Hiring a Real Estate Broker or Agent: A Series
Part I - What Are the Differences Between Commercial and Residential Brokers?
There is a lot to uncover within the “simple” question “How and When Do I Hire a Real Estate Agent or Broker?”, so the following is part one of our three-part series on this topic. This series breaks down the question above by uncovering issues from beginning to end. The goal is to provide the decision-making information to help you better understand and answer the question at hand.
First, let us explore why you might be asking this question. A few examples are as follows: a) your organization has “outgrown” your current location, b) your family wants or needs to relocate to a different area or home, c) your organization’s lease is ending soon, d) your entrepreneurial start-up is expanding beyond your home office, e) you are looking to personally invest in real estate, or f) your organization is considering building new or investing in its own location. Future articles will explore different scenarios because who you might engage and utilize are potentially very different real estate professionals. Two distinct segments of real estate brokers are Commercial and Residential. The below will identify and establish Part II and Part III of this series of articles.
Next for consideration is understanding real estate terminology. Specifically, we will focus on the difference between a real estate broker and a real estate agent or salesperson.
As noted above, there are two main segments of real estate professionals: Commercial and Residential. Within each of those segments are several real estate typologies or market types. The below will identify and help you understand the different segments, to best frame your questions and where you need to direct your current or future real estate attention.
How do Commercial and Residential Brokers Differ?
Before discussing the difference in brokers, agents, or salespersons, it is critical to understand the difference in Commercial versus Residential Real Estate. Essentially, the two are different sides of the same coin, but vastly different from each other. The technical difference between a residential and commercial property is as follows:
Residential real estate is all single-family homes and one to four-unit rental residences. In contrast, commercial property is anything with five or more units.
Condos, duplexes, and quadruplexes comprise the residential real estate market, while office, retail, multifamily (of five or more units), hotel, and other special-purpose buildings are considered commercial real estate. We will touch more on these typologies later in this article and in greater detail in Part Two and Three.
Now, let’s discuss the primary differences between commercial and residential real estate professionals.
Comparing commercial real estate professionals to residential real estate professionals is like comparing apples to oranges. Both are from the same genre, but that is where the similarities end. The following are general descriptions of the two types of real estate professionals:
Commercial real estate professionals are business-focused. Typically, they work solely with the property that is sold, leased, or used to achieve a primary goal of a predetermined business objective. Traditionally, commercial real estate is used as an investment to achieve an anticipated rate of return on the funds invested and/or serve a business’s functional needs.
Residential real estate professionals typically assist a homeowner and his or her family with their wants and needs. These professionals help work with property purchased or leased for individual use, most often to provide single-family and small multi-family housing options.
Traditionally, the process for commercial real estate hinges on numbers and return-on-investment calculations, so it is more of a typical business-like industry. With key factors such as the return on investment or successfully fulfilling an organization's return on goals. Residential real estate is nowhere near so cut-and-dried because it is more of an emotional purchase to fulfill someone’s wants and/or needs. Many residential buyers make decisions because the house just feels right to them. Because of this, and the need to work with buyers who are typically working during the week, the hours and time spent for residential real estate persons can vary greatly. Unlike their commercial counterparts, residential real estate persons can work a very non-traditional work schedule to include nights and weekends to go along with their weekday work.
Not only do the work types and schedules differ, but there are also many differences in scopes and skills required for the work for each. While some agents, especially in small towns or rural areas, handle all types of transactions, usually salespersons pick a residential or commercial focus. When choosing a real estate professional to assist you, it is important to understand their primary focus and if their professional experience matches what you are needing.
What is the Difference Between a Broker and a Salesperson?
Brokers and Salespersons primarily differ in their education requirements, pay structure, business responsibilities, and risk.
Education Requirement: Brokers and salespersons are both required to be licensed in the state they are operating in and complete a certain number of continuing education classes to keep their license current. Where their educational requirements differ is that brokers are required to take an additional exam(s) to receive their broker’s license, and they are required to take additional continuing education classes to keep their licenses current.
Business Responsibilities: One of the larger distinctions between a broker and salesperson is how involved they are in the business/brokerage. Brokers traditionally manage the overall office, company, and are typically an owner in the company. They make overall company-wide decisions such as marketing fund allocation, office costs, insurance, rules, requirements, etc. Most salespersons are independent contractors who work for themselves but under the license of a real estate brokerage. Like brokers, salespersons are obligated to act ethically and legally to meet the professional requirements and contractual terms of their brokerage office. Brokers additionally assume a level of oversight and supervision over any salespersons whose real estate licensure is held underneath them.
Pay Structure: Brokers and salespersons both make income from commissions on transactions they are actively involved in. Typically, salespersons are the lead entity with their clients, but ultimately work under a broker, and therefore split earned commissions with the brokerage company and the broker.
Risk: Brokers and salespersons as stated above have legal and ethical responsibilities while conducting business. By not meeting or upholding those responsibilities they could face losing their license. In addition to their own transactions, brokers take on the added risk of any of their salesperson’s wrongdoings in their transactions. If any issues were to arise in a transaction it could cause the broker to face legal ramifications, as well as the salesperson.
Do Real Estate Brokers and Salespersons Specialize in One Area, and What are Those Areas?
A broker or salesperson practicing in residential real estate can specialize in the following areas:
Listing or Sellers Agent – represents and acts on behalf of the seller of the residence.
Buying or Buyers Agent – represents and acts on behalf of someone purchasing a residence.
Dual Agent – some states allow for a broker or salesperson to represent both sides of a real estate transaction if disclosed to both parties beforehand.
A broker or salesperson practicing in commercial real estate can specialize in the following areas:
Listing or Sellers Agent – represents and acts on behalf of the seller or lessor of the building or space.
Buying or Buyers Agent – represents and acts on behalf of someone purchasing or leasing a building or space.
Dual Agent – as above, some states allow for a broker or salesperson to represent both sides of a real estate transaction if disclosed to both parties beforehand.
Typical Commercial Typologies or Real Estate Markets for specialization include:
Multifamily – including apartments, senior housing, row housing, etc.
Office – ranging from single story to high-rise, medical office, located in the central business district, or in suburban districts.
Industrial – manufacturing, warehouse, research, and development, or flex. Flex is defined as office/industrial hybrid spaces.
Retail- malls, community/neighborhood centers, strip centers, big box stores, etc.
Hospitality – hotels, motels, travel centers, water parks, amusement parks, golf courses, cruise ships, restaurants, movie theaters, etc.
Single-family residential (in bulk) – single-family rental homes that have been packaged together for single or group ownership/investment.
What is to come within our Real Estate series?
Our goal is to provide the decision-making information for you or your organization asking the question: How and when do I hire a real estate agent or broker?
We first explored a few different scenarios you might be dealing with to illustrate the perspective; that why you are asking is just as or even more important as to what you are asking. In doing so, we wanted to clarify the differences between residential and commercial real estate professionals to highlight that not all real estate professionals are a fit for your needs. It is important to recognize, that working with the right real estate professional is critical to you achieving your real estate goals, whatever those may be. Here, we also identified a few terminology items, provided more feedback on the different types of real estate professionals, and highlighted different types of real estate.
Our Part II series will continue to focus on Commercial Real Estate but will also highlight residential items. We will take a greater dive into more terminology, the pros, and cons of hiring a real estate professional, and questions you need to be asking yourself.
Part III of our series will outline the hiring process and how to decide to hire a broker.
Please stay tuned for future posts reviewing Real Estate Professionals as we continue through our newest series!