Should You Start Your Career in Residential or Commercial Real Estate?

I feel very qualified to talk about this because I have tremendous knowledge of both commercial and residential real estate. I spent my first 14 years in real estate working strictly commercial, and the past 25 years working purely residential. These two disciplines are as different as night and day so I'm going to be talking about ...

which discipline allows you to get started making money more quickly
Are there subtle age or gender biases in either side
How much money can you make in residential vs commercial
Do you need a college degree for either side
Is one discipline easier to work than the other
The one man shop in residential vs commercial
What’s a realistic goal for gross commission income in either, starting out new, with 5 years of experience, and at the end of your career
Which discipline offers the best long term career sustainability

There are countless types of commercial real estate. I specialized in office showroom and industrial building sales and leases, but there are agents who specialize in apartment sales, mini-warehouses, church sites, and even truck terminals. Many specialize in selling land for future development or just speculation. Because of that, I’ll always be talking in generalities and there will always be exceptions to every point I make.

I’ll be talking about commercial leasing quite a bit because that’s the bread and butter of most commercial agents. We call it "tenant representation", or “tenant repping” and there can be very good money in it. There are many successful agents who spend their entire career leasing and never sell a building. In residential, however, it’s difficult to make a living working leases because they’re much, much smaller. We only do leases as a service to our clients, not as moneymakers.

The Multiple Listing Service Is The Great Equalizer in Residential

The number one thing that stood out when I crossed over from commercial to residential was the incredible ease of doing business with the multiple listing service, or MLS. I call it “The great equalizer” because whether you’re brand new to the business or a 30 year veteran, you’re sharing the same amount of information on the MLS. A brand new agent, with some help of an experienced agent, can be working a deal their first week in the business.

Just as importantly, the MLS has teeth. It’s tightly controlled. If an agent misreports or fails to post a sale, chances are they’re going to be caught by their peers. We’re a self policing industry and just like on the golf course, we have to “protect the field” when someone isn’t playing by the rules.

Commercial agents, on the other hand, have historically kept their lease and sale comparables close to the vest. There is a company called Co-Star which allows agents to post and share information primarily on available listings, but you aren't going to find building sales or lease transactions reported, and that's exactly the kind of information agents need to establish values. Here's how bad it is.

Twenty five years ago when I was selling and leasing commercial I decided the only way I could get the sales and lease comparables was to convince other agents to share their information. I started four breakfast groups which met once a week with 15 agents or so in each. The admission to attend was providing two solid, accurate, and relevant sales or leases either they completed or knew about. Every month, I’d end up with 120 comparables or so and in return, I’d give out 8 of mine.

From these meetings, I developed an incredible database, probably one of the best out there. Believe it or not, some of those breakfast groups are still meeting today because there's still no other way to get agents to share information on their transactions.

Lockboxes

Once an agent has an electronic lockbox issued by their association, they can place it on the door of any home they have listed. Inside the lockbox is the key. The lockbox records the MLS number of any agent who opens the box so we know who's been inside. Even better, the listing broker doesn’t have to physically be at the home to open the door to let the buyer and buyer rep inside.

The appointments are usually scheduled with the seller through a third party call service. We many not know who the client is, but we’ll know who their broker is.

This may not sound like a big deal but it is. A commercial landlord rep usually has to physically meet the tenant and tenant rep at the building to let them in. The agents don’t have lockboxes. Here’s what happens in that scenario.

Let’s say you are a landlord rep and the building you’re trying to lease is 45 minutes away. That’s fairly common in Dallas. It will take you 45 minutes to get there another hour waiting around for the tenant to walk through the space, then it’s another 45 minutes back to office.

That’s a total of two and a half hours out of the day and totally wasted time for the landlord rep if the deal doesn’t make. It was the same thing 30 years ago as it is today.

Complexities of the Contract Forms

Residential offers are simple, promulgated (approved) forms provided, either the Texas Real Estate Commission of the Texas Association of Realtors. They’re easy to understand for the buyer, seller, and agent. After 3- 4 transactions, the agent will know immediately where to go to review 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.

You'll rarely see an attorney involved in Texas home sales, although I understand states up north require attorneys to review the documents. Agents who know what they're doing can draft an offer to purchase a home in 30 minutes and the other side might take an hour or two to return it. It can literally be that quick and easy.

By comparison, commercial contracts are usually drafted by the landlord's attorney, they're not promulgated forms. They can be very complex and usually onerous (or one sided) towards the landlord. Because agents cannot offer legal advice, the tenant has to bring in an attorney to review the lease. Now you have two attorneys (one for the landlord and one for the seller) and two agents (one representing the landlord and one representing the tenant) all reviewing and making changes to an offer. It can take weeks or months to get a contract approved and signed.

