Who Really Gets the Commission?
Commission breakdown can affect service. In the chapter “Where Does All the Commission Go?” we gave you a little math problem to help illustrate how a commission fee breaks down on a per hour basis. If you finished the problem, you probably came up with an answer of $54.86. Right or wrong? Wrong. OK, so you have your masters in real estate from USC and the battery on your 12-C works perfectly. Then what happened?
The catch is something all small companies need to be aware of, because it can potentially affect the quality of the service you get from your broker. Most brokers, like any salesmen, are highly motivated by the potential income at the end of the rainbow. That $19,200.00 commission we calculated in the article can get spread out pretty thin. Your broker may actually be truly underpaid—assuming, of course, that he puts in the effort and service you deserve.
Your broker’s working with “house rules.” As with almost any sales situation where your salesman (in this case, the broker) works for a firm, he splits any fee earned on a 50/50 basis with "the house." While some brokerage firms give senior brokers higher splits as a reward for service or past performance, many large houses keep an "across the board" rule on splits.
Now let’s go to the next level. Many of the brokers at large firms set up an agreement with another broker. They agree that all deals either brings in are split 50/50 between them. This has two benefits. First, when their efforts are combined, there is potential for more deals. Second, there is back up if one broker gets too busy on another deal—you see where this is going. Assume now that that's as far as the split goes. Your broker now earns 25% of the fee or ($4,800, or $13.71 per hour). To go a step further, in many cases, the senior brokers have “runners,” or rookie assistants who they pay either a monthly salary or a draw against commission. The runner may get 25-50% of his broker's side of the fee for handling your requirement or simply for doing the legwork. Get out the pencil again. $4,800 x .50=? That's right. We're down to $2,400—less than the new minimum wage.
Something's got to give in order to justify handling such a "small" requirement. What many tenants find is they either get the service of an inexperienced broker who was passively supervised by a senior broker more concerned about the 50,000 SF office deals he's working on, or the senior guy simply did the transaction and skipped the service part. Certainly a $3,600 fee looks a lot better if it breaks down to 20 or 30 hours of work. Yes, that's $120-$180 per hour—still equal to the a consultant's fee in many industries, and certainly far less than you pay other advisors you may work with.
Whenever I interview a prospective client, I ask what their concerns are for the delivery of service. More often than not, I hear that they worked with a broker, but that after two or three tours and no success, the broker never called back. (Sidebar—of course, now they want me to perform a miracle by finding them the right space after the previous broker "registered" them with every landlord in a 500 mile radius—more about "registering" another time).
Ask your broker up front what services he will provide and who else will be assisting him on the project. Now that you know how to calculate the commission, do the math and see if it justifies the service.