Are you thinking about getting into commercial real estate and are wondering how commercial real estate brokers get paid? Or a new broker trying to figure it all out? Well, I am so glad you are here. I will dish it all out for you, but I have a question first…
Do you have patience?
If you do- keep on reading. If not, save yourself the time as getting into commercial real estate may not be for you. I am not trying to sound harsh, but patience is a mandatory skill not only when you first start in commercial real estate but throughout your career. Okay, now that we have established that you have some level of patience or at least perseverance- let’s continue.
First, most all commercial real estate brokers work as independent contractors. This means that you are a contracted employee, you’ll have a written contract with the brokerage company and will be paid out as a W9 employee. Keep in mind with this setup the brokerage company will NOT withhold taxes and you will be responsible for taking care of the IRS (Taxes, Social Security, Medicare, etc.). Don’t forget about your health insurance either. This and many other traditional employee benefits are out the window in this business. As an independent contractor you are essentially self-employed (although your brokerage firm still has a ton of say). If you start out in commercial real estate and act as if it’s your own business and you plan and prepare that way, you will be so much better off in the long-run.
Note that I said that “most” commercial real estate brokers are independent contractors, not all. Some may hire you on as an actual employee, as a runner or an assistant with a small wage. However, you can be limited in this role.
You can also start your own brokerage firm, but many (if not all?) states require you to work with a established brokerage firm for a number of years before going it on your own. Plus, there are many benefits from starting out and learning in an environment with experienced brokers.
The majority of Commercial Real Estate Brokers don’t get a salary. It is a commission only gig. While some companies might offer you a draw or advance on commissions, don’t count on it.
When I first started, I was told many times to plan NOT to make ANY money for the first few years. That can be a tough pill to swallow if you are in need of money and have rent or a mortgage, or like to eat, or have a family to support. Unless you have money saved, are still living with your parents, or have a significant other that can help carry the weight for a little while, the barrier to entering the commercial real estate business can be tough. Really take a hard look and see if you could stomach not making money for a while. Do you have the patience you think you have?
Please just know that it is all totally worth it. You can make a lot of money in this business, but starting isn’t easy.
Keep it in perspective
Don’t compare your chapter one with someone else’s chapter 20. Be patient with yourself- but set goals and be accountable to them. Keep your head down and do the work, learn the market, cold-call and network like crazy and set your own (brisk) pace. Don’t be deflated when you see the broker in the office down the hall close a $5 million-dollar transaction when you are still trying to get your first lease signed. Allow other people’s successes to motivate you. Learn from those around you to better yourself.
Commission Splits and Percentages
So, you are close to inking your first deal. YEAH!!!! How much will you get paid? The answer: It depends.
Let’s start with a lease.
Typically, you will have two brokers involved: the tenant rep broker and the landlord broker. Unless you happen to represent both sides as a transaction broker, you can expect to split whatever the commission is 50/50 with the other broker. Meaning, 50% to your brokerage firm and then 50% to the outside brokerage firm (more splits to come before you get paid).
If you are the landlord’s broker, you will have already negotiated in your listing agreement what the commission percentage will be as almost 98% of the time the landlord pays all the commissions. This typically will be 5-7% of the total lease consideration. Also, in the listing agreement you will establish how and when the commission are paid. Often for leases it is one half upon the lease execution or signing, and one half that will be due when the tenant takes occupancy and/or rent commences.
If you are the tenant rep broker, you need to have your split of the deal agreed to in advance either in the LOI/letter of intent (keep in mind, this would be more in good faith as an LOI is non-binding), or in a separate commission agreement with the listing brokerage firm. Do your best to get this in writing.
Once the lease is signed, the landlord’s broker will bill or invoice the landlord and the landlord rep’s brokerage firm will cut checks when received.
What is owed to you?
The commission splits with your brokerage firm should be spelled out in your independent contractor agreement, along with what you are getting in return for the split. Broker splits are often on a sliding scale. For example, it may be 50/50 (50% to you and 50% to the firm) on your first $100,000 in gross commissions, then move up to 60/40, 70/30 and 80/20 as you move up and close more deals- it depends on your firm’s commission plan. Your split to the firm typically covers office rent, support staff, subscription services, signs, etc. It varies from firm to firm but you should understand the value your firm is adding.
