Beware of Agents Offering the Sun and Stars

ex·pec·ta·tion

noun

plural noun: expectations

a) a strong belief that something will happen or be the case in the future.

b) a belief that someone will or should achieve something.

Expectations - whether in business or personal relationships - are critical. The reason is simple. As you can see from the definition above: Expectations are based on beliefs.

Beliefs are a hard thing to change. Opinions can be swayed, rashly made impressions can be reversed, but beliefs are something much stronger and less malleable. Meeting someone’s expectations is much easier than trying to change what they believed to be true after the fact. This is in why relationships, business as much as personal, managing expectations is key to maintaining and strengthening those relationships.

In fact, Real Estate Magazine calls setting expectations “the foundation of every deal.

Setting the right expectations upfront can make or break a client relationship - even if the end result would have always been the same. For example, imagine your financial advisor called you and told you that your investments had lost $10,000. No doubt you’d be pretty upset and want to know what happened. Now imagine that two weeks prior your advisor had come to you and explained that because of COVID-19, many of your investments were at risk and you could see losses up to $100,000. Looking at it from that perspective, the $10,000 loss doesn’t seem so bad, in fact it might be received as good news!

When expectations are not met, one or both parties usually end up frustrated and unhappy. This is a lesson I’ve learned from over 25 years in commercial real estate and one that agents just starting out typically have to learn the hard way. As a client, you’re more likely to come out satisfied dealing with the real estate agent who gives it to you straight - even if you don’t like what you hear - rather than the agent who promises you the sun and stars.

Why do expectations matter for real estate investors or tenants?

They matter because, as I’ve often seen, clients can interpret setting realistic expectations as the agent not working hard enough or not wanting to negotiate on their behalf.

You may have read our blog on how landlords set rental rates, which explains why commercial lease rates are fairly inelastic and based on pretty predictable math, not emotion. This is in contrast to the residential market where emotions can play a huge role in price setting.

By setting clear expectations for you, an agent is actually helping you make the best possible decision and not trying to shirk his or her responsibilities.

For example, let’s consider the fictional case of Danny Dealgetter and Condos R Us.

Condos R Us is selling new industrial condos at an asking price of $340 per square foot (psf) and the listing agent has said that 10 out of 20 units have already been sold at prices around $334 - $335 psf with several conditionally sold and multiple inquiries.

Danny Dealgetter is our client. If it wasn’t already obvious, Danny loves a deal! He wants to offer $320 psf.

After carefully reviewing comparable sales and having lengthy discussions with the listing agent, it becomes obvious that $320 psf is not only unreasonable, it’s absolutely pie-in-the-sky wishful thinking. Our professional opinion is that a fair asking price for the condos would be between $333 and $335 psf.

After a few rounds of negotiations, the final sale price is set at $334 psf.

Now, imagine yourself in Danny Dealgetter’s shoes. You had your heart set on $320 psf; if the average condo is 1,000 square feet, that’s an extra $14,000 you’ll have to pay you didn’t expect. You can see how someone might perceive that as their agent not properly negotiating on their behalf. In reality, the offer of $320 psf would never have been accepted as the profit margins don’t work for the developer, Condos R Us. Since emotion rarely comes into play in commercial deals, allowing Danny to believe that $320 is even a possibility has automatically set him up for disappointment and may sour his feelings on what otherwise could have been a favourable deal for him.

But what if he had been forewarned? If Danny’s agent has come to him before any negotiations started, shared his or her research, and set expectations of a selling price of $333 to $335 psf, Danny could hardly be upset with $334 psf. At the very worst, he’s expecting to pay $333 psf and pays $1,000 more than expected, but at the very best, he’s expecting $335 and gets his condo $1,000 cheaper than expected. Either way, how Danny is feeling about the transaction - and his agent’s effort - is night and day to how he would be feeling if his expectations weren’t managed at all.

Beware the commercial real estate agent offering the sun and stars - as in most things in life, if it sounds too good to be true, it often is. For the best investment and real estate advice, choose an experienced agent with industry and market insight who can properly guide your expectations and help you make the best possible decision for you and your business.

Learn more about Steve Peres.

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