Commercial Vs Residential - What You Need to Know Before Making Your Career Move



If you're getting your Texas real estate license and trying to decide between residential and commercial, this article might clarify some things. I delve into a lot of the variables, so if you want to take the shortcut without reading my justifications, just scroll down to the last paragraph.


When I first entered real estate in 1984 I never even considered residential. To be honest, I thought it was a career for women and commercial was the career for men. Maybe it was for all I know. I don't know how many men were selling homes back then, but there couldn't have been many. But I do know this, commercial agents have historically looked down on residential agents. I did too.


Those were the days of big hair and big hats in residential so we on the commercial side just never took that side of the real estate seriously. There was very little interaction and cooperation between the two disciplines back then and it's no different today.


I spent the first half of my career, about 14 years, working strictly commercial. After a couple of very good years I quit "cold turkey". I had accumulated enough in savings to take a year off and decide what I wanted to do. All I knew was commercial, but from what I'd seen in my searches looking for a home to buy, I thought I could do it better job than what I was seeing in residential.


As they say here in Texas "I didn't know come here from sic 'em" when I started out as a one man shop in residential, but I survived and have been selling homes for the past 20 years. I have a lot of experience in both commercial and residential, so I can give you a pretty good idea what to expect in both. I can tell you this right up front, residential and commercial are as different as night and day.


For the "newbies" let me start by clarifying some terminology .

  • In real estate, when you talk about a "deal", it simply means a transaction. Whether it's a building sale, lease, home sale, or land sale, they're all deals. I learned this on my very first day of commercial real estate 35 years ago.

  • Commercial agents tend to call themselves "brokers", whether they have a broker’s license or not. It’s a catchall description like “Who were the brokers on the deal” or "who brokered the deal?". Residential agents on the other hand call themselves agents or Realtors. For simplicity, I’ll always use the term "agent" whether it refers to a residential or commercial agent.

  • Keep in mind, there are countless areas of commercial real estate. I happened to specialize in office showroom and industrial building sales and leases, so that's what I'll be talking about for comparison's sake. However there are agents who also specialize in apartment sales, retail, truck terminals, office buildings, mini-warehouses, raw land, church sites, etc. and they might never sell an office/showroom building or do a warehouse lease.

  • The reason I'll be using commercial leasing as representative of commercial real estate is because tenant representation, or "tenant repping", is the bread and butter of many, if not most agents. Building sales are pretty tough to come by so they have to rely on either tenant repping or representing the landlord in leasing spaces. The largest commission I ever made was $235,000 on a long term lease with a Fortune 100 company, so there's good money in tenant repping. In residential, you'll never survive specializing in residential leases. They're just too small. In fact, our team only work leases as a service to our clients.

  • And finally, you'll find exceptions to everything I will talk about here. I can't go into every possible scenario that might come up, so please understand I'm only talking in generalities

So what are the major differences between residential and commercial?


Quick Access to Good Information


Residential - The number one thing that stood out when I crossed over from commercial to residential was the incredible amount of information available on the MLS, or multiple listing service. I call the MLS “The Great Equalizer” because whether you’re brand new to the business or a 30 year veteran, you’re sharing the same amount of great information. With some help, a brand new agent on his first day has all the information they need to help someone arrive at a price to either buy or sell a home.


Just as importantly, the MLS has teeth. It’s tightly controlled. If an agent misrepresents a sale, chances are they’re going to be caught by their peers and reported. We’re a self policing industry so it has to be this way to be effective.


Commercial - Commercial agents have historically kept their lease and sale comparables close to the vest. Until fairly recently, there wasn’t even a site similar to the MLS where information could be shared among themselves.


There is now a company called Co-Star which allows agents to post and share information on commercial properties, but I’ve talked to quite a few agents and they all say the same thing … It’s either "worthless" or "better than nothing, but spotty at best". Agents will often hold back information on completed transactions without consequences and there are no non-compliance penalties.


This lack of sharing of actual building sale prices or leases makes it especially difficult for new agents to learn the market. There's a much longer learning period for commercial than residential, no question about it.


Lockboxes


Residential - Agents can place a lockbox with a key to the home on any listed property. A chip in the lockbox records the MLS number of any agent who opened the lockbox. That's a nice feature in itself but what really makes this such a big deal is the listing agent doesn’t have to physically drive to the home to open the door for the buyer agent and their client. That saves listing agents hours upon hours during the week of driving across town opening homes for agents.


The showing appointments are scheduled with the seller through a third party service so the listing agent isn't even fielding the calls. It's a very seamless process showing any home. Buyer agents can schedule one or a number of homes through the showing service, one right after the other.


Commercial - Commercial agents don't use lockboxes. There is no common, quick and easy access to every commercial building. So here's what happens.

