Joint Ventures in Real Estate: How to determining commission to charge
In a previous article, we discussed the commissions that real estate agents can charge. In Kenya, the Estates Agents Act sets scales from Scale 1 to 5 that sets the commissions to be paid. The rates vary depending on the services rendered.
You may read more on that here:
The above article sets rates for selling properties, letting, management and mortgages. But what fees should be payable to a real estate agent when they successfully bring parties together for a joint venture?
In most cases, the real estate agent who helped find either the land or the capital partner in a joint venture does not become a partner in the venture. The real estate agent needs to be compensated by receiving a commission. This is because had they not been there, the joint venture would not exist.
A few months ago, we were approached by a firm that needed 100 acres around Ruiru for a joint venture. After we introduced them to the landowner, the negotiations started and an agreement was reached.
While the meetings between the two parties went on, we reached out to the landowner for a commission. With the value of the land well over a billion, we were waiting for a hefty commission.
Long story short, we got way less of a commission than the usual 3% fee. We were not happy but had to accept the amount.
In hindsight, we should have prevented the situation. A good way would have been to have the landowner commit to paying an acceptable fee in writing, before being introduced to the property owner.
Do not fall into the same trap that we did. Here are sample Letters of Authorization to sell Real Estate and Letter of Authorization to source real estate. You can download these and personalize them to fit your needs.
The agentâ€™s remuneration act does not have a clear percentage for commissions to be charged for negotiating a joint venture. It however leaves room for negotiation between parties.
In practice, there are no generally accepted commission rates for joint ventures. There is also uncertainty in valuing the real worth of the joint venture. Is it the value of the land? Is it the value of the joint venture? Should the real estate be paid on the value of the venture even if they are not a party?
We subscribe to the school of thought that puts real estate agent fees as per the sales and purchase schedule for the value of the land. This way, they get a commission in the same way as if they had organized a successful sale or purchase of land.
As joint ventures take time, this commission can be paid at once when the joint venture agreement is signed. It is also acceptable to be paid in installments as the joint venture progresses.
Remember, you need to register with the Estate Agents Registration Board (EARB) to practice as a real estate agent in Kenya. Only EARB registered and licensed Estate Agents with a current practicing annual certificate can conduct Estate Agency. To learn more here is an article we wrote.
What do you think would be a good way to charge commissions for real estate joint ventures? Let us know in the comments section below.