What is a real estate agent, what is the role of a real estate agent (professional) and what impact do they have on residential property development?
Cloete (1999: 174) describes a real estate agent as someone who acts as the intermediary between the buyer and the seller of property and other rights in connection therewith, or in other words, introduces the one to the other. A real estate agent is someone who is competent enough to draw up a deed of sale and can arrange for bond or other finance, but it is advisable that an attorney should peruse all documents before signing them (Cloete, 1999: 174). Cloete (1999: 174) also states that a real estate agent should have sound knowledge of the property market and can therefore offer advice on stand sizes, market potential and market values.
Harvard (2008: 27) argues that the role of agents is questioned by some, asking whether their function is necessary. Certainly, it is possible to do without agents, as houses for example can be sold privately (Harvard, 2008: 27). Millington (2000: 15) mentions that in the past many successful developments were carried out with little or no market research having been undertaken and the developer proceeded on the strength of assurance of existing market demand from real estate agents as well as on the basis of natural instinct and optimism. However, it is possible that many unsuccessful developments might have been avoided if careful market research had been undertaken. Moreover, in today’s highly competitive markets it is suggested
that market research is essential, particularly in view of the incredible costs involved in many modern development projects (Millington, 2000: 15).
Prinsloo and Prinsloo (2004: 51) and McKenzie et al. (2011: 127) also share the same argument with Harvard (2008) stating that in perfectly competitive markets, there is no need for the services of a real estate professional or any other third party. Buyers and sellers are considered to be fully knowledgeable and are able to conduct transactions themselves (McKenzie et al., 2011: 128). However, as the real estate market is imperfect, the real estate professional’s role is to help buyers, sellers, landlords, tenants, lenders and others to overcome these market imperfections (McKenzie et al., 2011: 128).
In fact, the role of the consultant and the agent is essential in most property development as almost no development goes ahead without one or both being employed (Harvard, 2008: 27). Reed et al. (2015: 51) further add to Harvard’s (2008: 27) statement above about the role of the agent, and explain that an agent will introduce a site to a particular developer who is most likely to be successful in acquiring that particular site and undertaking the development. Reed et al. (2015:
51) further explain that when an agent introduces a site to a developer, the agent should provide enough detail to enable an initial decision to be made by the developer as to whether or not to pursue the potential development opportunity. A good point to note about estate agents (in the case of residential) is the fact that they may be instrumental in initiating the development process and/or bringing together some of the main actors in the process (Cadman and Topping, 2004: 17).
They also form the link between the developer and the occupier, unless the
developer uses ‘in-house’ staff to perform the agent’s role and the occupier is not represented by an agent (Cadman and Topping, 2004: 18). Therefore as Cadman and Topping (2004: 18) mention, agents play a vital role within the development process and they are often involved in every stage of the process (Cadman and Topping, 2004: 18). “It can be said that property development is more about who you know than what you know and the skill of networking cannot be understated, e.g. via LinkedIn” (Reed et al., 2015: 51).
Agents are able to perform this role due to their detailed knowledge of both the property market in terms of demand and current rent/prices and their ‘personal’
contacts with developers, occupiers, financial institutions and landowners. This emphasizes the fact that the development industry is all about ‘people’ (Cadman and Topping, 2004: 18). Successful agents tend to have certain common characteristics that customers value including good time management, extraordinary effort, superior organisational skills, professionalism, superior knowledge of the market and good personal communication skills (Larsen, 2003: 152).
Their aim is to make direct financial profit from the fees charged to their client (be it developer or occupier) for carrying out a professional service (Cadman and Topping, 2004: 18). In case of introducing one party to another, they only receive a fee if the transaction is completed, e.g. the property is let, but it is nearly always related to the value of the transaction in percentage terms (Cadman and Topping, 2004: 18). The percentage basis of the service provided to the developer is typically 1% of the land price but this can be negotiated (Reed et al., 2015: 51). As mentioned by Reed et al. (2015: 51), the 1% will also determine whether the agent
continues to be involved with the development scheme through marketing, letting and/or funding instructions.
They may be instrumental in initiating the development process by either finding a suitable site for a developer or advising a landowner to sell a particular site due to its development potential. Unless they are retained by a developer to specifically find sites to suit a particular use, they take the initiative in identifying suitable sites and ‘introduce’ them to the developers (Cadman and Topping, 2004: 18). According to Prinsloo and Prinsloo (2004: 51) and McKenzie et al. (2011: 128), the role of real estate agents (professionals) can be summarised by stating that they fill gaps in market knowledge by providing the following services:
Improve a property’s exposure to buyers by marketing, including MLS (Multiple Listing Service), advertisements, flyers, brochures and open houses.
Improve buyer awareness of alternative properties by the use of MLS, property tours and research.
Increase buyer and seller knowledge by:
Providing current market information regarding selling prices, rents and market trends (Reed et al., 2015: 51).
Advising clients and customers on investment opportunities, property characteristics and market issues.
Providing information on sources and alternative methods of financing
Helping the parties to negotiate an agreement and close the real estate transaction.
Increase the number of market participants, by persuading owners to offer
their property for sale and by encouraging people to overcome concern and acquire real estate.
These efforts can increase the numbers of buyers and sellers and help to reduce one of the major imperfections of a real estate market - too few participants.