Who Pays Commission in Commercial Real Estate Transactions? What You Need To Know

Commercial real estate transactions involve the transfer of ownership or lease of properties that are used for business purposes.

These transactions usually require the services of commercial real estate agents.

Realestate agent [PHOTO COURTESY OF THE MOTLEY FEE]
Realestate agent [PHOTO COURTESY OF THE MOTLEY FEE]
But who pays the commission to these agents, and how much is it?
Read also:How to Invest in Real Estate: A Beginner’s Guide

How Commission Works in Commercial Real Estate

Commission is the fee that commercial real estate agents charge for their services. It is usually calculated as a percentage of the sale price or the rent due under the lease.

The commission rate and the payment terms are agreed upon by the agent and the client before the transaction takes place.

The commission rate can vary depending on the type, size, location, and complexity of the property and the deal.

Generally speaking, commission rates are higher for smaller and less expensive properties, and lower for larger and more expensive properties.

For example, a typical commission rate for a property under $1 million can range from 4% to 8%, while a commission rate for a property over $5 million can be as low as 2%.

The payment terms can also vary depending on whether the property is sold or leased.

When a property is sold, the seller usually pays the entire commission at closing.

However, when a property is leased, the landlord may pay only half of the commission at lease signing, and the other half when the tenant occupies the property.

Who Gets Paid Commission in Commercial Real Estate

In most commercial real estate transactions, there are two agents involved: the listing agent and the buyer’s agent.

The listing agent represents the seller or the landlord, while the buyer’s agent represents the buyer or the tenant.

The listing agent is responsible for marketing the property, finding potential buyers or tenants, negotiating with them, and facilitating the transaction.

The buyer’s agent is responsible for finding suitable properties for their clients, advising them on market conditions, negotiating with the listing agent, and assisting them with due diligence and closing.

The commission is usually split between these two agents according to a predetermined ratio.

The ratio can be 50/50, 60/40, or any other percentage that both parties agree on.

For example, if a property sells for $1 million with a 6% commission rate and a 50/50 split, then each agent will receive $30,000 as their commission.

How to Save on Commission in Commercial Real Estate

Commission is one of the major expenses that buyers and sellers have to consider.

However, there are some ways to reduce or avoid paying commission altogether. Here are some of them:

1.Look for off-market deals

 

Off-market deals are properties that are not listed on any public platform or database.

They are usually sold or leased by owners who want to avoid paying commission or who want to keep their transactions confidential.

Buyers and sellers can find off-market deals by networking with other investors, brokers, attorneys, accountants, contractors, etc., or by using online platforms that specialize in off-market properties.

2.Look for wholesale deals

Wholesale deals are properties that are sold by wholesalers who act as intermediaries between sellers and buyers.

Wholesalers find distressed or undervalued properties from motivated sellers and sell them to investors at a higher price.

Wholesalers charge a small fee for their service, which is usually lower than the commission that agents charge.

2.Negotiate the terms

Buyers and sellers can always try to negotiate the commission rate and the payment terms with their agents before signing a contract.

They can also ask their agents to reduce their commission if they bring their own buyer or tenant without involving another agent.

3.Find a flat fee service

Flat fee services are alternatives to traditional commission-based agents.

They offer various services for a fixed fee instead of a percentage of the sale price or rent.

For example, some flat fee services provide listing services only, while others provide full-service representation.

 

Conclusion

Commission is an important factor to consider when engaging in commercial real estate transactions.

It can affect the profitability and cash flow of both buyers and sellers.

Therefore, it is advisable to understand how commission works in commercial real estate, who gets paid commission, and how to save on commission.

By doing so, buyers and sellers can make informed decisions and achieve their goals in commercial real estate investing.

 

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