Here is an example of how Commercial Real Estate Brokers get paid on a lease:
XYZ Corp just leased 4,500 Square Feet in ABC Landlord’s Shopping Center
The lease was for 5 years, starting at $14.00 Per Square Foot with $0.50 annual rent escalations
Here is the breakdown:
1st YEAR: $14.00 PSF x 4,500 SF = $63,000
2nd YEAR: $14.50 PSF x 4,500 SF = $65,250
3rd YEAR: $15.00 PSF x 4,500 SF = $67,500
4th YEAR: $15.50 PSF x 4,500 SF = $69,750
5th YEAR: $16.00 PSF x 4,500 SF = $72,000
Total Lease Consideration = $337,500
Lease Commission was 7% on this deal
$337,500 x 7% = $23,625 Total Commission
Split 50/50 between landlord and tenant rep brokers
$11,812.50 to each side
Let’s pretend you are on a 60/40 split with your brokerage firm
You walk away with 60% of $11,812.50
You made $7,087.50 on this deal.
Not too bad! Do three of these per month and you are well on your way to at least a quarter million a year. (To give some perspective, even in slower years I can consistently close an average of 4-5 leases per month, this may not be true for everyone but I thought it could be helpful to share here).
This is typically how commissions work for a lease, but every deal is different. Keep in mind that the above example is assuming you are the only broker on the listing. If it was you and a co-broker in your office your 50% would be cut in half accordingly. That is a downside of teaming on a listing, but there are also may positives.
Leasing is a great way to beat the “no money for the first few years” stigma as they have shorter deal span than a sale. Most leases can get done in 30 days to 4 months. However, some can be done faster and there are certainly those that drag on longer. However, if you are willing to do leasing (which I highly recommend) you can reap some more immediate rewards.
For me I planned on not making money for two years in my head, but in my heart, I knew I would not let that happen. Doing a lot of leasing is what helped me learn a lot and speed up my earnings.
Now on to sales transactions.
Here is how commercial real estate brokers get paid on a sale. Much like leasing there are usually two brokers involved: A seller’s agent and a buyer’s agent. The timeline for a commercial real estate sale is longer and your expertise needs to be much deeper.
There are investment sales and there are owner occupied deals and both have their pros and cons. Sale transactions are often more complex; there is title, inspections, environmental, entitlements and simply more involved. I wouldn’t say it is impossible, but closing on a commercial real estate sale normally can’t happen in less than 60 days and often it’s at least 3 to 6 months until all parties are at the closing table.
Again, if you represent the seller, you will have a pre-negotiated listing agreement with commissions spelled out. Sales commissions range from 3-6%. On larger investment sales, it is not uncommon for a seller to only pay their broker, not the buyer’s broker, and commissions are lower, sometimes in the 2% range. When you represent a buyer, you will want to make sure you have a commission agreement in place so money comes your way at closing either from the seller’s proceeds, or from your client, the buyer.
The good news is that after all that time and work the commissions are typically bigger than that of a lease, but not always.
This is very simplified, however here is an example of how Commercial Real Estate Brokers get paid on a sale:
Total Sales Price: $1,500,000
Total Commission 6% or $90,000
Split equally between buyer’s broker and seller’s broker at closing
So that is $45,000 to your firm, paid out at your scheduled split.
Again, let’s assume a 60/40 split- you’ll make $27,000 on the deal.
Not bad at all.
You can make a great living by focusing predominately on leasing and doing a handful of sales each year.
More ways to make that money
When you start out, leasing is a great option. As you ramp up, you will do more sales. However, those are not the only ways you can make money in commercial real estate.
Many banks will pay anywhere from $250-$1,000+ for brokers to do an opinion of value on a property (BOV – Broker Opinion of Value). Banks use BOVs in lieu of full blown appraisals on many of their assets. If you do a few good ones for a local bank they will always come back to you. They often have their own BOV forms which you just need to do some research, take some photos and complete. If you know your market and specialize this is a super easy way to make some extra cash.
Another way is helping tenants renegotiate their existing leases at lease renewal time. There is a huge value add for a tenant to use a broker to help them lock in new terms. I used this approach a lot when I was first cold calling because it was a much softer sell than trying to get them to relocate their business or open another location. Plus, I was able to gather a ton of data that helped me with follow up later on, “Oh, your lease is up in 18 months? I will call you around that time” and guess what? I did, and it helped me build my business.
Fact is, there are a number of ways in which commercial real estate brokers get paid. Every deal is different, and every broker is different. Get creative, work hard, do the small deals- they all add up.
The money is great, of course it is great, but remember this if you want to be highly successful in commercial real estate: You are in this business to help people. When you can truly help someone, the money will follow.
A mentor told me early in my career to keep looking for the light at the end of the tunnel (the tunnel of cold calls and rejection, and dead deals). While this was okay advice, once I realized that I needed to be the light in my own tunnel did things really start to take off.
Be the light in your tunnel.
Do you have questions on commissions splits, wondering if you are getting shafted on a deal, or not asking for enough? Shoot me an email. I would love to answer your questions on how commercial real estate brokers get paid and give you my thoughts.