Commissions to realtors and how you pay them

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Commissions to realtors and how you pay them

Darby Smith
Member since 2023 · 2 posts · 1 vote

"Industry standard" seems to be that you pay a percentage of the total lease to the realtor that found the tenant, for the full term of the lease, and that is paid up front.

Why?  Why do we do this?

Most of our properties are commercial buildings, office space, strip malls, etc.

We work a lot with a local realtor, and when we started out, he wanted paid for the entire length of the lease, up front, and since this was "industry standard" we did that.  We, like all of you, have tenants that don't make it.  Their business changes, or folds or whatever, and they move out.  Depending on the circumstance, you cannot always collect for the full lease, as in: you can't get blood from a turnip type of situations.  This was extremely prevalent during Covid.

We changed how we do business with realtors.  We no longer pay their percentage for the full term of the lease contract - we pay that percentage monthly, to the realtor, for the length of the lease that the tenant actually resides and uses the property.  If there are situations we cannot collect from (blood/turnip), there is no more percentage paid to the realtor.

I've heard the arguments: "It's not the realtors fault if you can't keep the tenant happy and in business."  Well, depending on circumstances, that might be true, but based on our experience, it isn't something we as the landlords are doing, but rather something the companies themselves are doing to not keep their business viable. 

As an example, why should I pay 6% on a five year lease up front to the realtor, when the business folds in a year and half?

I can tell you that your realtors will NOT like this model, at first... but after switching, they receive a regular monthly paycheck which lends to stability and a regular income for them and is more fair for the landlord.  I am not saying that realtors don't have value, because they absolutely do, but I'm not seeing why the landlord should pay for something that they do not receive.  It works and it has been much better for us. The risk is now equal and our realtor doesn't just throw anyone at us to make a sale because he knows that a viable tenant will net him more than a flakey one.

Maybe it's time to change the "industry standard".

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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
2y
Quote from @Darby Smith:

"Industry standard" seems to be that you pay a percentage of the total lease to the realtor that found the tenant, for the full term of the lease, and that is paid up front.

Why?  Why do we do this?

Most of our properties are commercial buildings, office space, strip malls, etc.

We work a lot with a local realtor, and when we started out, he wanted paid for the entire length of the lease, up front, and since this was "industry standard" we did that.  We, like all of you, have tenants that don't make it.  Their business changes, or folds or whatever, and they move out.  Depending on the circumstance, you cannot always collect for the full lease, as in: you can't get blood from a turnip type of situations.  This was extremely prevalent during Covid.

We changed how we do business with realtors.  We no longer pay their percentage for the full term of the lease contract - we pay that percentage monthly, to the realtor, for the length of the lease that the tenant actually resides and uses the property.  If there are situations we cannot collect from (blood/turnip), there is no more percentage paid to the realtor.

I've heard the arguments: "It's not the realtors fault if you can't keep the tenant happy and in business."  Well, depending on circumstances, that might be true, but based on our experience, it isn't something we as the landlords are doing, but rather something the companies themselves are doing to not keep their business viable. 

As an example, why should I pay 6% on a five year lease up front to the realtor, when the business folds in a year and half?

I can tell you that your realtors will NOT like this model, at first... but after switching, they receive a regular monthly paycheck which lends to stability and a regular income for them and is more fair for the landlord.  I am not saying that realtors don't have value, because they absolutely do, but I'm not seeing why the landlord should pay for something that they do not receive.  It works and it has been much better for us. The risk is now equal and our realtor doesn't just throw anyone at us to make a sale because he knows that a viable tenant will net him more than a flakey one.

Maybe it's time to change the "industry standard".

Reminds me of an old proverb “its good work ……if you can get it”.   You probably limit the number of brokers willing to work under those terms, but that doesn’t mean you shouldn’t do it.  I’ve never accepted the “standard” fee agreement on commercial property UNLESS obtaining a tenant is so difficult and requires so much work that it’s the only way to motivate a leasing agent to do the work marketing the property.

Ive used all different agreements, depending on the situation.  Often I’ve chosen to reimburse the broker for out of pocket marketing costs in exchange for a reduced commission, i.e., commission based on total of say 36 months instead of full 60 month lease.  Sometimes I’ve agreed to pay 12 months of lease payments worth of commission up front after signing, and 12 more every new lease year assuming tenant is still there.  I almost always insist that broker be obligated to find replacement tenant, but this only works if you have multiple properties and a continuing relationship with that broker. 

As long as a significant number of landlords accept the “industry standard” and just go along with it, then that’s what brokers will present to landlords.  It’s here that we have a vast difference in fees between what large landlords such as REITs pay, and what the small one property landlord pays.  When it comes to expenses landlords need to both (1) obtain quality services and (2) fight for every dollar.  It’s easy to save $ by purchasing inferior product/service, or easy to purchase superior service/product by paying top dollar.  The trick is getting both top service at significantly below market.  

