Do You Speak Residential or Commercial?
If you’re not fluent in a particular real estate specialty, partner with an expert translator. Your client’s success—and your reputation—could depend on it.
April 10, 2018
Jennifer Levine, CCIM, is the director of industrial real estate for Cushman & Wakefield/Commerce in Las Vegas. She works for one of the largest real estate services firms in the world, with a revenue of $5 billion across core services, and Levine has nearly 15 years of exceptional client service in real estate under her belt. But she will not buy or sell a home herself.
“Despite my hobby of constantly looking at home listings and comps, I always hire a residential agent for my residential transactions, and I refer my clients to residential agents for their residential deals,” Levine explains. “I feel like I would be doing a disservice to myself and to my clients if I did otherwise.”
Article 11 of the National Association of REALTORS® Code of Ethics does speak to the need for agents to fully understand the deals they take part in:
“REALTORS® shall not undertake to provide specialized professional services concerning a type of property or service that is outside their field of competence unless they engage the assistance of one who is competent on such types of property or service, or unless the facts are fully disclosed to the client.”
Levine recognizes that successful residential brokers and agents rely on an in-depth understanding of negotiation and contract nuances, laws, HOAs, inspections, schools, and the local housing market to provide their clients with optimal service. They are fluent in the language of home sales. That’s also why it’s imperative that residential experts think twice before participating in commercial deals. Whatever the specialty, if a REALTOR® isn’t fluent in a particular language, it can be detrimental to the clients and their own long-term success.
Like residential real estate, commercial has its own unique language and set of equations. “It’s just a different beast,” says Timothy S. Blair, CCIM, CPM, partner at Shannon Waltchack in Birmingham, Ala. “Residential agents are comfortable selling bricks and mortar—it’s what they’re good at. What is entirely different on the commercial side is the cash flow evaluation and analysis required on leasing and investment sales deals. It’s simply two different skill sets.”
Kelly Muldrow, CCIM, managing broker in Windermere Real Estate’s commercial practice group in Seattle, tells the story of a residential broker who assisted a builder-developer in the purchase of raw land for a mixed-use project.
“The developer’s due diligence failed to discover the underdeveloped fire-flow, stormwater, and sewer infrastructure at the site,” Muldrow says. “Because the property was zoned for mixed-use, the neophyte developer assumed existing infrastructure was in place, and the residential broker never knew to investigate this prior to closing. The property has been sitting idle and undeveloped for years, as the cost of installing required infrastructure to the site makes a mixed-use project unfeasible.”
Licensed to Deal?
In 2014, Todd Clarke, CCIM, owner of NM Apartment Advisors Inc. in Albuquerque, N.M., surveyed all local real estate licensees as part of a larger consulting project for the New Mexico Real Estate Commission. “A majority of [respondents] felt like we should have three real estate licenses: residential, commercial, and property management,” he says. “On this same assignment, we saw a number of grievously bad lawsuits and cases with brokers practicing outside of their expertise, including some six- and seven-figure errors and omissions claims.”
Properly applying commercial real estate concepts such as internal rate of return, net operating income, commercial loan underwriting, and lease analysis can unlock solutions that remain hidden from the non-expert. Understanding these analytical processes, as well as the nuances of commercial site selection, client service, marketing, and closings, can make or break a transaction. But the complexity and length of commercial deals often leads to significantly larger commissions than home sales, which sometimes proves too much for residential experts to resist.
“Yes, a large commercial commission looks great, but at what cost?” says William G. Curtis, CCIM, CPM, associate with NPL Group in San Antonio. “The last thing you want to be responsible for is a family business failing because you were not aware of all of the nuances in the transaction.”
Creating Expert Partnerships
This doesn’t mean residential experts can’t benefit from commercial deals. Jessica Roberts, a residential agent with Great Estates CT in East Berlin, Conn., has developed a strong partnership with a commercial expert in her market and says agents can learn a lot about the other side of the business by referring deals to one another. “Both agents should leave the transaction satisfied both financially and professionally,” Roberts says.
But it’s incumbent upon commercial experts to set the stage for a win-win partnership, and that starts with being totally transparent about fees. “I always make sure I offer up a fair referral fee from the start and send it in writing as well,” Levine says. She then keeps the referrer updated on the progress via email, noting tours, narrowed options, and the final deal package.
Fee structures vary based on the relationship, market, and transaction type, among other factors. Curtis notes that while it might be tempting to try to put together a deal yourself, especially in the current sales climate, that view is often shortsighted when agents fully consider the benefits of a referral fee and the potential of building a long-term relationship with a commercial pro.
“The market is hot right now across the country and many agents are not looking to the future,” he says. “Building these relationships and referral partnerships now is going to be key when the market finally slows down again. It’s a long-term play.”
Courses for Transition
Here are a few classes designed to help residential experts expand their knowledge of commercial real estate.
Residential pros who are faced with an opportunity outside of their expertise can find a qualified expert through NAR commercial affiliates such as CCIM Institute, IREM, and SIOR. Some of those who hold commercial designations and certifications started their careers as residential brokers and agents. All of these NAR affiliates offer educational resources that can help residential pros to become more informed about the commercial side of the business and to perhaps make the transition into full-time commercial real estate work.
Tools for Transition
Ultimately, long-term success depends on a real estate professional’s ability to discover the best solution for a given situation—to properly learn the language or find the right translator.
“People trust your advice when they are making significant financial decisions,” says Robert G. Thornburgh, SIOR, CCIM, CPM, executive vice president and partner at Kidder Mathews in Long Beach, Calif. “No real estate venture is without risk, but the quality of our counsel and its impact on a deal can’t be overstated.”