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The Differences Between Commercial and Residential Real Estate

Posted by tomgrisak on July 15, 2017
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My first decade and a half in real estate was devoted purely to commercial real estate.  My past 17 years have been strictly residential, so you might consider me kind of a hybrid.

If you’re trying to decide whether to get into commercial real estate or residential here are some of the major differences I’ve noted.

Commercial Negotiations Take Longer Than Residential

Commercial transactions are often much more complex than residential.  Because of this, most landlords will use their own contracts drafted by their own attorneys.  They aren’t state approved (promulgated) and we agents cannot give advice on legal issues.  That means the tenant has to hire an attorney to wade through the contract looking for potential legal objections.

Now you have the Landlord, Landlord’s attorney, Landlord’s Leasing Agent, the Tenant, the Tenant’s attorney, and the Tenant’s Agent all giving input.  You’ve got 6 very busy professionals discussing every sticking point.  You can see how the entire process bogs down.  Days can easily turn into weeks before the contract is every fully agreed to and signed.

Why Residential is So Simple in Texas

On the other hand, at least here in the great state of Texas, attorneys are rarely used for residential sales. We use state promulgated contracts which are simple to understand, fair, and very straightforward.  I don’t know if I could name five times attorneys had to get involved on my contracts in the entire time I’ve been in residential.

We usually close sales in residential within 30-45 days of the offer being submitted and we’re paid at closing by the title company.   That’s awfully nice and almost unheard of on a commercial transaction.  Those can drag on for months.

Commercial Checks Are Typically Bigger But Spaced Farther Apart

Commercial transactions are often much larger than residential so the checks are bigger.  They just don’t come as frequently. My largest check in commercial was about $235K on a 10 year lease with a Fortune 50 company.  I’ve never had one near that size in residential.

Emotions Run Higher in Residential

Residential real estate can be very emotionally charged. Divorces, other family situations, financial problems, etc. come into play all the time.

On the flip side, commercial is almost always cut and dried.  Will it serve my needs and how much is it going to cost me?  No emotions, just numbers crunching.

The Level of Professionalism Between Commercial and Residential

Commercial brokers on the whole are more professional, polished and educated than residential agents.  Sorry, I’m not trying to be insulting.  It’s just the truth.

When I first got in the residential side I had an agent call to let me know she was writing out a contract on the hood of her car and would be sending it over.  That was so foreign to me but now I understand.

I came from the commercial world of high profile building locations and signage.  Elegant conference rooms with incredible views.  Companies shining the agent’s shoes.  Shirt and tie salesmen would drop by our offices to show us the new lines.  The car you drove or your watch defined your level of success.   I was never comfortable in that world, but I understood it.  Residential is much more relaxed, but no less competitive than commercial.

There’s a much longer and steeper learning curve in commercial than residential.  Commercial transactions can be very complicated, especially investment properties where you’re dealing with pro-formas, common area maintenance, estoppel letters, environmental reports, tenant finishout, etc.  Residential is very simple in comparison.

Residential Allows You To Get Started More Quickly

You can be up and running in residential the day you get your license and working on a transaction.  Maybe it’s one of your relative’s homes.  You might not know what you’re doing, but you can stumble on a nice sized deal and get the help you need because selling a home is not a very complicated process.  Stressful, yes, but not complicated.

Chances are you won’t just stumble into a deal in commercial.  There are way too many brokers out there who’ve been keeping up with those tenants, buyers, and sellers for a long time.  You’ll have to fight your way through them.

How many people will trust a brand new agent to negotiate a 5 year lease for their business or help them buy a building?  I would give yourself a year to make your first deal in commercial but you should be able to cut that in half in residential.  If you work smart and hard, you can really speed it up and start closing multiple deals in your first several months.  I’ve seen it done in our KW office with brand new agents.

The MLS Levels The Playing Field

Commercial brokers tend to keep their information close to the vest and don’t share. They always have.  They have a lesser version of the MLS, but it doesn’t have the quality of comparables, mandatory broker participation, or the enforcement teeth of the MLS.  The MLS gives even the newest agents the exact same comparables and information as a 30 year old veteran.  How great is that?

Residential Has Smarter Systems

Showing procedures in residential are light years ahead of anything on the the commercial side.   They don’t use lockboxes in commercial probably because there’s no place to hang them.  The leasing agent has to meet the tenant prospect along with their agent at the space to open the door.  Let’s say 45 minutes to drive to the building in traffic, half an hour to show it, then 45 minutes back.  Talk about a day killer.

The residential side has it figured out.  The listing agent places a lockbox on the door of the home and the showing agents have access to it with their keypad.  No-one’s waiting on anyone to show up and open the door.  The listing agent knows who the agent was who showed the home so they can call them after the showing.

In Residential, You’re Always Dealing with the Decision Maker

In commercial, you might have established a great relationship with the local contact for a company leasing space.  Maybe even made a deal with him.  You know he’s going to call you when he has real estate needs and then, all of a sudden, your guy is out of the picture.  He might have left his job, been promoted, retired, fired, anything.

Now the real estate decisions are being made in corporate and the new guy doesn’t know you from Adam.  You’re back to ground zero competing with every other broker out there for their business.

The great thing about residential is you’re always dealing with the homeowner, the shot caller.   There’s no-one above them they have to report to when it comes to picking an agent.  If you do a great job for them, they’ll remember and probably use you again and again.

The Sexism Thing

Like it or not, commercial brokerage is still dominated by men. It’s just the way it is.  When it comes to developing real estate relationships, men will take other men out for golf, drinking, hunting, fishing, etc.  It’s almost expected at the higher levels.

I rarely saw women agents doing those things so in a way, it’s tough for them to compete the men.  I always really respected the women who rose to the top in commercial knowing how difficult it must have been to get their foot in the door.

Residential is just the opposite. I don’t have any stats to go on, but I’d bet there are way more women than men on the residential side.  I also believe women sometimes even have an advantage over men.  I know when I go on listing appointments with our female agents I tend to be more to the point and they can connect in ways I don’t.

So Which Is Better?

Bottom line, I’ll take residential over commercial any day.  That’s something I never thought I’d say 18 years ago.

I have a better quality of life.  My furthest appointment is 15 minutes away.  Living in the same area as my clients, we already have a lot in common.  I can build lasting friendships.  It’s just a great life.

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