The landlord representative has to first take the call from the tenant rep and schedule a time to open the door to the space for them. The drive to the building might take 30-45 minutes in Dallas traffic. The listing agent has to stay there until the building tour is completed and then drive back to the office probably fighting traffic again. All that can easily take 2-3 hours out of the day of the listing agent. That's all wasted time for the listing agent they'll never get it back.


If you're the tenant or buyer rep, you might have to call five different listing agents to show five different buildings on the same day. You'll have to coordinate with all of them on a meeting time, then hope they aren't late because that will impact all the showings behind it. Setting up multiple showings in residential is a breeze in comparison and a huge time saver.


Contract Forms


Residential - Residential contracts are easy to understand, standardized forms provided to agents by either the Texas Real Estate Commission or the Texas Association of Realtors. All agents are allowed to do is fill in blanks and enter business points so they're simple.


After 3- 4 transactions, the agent knows exactly where to look to quickly understand the terms of the offer. The contract is fair to both parties and outlines exactly what each side has to do to remain in compliance.


Because the residential contract forms are easy to understand, standardized and approved by TREC or TAR, the buyers, sellers, tenants and homeowners tend to trust them. They all have the right to have an attorney review the document, but it rarely happens. There have been maybe 5 times in my career where I had an attorney involved and that was usually a one-off situation like a family trust selling a home.


It's not unusual to have an offer negotiated and signed within an hour or two. One of my first deals, the buyer agent wrote out the offer on the hood of her car in handwriting and sent it over. Believe me, that just doesn't happen in commercial It might take a day to get an offer fully executed, but that's it.


Some states require attorneys to represent the parties to the contract, but thankfully Texas isn't one of them. It expedites the entire process.


Commercial - I'll focus on leases because so many agents specialize in leasing. These contract forms are almost always prepared by the landlord's attorney. Not surprisingly, they're usually very one-sided for the landlord.


One sentence or even one word in a contract might have significant meaning and agents just aren’t equipped to handle that kind of responsibility. Agents are not allowed to offer legal advice so the smart ones will advise their clients to bring in an attorney to review the lease. Now you have four people looking at the lease document, two attorneys (one for the landlord and one for the tenant) and two agents (one representing the landlord and one representing the tenant).


Any change, no matter how small, has to be approved by both attorneys and initialed by the landlord and tenant. That back and forth takes a lot of time.


There are also "deal maker" and "deal breaker" attorneys. If you end up with the second variety, your work as the tenant rep is going to be cut out for you. Eventually your client will just have to decide whether a point of contention on the lease their attorney pointed out is worth losing the deal.


In comparison, negotiating a residential standardized contract is a piece of cake.


How Long Does It take to Make Commercial Leases Vs Home Sales


Residential - You're usually paid within 30 to 45 days from the day the contract on the home is signed, but I've sold homes in less than two weeks. The title company cuts you the check the day the home closes.


Commercial - Leases take forever and then you have to wait for the landlord to pay you. If an agent isn't already working with a tenant ready to make a move at least a year out, there's a good chance they're too late. Some agent probably already has control of the situation or at least has been building a relationship with the tenant.


Nothing can happen until your client's lease rolls, so you'll probably be spending weeks or months beforehand looking at spaces. Then you have work with the landlord to find out how much space is needed, what tenant improvements are required, price it out, and negotiate the lease document.


You'll end up negotiating not only the lease rate, but also the common area maintenance, right to sublease, renewal rates, and a myriad of other points in a very lengthy lease contract. All and all, consider a lease to take a year from start to finish. In that same year, if you were in residential, you might be able to close 15 or 20 homes.


For every 10 deals you have working in commercial, you might make 3. Anything can happen and "time kills deals", so you'd better keep your deal pipeline full.


Dealing With Your Clients


Residential - Emotions often run high when you’re talking about someone’s home. Many owners take great pride in their home and put their heart and soul into it. Some see it as a reflection of themselves.


The seller may have raised their family in the home and have wonderful memories. The home is very special to them and because of that, they might be out of line on pricing on the high side. But buyers see the home in an entirely different perspective.


To this day, when I’m on a listing appointment and see a potential objection a buyer might have, I will bring it up right away. I can’t just ignore it because it’s an uncomfortable subject. I may lose the listing, but I have to discuss it with the sellers or when comments start coming in from buyer agents they'll wonder why I didn't bring it up.


You'll have to learn how to discuss potential objections you see in a home without offending yourself. That’s an art in itself.


I’ve sat in quite a few listing appointments over the years talking to sellers with tears in their eyes. They were selling for different reasons but all were deeply affected having to leave their homes. As their agent, you have to be compassionate and understanding. The best thing we can do is try to make the selling process as painless as possible.


