Where Does All That Commission Go?

 

Commissions:

 

• Why are they there?

• Who gets them?

• Who pays them?

 

These are probably the three most common questions asked by my clients. In most cases, the only "first hand" knowledge you may have about the subject is the last time you sold your house. You remember—you got $400,000.00 for the house, paid off the $160,000 mortgage, about $15,000 in other fees and were left with $201,000. All of this is (at least in California) paid out of a neutral escrow account into which both parties deposited predetermined amounts of money. Wait a second—that doesn't figure.

 

Actually, it does. The two brokers split $24,000. Figure it this way: The buyer paid $12,000 more than he wanted while you received $12,000 less than you wanted. The $24,000 is the fee the brokers split, which was for their professional consulting and paid out of the escrow. As the seller, you got the service of a broker who:

 

• Marketed your property.

• Negotiated the deal.

• Made sure all the proper documents were completed.

• Handled any unexpected problems.

 

The buyer's broker showed the buyer the market, then worked with your broker to complete the transaction as noted above.

 

In commercial real estate, it's pretty much the same. The brokers have much of the same basic responsibilities. However, the tenant's broker probably has a long list of additional services they should be providing other than serving as a tour guide.

 

Did they deserve their commission? Probably yes, sometimes no. Have you ever been to the doctor, waited an hour to see him, only to have him actually see you for two minutes and hand you a bill for $75? Are you paying for his time, or his expertise? Sometimes a real estate transaction goes quickly, while others tend to drag on.

 

Typically (and speaking strictly from the tenant's side), it takes between 240 and 300 hours to complete a commercial real estate transaction. Do the math—if you planned carefully, you probably started working with a broker at least nine months before you needed to move. 9 x 20 working days x one and a half hours per day (sometimes more, sometimes less) = 270 hours. If you have a good broker, he probably will do additional work for you after the lease is signed for which he will not earn any additional money. It's called servicing the client—what a concept.

 

Over the term, add another sixty-seventy hours minimum. That's a total of almost 350 hours.

Let's say you're a small fifteen-person firm who occupies about 4000 SF of office space for five years. Your average rent in an office building is $2.00 PSF. Your broker is paid between three and four percent of the total rent you would pay to the landlord (in some markets, commissions are based on $ per SF). Again, do the math. 4000 x 2 x 60 x 4%= 19,200 / 350=?

I think I just talked myself out of my profession.