We have written before about the financial benefits of picking the right broker, but new research suggests owners can assess a broker’s value-add potential before ever speaking to them. A recent study focused on the “connectedness” of a broker, first looking at the size of that broker’s network, then looking deeper at the quality of those connections, and came to a surprising conclusion.¹

Contrary to what you would think, they learned that a broker’s number of connections (i.e. a broker having an extensive Rolodex) actually does not have an effect on sale price. However, when a broker brings a buyer with whom he/she has a history of transactions, price goes up significantly. Specifically, one standard deviation in the number of sales a buyer has previously transacted with a broker in the prior 36 months was associated with a 1.7% higher sale price per square foot.

The study analyzed 71,000 property transactions from 2010 to 2021, including apartments, industrial, office and retail using CoStar data. CoStar records buyer and seller brokers, along with the names of the buyers and sellers. Transactions done by a broker with any seller or buyer during the prior 36 months drove the “connectedness” score. Notably, highly connected buyers “were significantly more likely to be engaged in office and retail transactions” vs. apartment and industrial.

This study’s results echo those from other studies of connection. Outside of real estate, researchers have found CEOs are more likely to be paid better -- and less likely to be fired -- if the CEO and a company’s directors have high degrees of connection. One study of sellers in a large online marketplace found that when sellers could connect, sale prices were higher. That list goes on. Deeper connections and economic value are linked.

OK, brass tacks, you want brokers that have deep, not just broad, buyer connections. When your broker brings connected buyers, it’s likely to create a price premium. But here’s the nuance—does that point you toward boutique, relationship-driven shops, or toward larger firms whose brokers carry deep ties with institutional buyers? The research doesn’t settle that, and in practice both models can deliver if your actual lead broker(s) has those deep relationships. What it does make clear is this: When you’re deep into the process and evaluating offers, it’s smart to look favorably at those that have a deep relationship with your broker.

So how do you figure out which broker has those kinds of connections? It’s actually not that hard, and the premiums make it especially worth doing if you’re going to be transacting multiple times in a given market. But you’ll need someone younger than 25 because it’s a technical process, if not a complex one.

It’s easiest to start at the firm level - let’s look at a hypothetical Main Street Brokerage Inc. The goal is to find the number and value of relationships between Main Street and the greater investor community based on prior transactions. So you need transaction data - CoStar, CompStak and Real Capital Analytics are all good places to get that.

Start by mapping Main Street’s last three years of transactions—each buyer or seller is a one-to-one “pairwise link.” We’re starting to talk in terms of network here, and we are measuring Main Street’s centrality, specifically its “degree centrality.” Imagine Main Street is a dot on a page, and lines connect that dot to buyer and seller dots. The more lines, the bigger its Rolodex, the more degree centrality Main Street has. The research found the average brokerage had more than 4,000 connections to buyers or sellers. But we know that’s not the source of Main Street’s value.

Now measure the depth of each relationship, so if Main Street and a buyer or seller have worked together more than once, that needs to be reflected in the model you build. In network terms, the line between Main Street’s dot and that buyer or seller gets thicker.

Lastly, (tell a young person to tell a computer to) repeat that technical process for the brokers in that market and stack rank the brokerages by the number of connections that have repeat transactions. You’ll likely find what the researchers found, which is significant differences in the number of these deeply connected relationships each brokerage has, and that the number of valuable relationships does not always correlate neatly with firm size. The rankings will show you who is on top.

Whether or not you pursue this scoring exercise, the study makes one thing clear: broker selection affects sale price, and to us burning calories to get good at broker selection feels like a smart way to create value. Especially at a time when value add is hard to come by.

This study also raised for us an idea we’ve had writing prior newsletters, that research like this - valuable but not super easy to use in practice - should inspire proptech entrepreneurs to build tools based on these insights. A service that maps broker connectedness could add real value to the industry and entrepreneur alike.

Who: ReLease

What: When apartment landlords partner with ReLease, any new or renewing renter can terminate their lease anytime, no fee, no penalty.

The Sparkle: Psychologically and financially, a lease comes with commitment. If you need to break it, it costs you money and hassle. Flipping that on its head, ReLease sells “Relocation Coverage” to landlords so that any resident in the building can leave their lease at any time, no penalty or fee. ReLease covers the landlord for lost rent until a new tenant moves in. The product is insurance-esque, but the value comes with higher rents and lower vacancy. Tenants really value the option to leave whenever they need to, and they pay for that option in the form of higher rent, earning landlords more than twice the cost of the ReLease program.

Proof that sometimes, the most elegant ways to study nature are delightfully low-tech.

You can literally measure the blueness of the sky. This simple device was invented in 1789 by Swiss physicist Horace-Bénédict de Saussure and German naturalist Alexander von Humboldt—a simple circle of blue swatches used to compare and quantify the sky's shade.

This “Cyanometer” is easy to find today and artists have even turned the idea into a colorimeter, which calibrates grays to match cloud tones. And yes, there are printable DIY versions:

Link: https://byopiapress.wordpress.com/2024/05/19/a-cyanometer-and-a-cloud-colourimeter/

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