives.”

Some of the worst leases have been signed by large companies probably because executives felt they had to be in a specific building.

While it is true that the number of large surfaces in a given area are limited at any given time, it definitely does not mean that a tenant must accept any condition proposed by an owner.

It is of utmost importance for users of large surfaces begin searching for a location in advance. A company that occupies 90,000 m2 should start defining the search project, especially if what they need is a turnkey building, five years before the expiry of their present contract. Starting early means the company will be able to view more spaces and include options which require constructing a building and considering different options for renting vs buying. There are always more alternatives for large spaces than companies could imagine, including existing buildings undergoing renovation or buildings in different areas considering the limits and turnkey projects.

Developing alternatives objectively, analysing them in detail, will give the company the actual costs to be borne and the advantages and disadvantages of each opportunity. Equally important is that this will give the company the ability to start negotiations, and if they were not satisfactory, may withdraw and begin negotiations elsewhere.

7. “The owner contract is repetitive, with standard conditions.”

So-called “standard conditions” are invariably “pro-owner clauses”, because the contracts are drafted by properties that naturally protect their interests.

“Standard clauses” often include items that can seriously affect the budgets of companies and operating costs, maintenance, vague rules of operation or compliance with the owners and no audit rights.

Companies cannot rush into accepting “standard conditions”. Rental negotiations should be carried by the objectives of your business, not by the wishes of the owner to avoid risks (by passing them on to tenants). The activity of the company should be transferred and guided when negotiating conditions to be sure during the negotiations.

8. “We must focus on the rent and the basics, let the lawyers take care of the small print.”

Many executives imagine they have secured their highest outgoings by agreeing on the basics. However, the remaining contract is loaded with further expenses. Easily. There are 18 or 19 significant costs apart from the rent in a typical lease, many of them hidden, and it runs against the interests of estate agents and the owners themselves. Identifying and clearly expressing these costs can jeopardize the operation.

Only lawyers working with the end-user representation model will provide complete information to protect tenants, because they are trained to analyse (mainly based on experience) agreements and items that can have excessive costs in contracts.

Best advise
Generally, the most common reason tenants seem to take bad advice from a realtor is because they are impressed by the great deals they have made. But as a point of discussion, great deals are meaningless unless they are good deals for tenants. The fact is that a substantial number of contracts in excess of 4,000 m2 have serious problems, including contracts that were reviewed by competent lawyers.

It’s shocking to see how many contracts have inadequate cost controls, high electrical formulas costs, increases after increases, vague property performance standards, weak sublease rights, rigid audits… In some cases, leasing problems become so severe that they cause serious management problems affecting the core business of companies.

When you meet with a realtor, do not ask about what deals they have done recently, ask how many signatures they protected. Probably, you will find everything you need to know by discussing how the agent analyses locations, evaluates properties, negotiates contracts, negotiates other kinds of real estate transactions, monitors output controls, audits the accounts and other ways of defending the tenant. How else could you be sure that a real estate agent and the result of the contractual project actually protect the vital interests of your company?