“The beginning of wisdom is the definition of terms.”
A lot can be learned from reading a dictionary. It reveals the origins of words and uncovers the true essence of what things are. This is especially true when the word defines a person’s profession such as “doctor”, “lawyer” or “broker”. Though professions evolve over time due to changes in technology, custom and practice, at their core, these professions essentially remain the same. Certainly there have been tremendous medical advances over the past 500 years; however, a doctor is still someone who treats sick people. The legal industry is much different than it was 200 years ago but lawyers still advocate for their clients at the negotiating table or in the court room applying the rules of law. But what about a broker?
Webster’s, defines a broker as “one who works with opposing sides in order to bring about an agreement.” They list, among others, as synonyms “mediator”, “conciliator” and “intermediator”.
Historically, brokers put deals together between two or more parties. They matched together people who wanted to sell something with people who wanted to buy something. To facilitate deals, brokers often helped the parties determine a fair price based on similar deals being transacted whether it be corn, soybeans, minerals or real estate. Brokers were not advocates for either party—they couldn’t be because they had both seller and buyer clients. Brokers were merely intermediaries and facilitators trying to make a deal happen.
Unfortunately, unlike with medicine or law, not a lot has changed over the years with regard to real estate brokerage. Notwithstanding what many full service brokerage firms say in their marketing materials, ultimately many brokers still view themselves as primarily as intermediaries who bring landlords and tenants together—their value is space finding. It’s right there in their engagement letters.
The tenant engagement letters required by most large brokerage firms say that, following the expiration or termination of the engagement, if the tenant ends up doing a deal with any building the broker showed or otherwise identified to the tenant during the term of the engagement, the broker will be owed a fee. There is no requirement that the broker negotiate actual deal terms, structure a deal or shepherd the deal to closing– the mere introduction of the property to the tenant entitles them to a full fee. In sum, their job was simply to find the tenant a building.
There is other, more compelling evidence that most brokers still view their role as a deal facilitator and not as an advocate for tenants. Whereas lawyers can never represent opposing parties without an express written waiver from all of their affected clients, brokers take positions that are directly adverse to their clients all the time. They regularly represent landlords and tenants in the same market and even the same transaction. In fact, they will even be the landlord in a transaction with one of their tenant clients and negotiate aggressively against them.
How can a broker reconcile these direct and irreconcilable conflicts of interests? Simply put, there can be no real conflict of interest if they see themselves primarily as match makers facilitating a deal between a willing buyer and a willing seller—just like the old days.
However, whereas it might have sufficed 100 years ago for a broker to be a mere facilitator in a world where buyers and sellers (or landlords and tenants) had relatively equal knowledge and leverage, that’s not the case today. Now real estate is dominated by large REITs, insurance companies and private equity funds. These landlords have large staffs of experts and professionals who work in real estate all day, every day whereas tenants only need space maybe once every five or ten years. It’s a rare event so they don’t have on staff the expertise to compete with the landlord’s army of professionals. As a result, when the time comes for a tenant to do their lease, they need a dedicated advocate, not a neutral intermediary.
Sometimes to understand why things are the way they are, you need only look at a dictionary. How a profession is defined often reveals the essence of what that person does and what they believe their true service and value is. The traditional roles of professionals don’t really change much over time and old habits die hard; especially when the traditional roles worked so well for the professional. While clever marketing materials can spin wonderful tales, the engagement letters they are required to sign and the conduct of brokerage firms tell tenants the real story. In the end, a broker is not enough. Just ask Socrates.
For more information contact Glenn Blumenfeld