Differences in Clientele

Commercial real estate is usually very cut and dried. You’re dealing with business executives who are making a business decisions for their company. I never saw sellers become emotional about selling, buying or leasing a building. It's not like they have built lasting memories in their space.

Commercial is strictly a numbers game where the decision makers are dealing with an income analysis, projections, etc. It's not an emotional business.

I've sold some ugly buildings in my time, but my investors didn't care. It is was a solid real estate deal and the building was structurally sound, the look of the building had no bearing on their decision to buy it. Commercial building buyers tend to be pragmatic about their decisions and emotions just don't come into play.

Of course, if it's a high profile company, they're going to want a building befitting their status. That's at another level and there will be preferences between their buying or leasing options, but it's certainly not at the emotional level of someone buying or selling a home.

Emotions can run high when you’re talking about buying or selling a home. Many owners have taken great pride in their home and put their heart and soul into it through the years. Some see it as a reflection of themselves, especially when you see a home with that real pride of ownership.

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. Because they've loved it for all those years, they assume buyers will see the same thing. When a low offer (in their opinion) comes in, they might think the buyer is trying to "steal it". That's when pride and ego can come into play and a good agent has to be able to deal with those emotions.

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

Absolutely, and many agents do in the smaller markets. However, I've found the most successful agents stay within their own discipline of real estate and don't go off on tangents that pull them away from what they really know best. They stick with what they know best.

Again, commercial real estate can be very complex with issues you just don't see in residential. For that reason I believe it's best to leave those transactions to agents who do it full time. Even now, being away from commercial for all this time, I'd never work a commercial transaction because so much has changed since I was selling and leasing.

Is There a Gender Bias?

In commercial real estate, there always has been a subtle gender bias against women. The National Association of Realtors says 75% of commercial agents are men. I'm not defending it, but it's there. I saw it when I was practicing commercial long ago and I actually called some of my commercial friends still in the business and they said it's still that way. Most business executives are male and men tend to want to do business with other men.

In residential, it’s just the opposite. It’s a female dominated market. The NAR reports 62% of license agents are women but from what I've seen in my own Keller Williams office, I think it’s higher than that. I believe women have an advantage in residential because they can relate better to females than men.

I once went on a listing appointment with another male agent in our office. We met with both Mr. and Mrs. seller and thought we had earned the listing. We had that area blanketed with our sales so we felt pretty good we had convinced them of our knowledge and track record. We were both surprised when the listing went to a competitor female agent.

When I lose a listing opportunity after meeting with a seller in person, I always try to find out what happened. Was it something I said, the suggested price, how we marketed, etc. Mrs. seller said it was a close call but she felt a female agent would provide more of a personal touch on their home than a man. So there you go, the door swings both ways. What she failed to mention was the agent she chose lived right behind her as we found out later :-)

Age Bias

According to the National Association of Realtors, the average age of a residential agent is 53. That surprised me when I first heard it, but it makes sense. It’s often a second career for those who have retired or even lost their job at a later age in life.

Looking around our Keller Williams Allen, Tx office over the past 15 years, I don’t see a lot of new agents in their 20’s coming in to us. I'd bet the most common age group is 40 and above with lots of moms working not that their kids are in school. If there is an age bias in residential, I've sure never seen it although I think it's fair to assume buyers and sellers might like to work with an agent in their same general age group.

The average age of a commercial broker is 62, nine years older than residential. They have been in the business for a long time and many are nearing retirement age. The larger real estate transactions are almost always controlled by older and more seasoned agents and that might never change. 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 their business.

There might be some inherent age with business executives and younger agents with little experience, but I’ve never noticed any age bias on the residential side, especially if the broker is with a strong brokerage with a good reputation and track record.

How Long Will It Take To Start Making Money

Home sales normally close faster than building sales, usually within 30 to 45 days. As mentioned, with some luck, a brand new agent can get on an immediate home sale or purchase, possibly with a relative. Building sales are more complicated and usually take 2-3 months to get all the ducks in a row.

If you move into an area without knowing a soul give yourself 6 months minimum to make your first sale but it might take as long as a year. It takes time to meet people, establish your database of prospects, and close deals. If you grew up in the area you’re working, there's a good chance you can procure a buyer or seller client much more quickly.

In commercial, don't be surprised if it takes as long as a year to close your first transaction. The same prospects you're courting have been hit on by other commercial agents for years. You’re working with businessmen and businesswomen, not home buyers or sellers so they are more deliberate and slow moving. They're also responsible for protecting the interests of their company and have to be thorough with their search so there's a lot more involved than a residential sale or purchase.