Commercial - Commercial real estate is very cut and dried. You’re dealing with business executives who are crunching numbers and making a business decisions for their company. I can't recall ever seeing a seller become emotional about selling a building.


Many investors won't care if they're looking at the ugliest building on the block. If it’s making money and has a solid future of income potential, to them it’s a beautiful building.


I could always talk to business people openly. They tend to be pragmatic and I’m not telling them something they don’t already know.


Working With The Final Decision Makers


Residential - The beauty of residential is there are no gatekeepers. This is a big one. When you knock on the front door or call a homeowner they are the real estate decision makers. There's no-one above them telling them who to use for their real estate needs.


You can develop a relationship that can last for years or decades. Do a great job for your clients and they'll continue to use you plus refer you to their friends and family. You're building business for years down the road and no-one can take it away from you.


Commercial - Try walking into an office space and ask to meet with the decision maker. Chances are you won't get past the receptionist/gatekeeper. They'll tell you they don't have any real estate needs because that's what her boss has told them to say.


If you can't get past the gatekeeper, your next move is to try to call the decision maker. Chances are, you'll be blocked again by his administrator.


Let's say you actually get your foot in the door and start working with the local decision maker about leasing or buying a building. You might spend weeks or months showing spaces to them.


Then one day you get a call from your client. He feels terrible, but the word has come down from corporate they want to use another agent with another company. Someone at the corporate level has probably developed a relationship with another brokerage. The local guy will tell you he really appreciates all the work you've done and he'd really prefer working with you, but his hands are tied. He's not going to risk his job by standing by you when he's been told to use someone else. This happens all the time.


It's rare to keep those long lasting local relationships in commercial. You might make a lease or two with them, but eventually they'll either move on, retire, or some other agent will develop a relationship with them right under your nose.


Gender Bias


Residential - The NAR reports 62% of license agents are women and I wouldn’t be surprised if it’s really higher than that. Women tend to relate better to women and they’re often the decision makers when it comes to buying and selling homes.


Does it hurt being a man selling residential? There will probably be some cases where it will work against you, but I've managed to get my share of the business.


Commercial - The National Association of Realtors states 75% of commercial agents are men. Attend almost any commercial real estate function, and you’ll see a heavily male dominated audience.


Some men might prefer working with another man for their commercial real estate needs just as some women might prefer working with another woman in residential. There's still a good old boy network in commercial. Men go fishing, hunting, golfing, with each other women often don't have that opportunity to develop that bond outside of the work environment.


I have a lot of respect for successful female commercial agents because I know they have to work harder than men in many respects. But my advice to a woman getting into real estate is take the safe route and get into residential. The table has already been set for you.

Age Bias


Residential - According to the National Association of Realtors, the average age of a residential broker is 52. That surprised me when I first heard it, but thinking about it makes sense. Residential is often a second career and many start after early retirement.


Looking around our Keller Williams Allen Texas office I don’t see a lot of new agents in their 20’s but it’s very common to see a new agent in their 30's, 40’s, or 50’s. If there's an age bias in residential I've never noticed it.


Commercial - Again, according to NAR, the average age of a commercial broker is 62, or 10 years older than residential. I don't have the facts to back it up, but I think it's because so many commercial agents stay in the business for so long.


The larger real estate transactions are almost always controlled by the older and more seasoned agents with many years of experience under their belts. Young agents just aren't going to get control of those big deals unless there's some sort of relationship with the decision maker already.


My commercial friends tell me new agents are coming into the business in droves and most are in their 20’s to 30’s. They’re taking away a lot of the business from the older agents because they're not afraid to get out and knock on doors, something the older agents used to do, but won't do anymore. They're relying on referrals and repeat business.


Can You Work Both Commercial and Residential At the Same Time?


Sure, and many agents do. In the smaller markets, it’s probably a necessity. Having said that, I've always been a “stay focused” kind of guy.


I suggest you pick a career path, either commercial or residential, and stick with it. Know your area inside and out and don't be tempted to deviate when you sniff out another deal in an area you know nothing about.


You might find yourself knowing a little about a lot of areas but you're losing deals in your area by not staying on top of the market.



How Long Before You Make That First Paycheck?


Residential - With a little luck, you can be working a deal within your first thirty days, especially if you have a nice sized sphere of friends and family. Still, I'd give yourself 6 months on the outside to make your first sale. If you haven't started making money by then, something is wrong.


A nice benefit to selling homes is it's usually no longer than 30-45 days from the time you start working deal until the home sells. And you get paid by the title company the day of the closing..

Commercial - It can easily take a year to make your first lease even if you grew up in the area and know lots of people. You'd better have some staying power. The time it takes to really understand what you're doing is much longer in commercial.


