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December 22, 2014

Getting Started in Commercial Real Estate

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Getting Started in Commercial Real Estate

Thinking of branching out into the commercial sector? Learn what it takes to get started and what kind of income potential awaits you.

Excerpted from The Insider's Guide to Commercial Real Estate (Dearborn Real Estate Education). This excerpt is taken from Chapter 1, "Getting Started." 

“Why do you want to be in commercial real estate?” That’s the first question I ask of those who come to me for advice. The advice I give them is directly related to their answer to my “why” question.

But let’s start with the one thing everyone has in mind: the money. Do you make more money on commercial real estate than on residential? Let’s try some math, as seen in the following example:

A Sample Residential Transaction:
Agent sells $275,000 home.
Agent co-brokers it with another firm. (The other firm is the listing firm.)
Agent’s firm gets 3%.
Agent gets 65% of his or her firm’s share.
Agent’s commission = $5,362.50.

A Sample Commercial Transaction:
Agent leases 7,500 square feet of space with a 3-year lease at $12 per square foot.
Agent co-brokers it with another firm.
Agent’s firm gets 3%.
Agent gets 65%.
Agent’s commission = $5,265.00.

What about selling a $50,000,000 mall? Likely, you won’t be doing any of those types of transactions right away, if ever! In any case, even though you can make a lot of money on big deals, they take much longer to put together.

While most residential transactions usually close within one or two months of signing the contract, commercial deals do not. Even the 7,500-square-foot lease in the example above could have taken as long as six months or more to get done and paid. Then again, it may have closed in a few weeks.

The shopping center example above illustrates that while it can be frustrating and somewhat risky, commercial real estate can also be very satisfying when a deal finally goes right. Another advantage to the commercial field is its variety.

Career Options

For many years, I taught the real estate courses needed to obtain a state real estate license. While most who enrolled thought they would sell homes — either new construction or general brokerage — many were encouraged to try commercial real estate when they saw all of the career opportunities in it. Let’s look at some of those opportunities.

General Brokerage. Commercial agents can represent buyers or sellers, assisting with the sale of a commercial property. These agents are typically independent contractors, not employees of a company, and work on commission. Depending upon the size and depth of the market, an agent may specialize in a certain product type (retail, office, industrial, investment — such as apartment complex brokerage) or a certain geographical market.

Development. An agent can work in several areas, such as actual development, project management, and leasing. The development staff purchases land and builds something on it — a shopping center or office building. The developer arranges financing, negotiates the “anchor” tenant leases, hires the architects, contractors, etc., and supervises the process until it is completed and the tenants move in.

Property Management. Once a property is purchased or developed, it needs to be managed. The property manager handles the day-to-day operations of a property — staffing, contracting for services, repairs, maintenance, etc. Individuals employed by property management firms are usually paid a salary.

What to Expect

What can a person expect as far as compensation, hours, and so on, as a commercial real estate broker? It depends. The 2006 NATIONAL ASSOCIATION OF REALTORS® Commercial Member Profile had the following findings based upon its 2005 random sampling of 25,000 REALTORS® with an interest in commercial real estate:

  • Slightly more than half of the respondents had an annual gross income of $75,000 to $249,000 in 2004, while 5 percent had an annual gross income of $500,000 or more.
  • Selling commercial property generated more income than leasing. More than half reported a volume of over $2 million.
  • Half have been involved only in commercial real estate for 16 years or more, whereas 42 percent of all REALTORS® have fewer than 5 years of experience.
  • A little over half work for a firm that is exclusively commercial oriented. About 25 percent work in an office with a mix of residential and commercial.

Taking the First Steps

Let’s say that you are a successful residential real estate agent looking to change careers. You are not sure in which area of commercial real estate you’d do best. You have business experience and you know people. (We’ll call these folks your “sphere of influence.”) What should you do?

Step 1. List everyone you know in commercial real estate.

Step 2. Call all of your relatives and closest friends and list everyone they know in commercial real estate.

Step 3. Start calling. Call first those from your list you feel will give you some time. Ask for only 15 minutes of their time. Explain that you are gathering information only, not seeking a position at this time.

Step 4. Conduct the interview. During the interview, ask the real estate professional how he or she got started and what advice they would give a newcomer. Ask for a brief overview of their business and their industry, and ask if you can borrow or have some industry publications, usually found in their reception area or office library. Before you leave, ask for two or three names of other commercial real estate people you should talk to.

Step 5. Narrow your search and research further. When you think you have narrowed your search, go to the industry-specific Web sites and do some research. Read their publications and get to know the jargon, types of projects, and key players. Also, attend as many commercial real estate classes as you can. Not only will you learn, you will probably make your best contacts there.

Step 6. Know the details about employment. Get an idea of compensation structure. Some positions are commission only; some may be draw against commission; some may be salary. Decide what you can live with and what you can’t.

Step 7. Begin the interview process. You are now ready for serious interviewing. Narrow your final choices down to no more than five. Just as with commercial properties, commercial professionals don’t like to have our candidates “shopped.”

Step 8. Get the job. Call back your contact person for another meeting. Explain that you have talked with many professionals, have narrowed it down to XYZ field (retail, office, etc.), have visited some of their deals or listings, and have some specific questions. When you meet, ask your questions, share what you have learned, and ask what opportunities his or her company has. Keep in mind that most commercial firms don’t have “openings” but create slots depending upon need or opportunity. Explain what you can bring to the table. Remember that the company is interested only in what it will be gaining, not what you will. Don’t spend too much time talking about your wants, needs, and desires unless specifically asked, and then keep your reply brief.

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