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:
Real
Estate Agents Commissions in
Kenya: Understanding what Commissions to Charge
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.
Real Estate Joint Venture in Kenya: Top Ten Real Estate Hotspots offering highest returns
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 agent’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.
How
to register with Estate Agents Registration Board as a real estate agent in
Kenya
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.