You're also working with businessmen, not home buyers or sellers. Their decisions are more protracted and deliberate. After all, they're not just doing what's right for them, they're protecting the interests of their company.


Without the MLS and access to solid, accurate, and plenty of comparables to work with, it's a challenge learning any market well enough to be competent in representing a tenant. How will you know what a fair deal is? What's overpriced? What's a great deal?


One other thing about tenant repping. Just because you've got a signed lease doesn't mean you're going to get paid right away. Some landlords pay half upon signing of the lease and the second half after your client occupies. You might end up waiting 2-3 months after the lease is signed to get paid in full.


Where Will You Make the Most Money


Residential - Our Keller Williams Allen office is the #1 real estate office in all of Collin County. We have about 225 agents in our office, so I'll assume that's a good representation of the industry as a whole.


We have agents who I consider "newer" (three years or less) making over $200K per year. Their first year they were probably in the $70K range, but that's not bad starting out with a new career and no knowledge of the real estate business.


I'd say $250-$300K per year is a reasonable expectation for an agent in our office by their fifth year. The agents who have been in the business for quite a bit longer understandably are making quite a bit more. After 4-5 years, the people they've sold homes to are often ready to make another move so there's the repeat business.


Ten years in, I'd expect a good, hard working, and smart agent to be making $500K or so. Build a good team around you and you can get into the million dollar plus a year club. There are more of them in residential than I would ever have guessed. That's not an exaggeration but it takes time and some real expertise.


The opportunities are endless for residential agents because new homes are coming up like weeds all over. It's easy to move people up, down, to older homes or maybe newer homes. Bigger lots or smaller lots. Sure, there are a lot more agents in residential than commercial, but there are also many, many more opportunities.


Commercial - Again, I'm strictly speaking about office/showroom and office warehouse leasing and selling agents here. I don't know what agents who specialize as pure office leasing agents make, but my guess is their income levels would be similar unless they're a real "heavy hitter".


Because I've been out of commercial for so long I had to ask some of my friends who I started out with what a commercial leasing and selling agent should be making by their 5th year. They said $200K to $250K. Then I asked them what their goal was every year. Surprisingly, they said the same thing.


Now I was baffled because they were making that 20 years ago. I asked them why their business hadn't doubled or tripled. With all their experience, knowledge, and contacts it just seemed natural that it would.


What they told me was very interesting. They said the commercial side is now much more difficult now than it was when I was working. There are endless younger agents coming into the business. They're more aggressive and don't mind knocking on doors, something the older veterans just don't want to do.


My friends said they're doing a reasonable job of hanging on to their long term clients but many of their contacts are retiring and moving on. Their business is getting whittled down every year and they have to work harder just to sustain what they've made in the past. I sure didn't like the sound of that. I'd be expecting a raise after 20 years in any industry.


The really big money ($1 million a year plus) is being made by agents who end up working with a developer. They usually start out as commercial agents then are recruited by a developer. They become part owners and build their wealth that way. Those jobs are few and far between, but they're out there. To get to that level you're probably going to need an MBA.


The steadiest money is working as a landlord representative leasing their spaces. You're pretty much guaranteed a nice income with both lease renewals and new tenants. If the landlord portfolio is large enough, they're probably making in the $200K to $250K range year in and year out. They don't get to hit the huge home runs, but they're hitting singles and doubles all year long and those add up.


New buildings don't come up at the pace of new homes, so the opportunities are narrower. Commercial is a tough, tough business.


Are The Working Days The Same?


Residential - Early in your career, before you start getting listings, you’re going to be representing buyers and spending a lot of time on weekends. Your clients probably work Monday thru Friday, so weekends and after work may be the only time they have to look at homes.


Many agents take their days off during the week so they’re available on the weekends. If you decide you want to just list homes, you'll only be showing your own listings. Most of the time other agents are showing your homes for you so that frees your time up greatly on weekends too.


Commercial - If you like your weekends to yourself, commercial might appeal to you. Most commercial agents don’t work on weekends. They may do research or drive an area area to learn it, but they usually follow the same work week as their clients, Monday thru Friday. I don't think I ever showed a building on a weekend when I was in commercial.


What Would I Do Today?


If you haven't figured it out by now, there's no question, I'd get into residential real estate rather than commercial unless I was interested in moving into a corporate role with a developer. In residential, you'll have countless more opportunities to sell homes vs building sales and leases. You can hit the ground running and start making money faster. You'll have a tremendous amount of great information at your fingertips with the MLS. The ease of doing business is light years ahead in residential over commercial. And finally, you're always dealing with the final decision makers and can build lifelong relationships.