How to avoid paying commercial real estate commissions
I’ve always dreamed about writing a shocking expose about the underbelly of the commercial real estate profession. There are people out there who believe brokers fleece the public by charging exhorbitant commissions for doing very little work. Unfortunately, this is not that article. But what I WILL do is explain some of the different methods by which commercial real estate brokers get paid for their services. How do I know this information is of interest to people? Because I am frequently asked, “how do you get paid?”
To start the conversation, I will say that what my firm charges for commissions or fees as they are sometimes called, has nothing to do with what other firms charge. There is no “standard” or “customary” fee structure. Fees vary from firm to firm based upon such criteria as: 1) type of property being sold or leased, 2) size of property, 3) level of services being rendered, 4) whether we represent a seller/landlord or buyer/tenant.
In our shop, we handle retail, office, industrial, investment, land and some business opportunities. For selling a property, it is our practice to charge a flat percentage of the eventual gross sales price. The market dictates what that percentage will be. What do I mean by “the market dictates commissions?” When we offer a package of services at a given percentage to our prospective client, they know they call in any number of brokerage firms and compare the “services vs. commission ratio.” If enough prospective clients reject our structure and go with a competitor, we know our fees may be too high. This is how the free market works. If that happened often enough, we might have to change our structure or go out of business. Commissions are negotiable and clients will sometimes ask if we can “do it for less.” But if we can’t negotiate on our bread and butter, how good are we likely to be at negotiating the sale or lease of your property?
Real estate brokers get paid “on the come.” We do the bulk of our work upfront on an incentive-based program. If the property doesn’t close, we don’t get paid. It doesn’t matter if we have 100 hours into solving your problem and something bad and unforeseen happens beyond our control, we must orchestrate a successful close if we expect to get paid. So no matter what the percentage is, none of it gets paid unless and until there is a closing. Now THAT’S an incentive to do everything in our power to “git er dun,” as Larry the Cable Guy says.
For handling leases for landlords, here are some of the varieties of commission structures utilized by our firm:
• For retail, a given number of dollars for each square foot of space leased. For example, for a 2000-square-foot storefront, a commission might be $5 per square foot or $10,000. Notice this approach has nothing to do with a percentage calculation.
• For office property leasing, a certain certain number of dollars per square foot PER YEAR might be the structure. For example, a commission on a 2,0000-square-foot office suite might be $1 per square foot per year and a hypothetical lease might be three years so the calculation is $2,000x$1x3 years or $6,000 commission.
•For industrial lease space, we charge a certain percentage of the first year’s rents plus a smaller percentage of the subsequent years’ rents. For example, a 10,000-square-foot industrial space might lease for $5 per square foot or $50,000 per year. We might charge 8 percent of the first year’s rents (.08 X $50,000 or $4,000) and 3 percent of year two and year three rents (assume a three-year lease) or .03 X $50,000 ($1,500 for year two and $1,500 for year three) for a total commission of $4,000 plus $1,500 plus $1,500 or $7,000. This amount is paid to us when the lease is executed and security deposits and first month’s rent is paid. It is common for the landlord and NOT the tenant to pay the broker’s fees for a lease. There are always exceptions to every rule.
One complicating component of this discussion is which broker procures the buyer or tenant. A cooperating broker (a broker different from the listing broker) demands to be paid a fee for bringing his client to the transaction. Regardless of the structure employed in our listing and regardless of what we offer to a cooperating broker, that broker might tell us (preferably BEFORE he shows any of our listings) that he wants “x” amount of commission. That request may be more money than we are offering, so we will go to our client and convey the request. The client gets to accept or reject any such request for more than offered fees.
There is a lot more to say on this subject but space limitations dictate that I wind this down. The takeaway on all this is that brokers are incentivized by fees that are most often paid out only if the broker is successful. Try to beat us down and you take away our incentive. I will assume you don’t want to do that as it is not in your best interest to have your broker less than enthused about your property. Some of our saavy clients will offer bonuses or extra fees or “spiffs” to get the job done quicker. This makes a lot of sense in a depressed market. If you want to know what a given broker charges, you have to ask. Don’t want to pay any commissions at all? Don’t ever sell or lease your property!
If you think you are saving a brokerage commission by selling or leasing without a broker, think again. Buyers and tenants will typically deduct a broker commission from their offer just because you don’t have a broker.
• Bruce S. Kaplan is senior broker associate with Premier Commercial Realty, 9225 S. Route 31, Lake in the Hills. Phone 847- 854-2300, ext. 20, or email firstname.lastname@example.org.