Who Really Pays the Commission in
Commercial Real Estate?

 

The money comes from someplace. Commissions are a percentage of the total amount of a sale paid to the individual or individuals who procure or implement a transaction. How's that for a Websterian definition?

 

Brokers, like many sales people in just about any type of business you can name, are paid a commission for the services they provide to the principals in the transaction. The question I am always asked is “who actually pays that commission?"

 

It's your money. While that answer appears simple, it's actually fairly complex. As in the famous line from the movie All the President's Men, you have “follow the money" to understand commission. Here goes—hang on to your tour book.

 

First, we must acknowledge that the developer or landlord is in the real estate business. Everything they do is either connected to or tied up in real estate issues (including, of course, their financing). When they build or buy a building, they have what is known as a "pro-forma.” This is essentially a profit and loss sheet recording how much money comes in and how much goes out. One of those line items is the cost of marketing the building—or, in other words, commissions.

 

Believe it or not, you actually pay both your broker and the landlord's broker for completing your transaction. How does that work? It's really simple from here. The broker(s) are paid a set fee for assisting in the transaction (typically somewhere around 6% of the total rental amount). The funding for that commission is built into the total rental rate just like the money that is paid out of escrow when you bought your house. Rather than the seller taking slightly less profit and the buyer paying slightly more, in the case of commercial real estate, you pay both sides.

I’ll bet you’re saying, “That’s unfair.” Indeed—then again, I’ll bet no one actually spelled it out quite this way either.

 

What if I don't use a broker? This is a question that has several answers. For now, we’ll just address the commission as it may be impacted by the “if you don’t use a broker you’ll get a better deal” scenario. The major reason you likely will not get a better rental rate is that the market drives real estate. Whatever the last deal was—that’s market for the next deal. If a landlord shaves a dime off your deal, then the next guy will want the same deal—but he’ll have a broker to pay. There is a whole bunch of other reasons why a landlord (when it relates to renewals) or a listing broker (when it relates to new transactions) would love to suggest you don’t use a broker—but that’s a whole other discussion and is addressed in other chapters.

 

66 Tidewind Suite 200 Irvine, CA 92603
Phone                      

jerryn@inhousecorp.com

CA DRE #01026305

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