Leases usually take the longest to make from start to finish. If you're not already starting to develop a relationship with the tenant 3-4 months out, you're late. Tenants might start looking for new space 6 months out whereas a home buyer and seller can make a quick decision in a matter of days.

After the ideal lease space is found, the negotiations start and has already been mentioned, that can take several weeks to hammer out if there are attorneys on both sides. When the lease is finally signed, the broker might not get their check right away. Some landlords won’t cut the check until the tenant is in the building or the tenant improvements are completed.

Costs of Doing Business in Residential Vs Commercial

Working as a buyer or tenant rep in either commercial or residential is the least expensive way to get into the business. It only costs you your time and wear and tear on your car. Listings on both the commercial and residential side will be much more expensive.

Our listing costs are about $1,500 per home right out of the box. That covers our professional photography, copywriting, staging, administrative fees, lockboxes, signs, MLS fees, and social media costs. If we don't sell the home, we're out that money. Our oversized signs about another $75 apiece

There is much less marketing that goes into leases or building sales. For example, they don't require professional photography and staging but the commercial signs are much larger and more expensive than residential. They can cost as much as $800 and can be used only once.

Where Will You Make the Most Money

The largest single commission check I ever made was $234,000 and that was for a ten year lease with Hitachi Semiconductors. I represented Hitachi on the transaction.

The largest residential commission check I ever received was $90,000 but that's pretty rare. I was on my own as a broker and had both the buyer and seller for the home.

I specialize in high end estate and luxury homes so my checks for selling homes are normally in the $15,000 to $20,000 range. But I also bring in an agent on our team to help me with the listings and they're paid a portion from my proceeds.

For this article, I decided to call a couple of my commercial agent friends from long ago and asked them how they were doing. Of the three, one was doing well in the $700K per year range, and two were struggling. They were in the $300K per year range 25 years ago, and they're not making that right now. I asked them why and they replied commercial is getting tougher and tougher every year.

The new agents are getting out, hustling, knocking on doors, and meeting the decision makers. My veteran agent friends admitted they reached a point in their career where they stopped doing those things and are relying on their established clients. The problem is, with so much competition, they're losing their clients.

My friends said the best money is project leasing for a landlord on big buildings. But even when they make a big lease, the commissions are so cut up there's not a lot left for them. The corporate account executive is going to get his share, then the local office will get theirs, and what’s left is split between all the local agents who actually made the deal. They might have 2 or 3 agents assigned to the listing, so it’s cut two or three ways again.

Residential

In our Keller Williams Allen office of 236 . I didn’t include the team leaders, who will be making more. I only looked at the individual agents who have been with KW for less than 5 years.

We have about 30 agents on track to make over $200Kor tripling this year, and some will be doubling or tripling that. I personally have above $1 million my self for thee of the last 4 years. Could I have done that in commercial? Who knows, but probably not.

Where Will You Have More Time To Yourself?

If you want to be successful, you’re going to have to put in long hours, in both residential and commercial. There are no shortcuts, no-one is going to give you anything, and there is a learning process.

However, most commercial agents I know still don’t work on weekends. They might be doing research, but they usually follow the normal work week of their clients, Monday thru Friday like most business executives. If you like the idea of being with the kids and family on weekends, this might appeal to you.

Residential is just the opposite. Early on in your career, before you start getting listings, you’re going to be spending a lot of time on weekends working with buyers looking at homes. If your clients work Monday thru Friday like most, weekends and after work may be the only time they have to look at homes. When we’re off daylight saving’s time and the days are shorter, it’s almost a necessity to see the homes on weekends.

For this reason, lots of agents take their days off during the week so they’re available on the weekends. Once you start listing, you’ll find you’ll have more time of your own.

Getting in Front of the Decision Maker

When you’re sitting with a buyer or seller talking about their real estate needs, you’re talking to the final decision makers. They’re the ones who have the final say on who they’re going to be working with. There’s no-one above them making that call.

In commercial, if you’re working at the local executive level you may or may not be talking to the final decision maker. The person two layers up may decide they want to use another agent even after you’ve put in months of work showing them buildings. Just like that, you’re out in the cold.

If you do a great job for your buyers or sellers in residential and stay in touch with them after the transaction, they’ll most likely call you when they’re ready to buy or sell their next home. No-one is making that decision who to use for them. You usually don’t have those opportunities in commercial. This really is a big deal.

My Bottom Line Between the Advantages of Residential Vs Commercial Real Estate

Without question, brand new agents can start making money more quickly in residential than commercial
Without question, residential is light years ahead of commercial in the ease of doing business.
A good residential broker can be the $250K range within 3 years assuming they work smart and their area of specialization has higher price point homes

Overall, residential is a more stable path because you’re always working with the final decision maker. Do a great job for them and they’ll probably stick with you