- October 26, 2023
- Reading time about 6 minutes
Contrary to the forecasts, the inflation rate has not dipped in September either. It remained at 3.7% in the previous month as opposed to the forecast. After seeing the 40-year high of 9.1% in 2022, it could look like a relief to many, yet it is far above what the Federal Reserve aims. Having an annual inflation rate of 2% looks like a far-away dream till 2026.
To tame the inflation rate, the Fed has kept the interest rate steady between 5.25 to 5.50%. One thing is sure among all these numbers and forecasts, the brokers must win, process, and close a deal quickly. The longer the Commercial Real Estate (CRE) cycle, the more hidden costs you will bear.
This blog will untangle the intricacies of the CRE deal cycle and how inflation affects your commission and earnings. Let’s find out.
What is the Commercial Real Estate (CRE) Deal Cycle?
The commercial real estate (CRE) deal cycle involves the systematic stages that real estate brokers and agents follow to spot, assess, secure, and close commercial real estate transactions. Starting from property sourcing, probing, financing, and negotiation to closing, a broker receives his/her commission upon successful completion of the transaction.
A shorter CRE deal cycle is important for brokers for more than one reason. As a broker, you receive your commission early when the CRE deal cycle is shorter. It also helps you sail through a highly uncertain economic landscape. Here’s how a shorter CRE deal cycle can help you-
- Quicker Commissions
- Efficient Risk Mitigation
- Better Response to Market Changes
- Reduced Holding Costs
How Does Inflation Impact Your Commission?
With the inflation rate not seeing any remarkable dip, it is constantly affecting the value of the commission that you’ve earned but will receive after a few months. Inflation can affect your commissions directly and indirectly. Here are some straight facts-
- Inflation decreases the purchasing power of money over time. Your money will lose its real value if the deal closes in the coming few months
- Your clients might want to negotiate lower commissions with you during inflation, saying it is financially crunching times.
- Volatile market conditions might call for changes in volume and type of commission.
Talking about the diminishing purchasing power of your commission, here’s how it works in the CRE business.
Suppose you have won a new listing for a property from a CRE auction platform with an estimated value of $1 Million. You expect to close the deal in 8 months at a commission of 3% of the property’s sales price. It certainly looks great, doesn’t it.
Here’s a catch.
If the deal were to be closed today, you would have received $30,000 (3% of $1 Million). But it is closing after 243 days. You will still receive $30,000, but the purchasing power of that amount will be less due to a continuous rise in the inflation rate. Let’s calculate the real value of your commission at 6% inflation.
Real Value of commission = Commission / (1+ Inflation Rate) ^ (Time in Years)
Real Value of commission = $30,000 / (1 + 0.06) ^ (8/12)
Real Value of commission = $28,857
During these 8 months, the value of your commission will decrease by $1143. That means your commission won’t go as far as it would have gone if you had received it right away.
How Does Interest Rates Affect Your Earnings?
Inflation is the result of increasing customer demand. To meet the growing demand in the market, more resources are deployed to pace production, subsequently increasing the wage rates and buying power of people. The Federal Reserve takes preventive measures to curb inflation. Increasing CRE interest rates is one of them. High interest rates control consumer spending, decrease demand and ultimately curb inflation.
When interest rates are higher, and your commission is calculated on the property’s sales price, this can potentially harm your commission amount if a property’s valuation sees a downside.
It must strike your mind if you are bearing any hidden cost amid all this. Answer is yes.
As a broker, you invest your time and money both when the commission amount is locked in the CRE deal cycle. You have your personal and professional expenses to meet all this while. You might not be borrowing money from anyone to do so but you’ll still have to borrow money from yourself.
Another cost you bear when interest rates are high is the opportunity cost. During the CRE deal cycle, you spend your personal funds to bear your expenses and get reimbursed when you receive your commission. There’s a lost opportunity here. You are employing your personal funds here instead of investing them in a profitable investment.
To bear these hidden costs, you must negotiate for a higher commission. Here’s how you can reduce the impact of inflation and high interest rates on your earnings.
How to Manage the Impact of Inflation and Interest on your Earnings?
The Federal Reserve aims to lower the inflation rate to 2% by 2026 and will take further steps to minimize the impact. There are certain ways you can manage the inflation impact on your real earnings.
Negotiate an Arrangement with a Higher Commission
Credibility is the key to negotiating a higher commission with your client. In a highly competitive real estate market where there are many brokers to do the job at a much lower commission, it can be challenging to negotiate a high commission. Personal branding can serve the purpose perfectly. IDX website for brokers is an effective way to build a professional online presence. By offering correct and comprehensive property listings, you can prove your commitment to your services. Another way you can present yourself as a trusted real estate broker is by putting testimonials on your IDX website. By building a reputation, you can market yourself better and ask for better commission.
Settle for a Bigger Commission Split
Negotiating a bigger commission split with your brokerage can boost your income during inflation remarkably. Start by searching for brokerages in your area that offer high splits. You can study their commission structure and prepare a plan to communicate what value you will bring to the brokerage.
There are certain brokerages that provide 100% share to the brokers, but charge collect expenses and desk fees from them. Then there are brokerages that split the commission in 50:50 and don’t charge any added fees. The higher the rapport with the brokerage firm, the better the split.
Agree upon a Shorter CRE Deal Cycle
Narrowing the CRE deal cycle is the most practical option to avoid the impact of inflation and high interest rates. The faster you close a deal, the lesser the chances for inflation to affect your business.
The top real estate IDX MLS website empowers you with an integrated dashboard that allows you to manage multiple auctions and deals efficiently. Features like interactive bidding countdown and multiple auction formats allow you to manage the Commercial Real Estate (CRE) deal cycle efficiently. Analytics and insights help you stay ahead of the curve during volatile economic dynamics.
If you’re looking for a comprehensive real estate auction website builder to streamline your real estate business, get started with Bidhom for free. With Bidhom, you can list, market, and close more deals. Contact us today!