Private Mortgage Financing Partners, LLC
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  • James Hamling
    Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
    2y

    @Darby Smith your talking specifically to Commercial Real Estate, but inferring it's universal, it's not. 

    In commercial this construct has long been around for fee's and can make sense. 

    In residential it does not. In residential it would put one into a term contract with PM, and many don't like that. Secondly, agent's move around a LOT in residential so good chance that agent won't be at that broker 5yrs. 

    0Reply
  • Darby Smith
    OP
    Member since 2023 · 2 posts · 1 vote
    2y

    It does apply more to a commercial setting, you're absolutely right about that.  Yet where that individual goes shouldn't be a problem.  If you pay them, they are responsible for the fees to their broker.

    I can't imagine that we are the only ones doing this.

    0Reply
  • James Hamling
    Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
    2y
    Quote from @Darby Smith:

    It does apply more to a commercial setting, you're absolutely right about that.  Yet where that individual goes shouldn't be a problem.  If you pay them, they are responsible for the fees to their broker.

    I can't imagine that we are the only ones doing this.


    In commercial it's fairly common, in my sphere at least. 

    In residential, agent migration is the issue with such taking hold. It is technically the broker holding things but it's the agent's who do all the things, so that makes the issue with it there. 80% of agent's last 4-12 months. And 80% of what's left also moves in next 12-24 month's. 

    If I were to offer such in residential leases I'd have to increase the cost because I am front loading my expenses, and cost of $ with inflation. So it would end up costing a landlord more. 

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    2y
    Quote from @Darby Smith:

    "Industry standard" seems to be that you pay a percentage of the total lease to the realtor that found the tenant, for the full term of the lease, and that is paid up front.

    Why?  Why do we do this?

    Most of our properties are commercial buildings, office space, strip malls, etc.

    We work a lot with a local realtor, and when we started out, he wanted paid for the entire length of the lease, up front, and since this was "industry standard" we did that.  We, like all of you, have tenants that don't make it.  Their business changes, or folds or whatever, and they move out.  Depending on the circumstance, you cannot always collect for the full lease, as in: you can't get blood from a turnip type of situations.  This was extremely prevalent during Covid.

    We changed how we do business with realtors.  We no longer pay their percentage for the full term of the lease contract - we pay that percentage monthly, to the realtor, for the length of the lease that the tenant actually resides and uses the property.  If there are situations we cannot collect from (blood/turnip), there is no more percentage paid to the realtor.

    I've heard the arguments: "It's not the realtors fault if you can't keep the tenant happy and in business."  Well, depending on circumstances, that might be true, but based on our experience, it isn't something we as the landlords are doing, but rather something the companies themselves are doing to not keep their business viable. 

    As an example, why should I pay 6% on a five year lease up front to the realtor, when the business folds in a year and half?

    I can tell you that your realtors will NOT like this model, at first... but after switching, they receive a regular monthly paycheck which lends to stability and a regular income for them and is more fair for the landlord.  I am not saying that realtors don't have value, because they absolutely do, but I'm not seeing why the landlord should pay for something that they do not receive.  It works and it has been much better for us. The risk is now equal and our realtor doesn't just throw anyone at us to make a sale because he knows that a viable tenant will net him more than a flakey one.

    Maybe it's time to change the "industry standard".

    Reminds me of an old proverb “its good work ……if you can get it”.   You probably limit the number of brokers willing to work under those terms, but that doesn’t mean you shouldn’t do it.  I’ve never accepted the “standard” fee agreement on commercial property UNLESS obtaining a tenant is so difficult and requires so much work that it’s the only way to motivate a leasing agent to do the work marketing the property.

    Ive used all different agreements, depending on the situation.  Often I’ve chosen to reimburse the broker for out of pocket marketing costs in exchange for a reduced commission, i.e., commission based on total of say 36 months instead of full 60 month lease.  Sometimes I’ve agreed to pay 12 months of lease payments worth of commission up front after signing, and 12 more every new lease year assuming tenant is still there.  I almost always insist that broker be obligated to find replacement tenant, but this only works if you have multiple properties and a continuing relationship with that broker. 

    As long as a significant number of landlords accept the “industry standard” and just go along with it, then that’s what brokers will present to landlords.  It’s here that we have a vast difference in fees between what large landlords such as REITs pay, and what the small one property landlord pays.  When it comes to expenses landlords need to both (1) obtain quality services and (2) fight for every dollar.  It’s easy to save $ by purchasing inferior product/service, or easy to purchase superior service/product by paying top dollar.  The trick is getting both top service at significantly below market.  

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    1Reply
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