One could describe the relationship between commercial and residential real estate as if they are distant cousins. They have some similarities that keep them related, but the differences are so vast that they rarely cross paths. The client perspective highlights some of the similarities and differences between the two.
The similarities lie in the foundation of the relationship.
Exclusive representation. There are many different types of representation in a real estate transaction. The most common type of broker agreement we see is exclusive representation. Upon agreeing to exclusive representation, your broker owes you, the client, fiduciary duties. We affectionately call these OLDCAR:
Obedience
Loyalty
Disclosure
Confidentiality
Accounting
Reasonable Care
These duties ensure that your broker always works in your best interest.
Code of Ethics. In addition to the fiduciary duties owed to you, brokers also abide by the National Association of Realtor’s (NAR) Code of Ethics. With that being said, not all commercial brokers belong to NAR. However, it is required for all residential brokers and sales associates to be members.
The differences between residential and commercial real estate representation start to show up when the transaction starts to take shape.
Showings. The listing broker is usually present during showings in a commercial transaction. This is helpful as they know the building the best. They are also there to provide insight from the landlord’s perspective when it comes to negotiating terms. In a residential transaction the showings are typically private unless it’s a special property, or the seller requests their representative be in attendance.
Contracts. Residential contracts are written by the Association of Realtors and are templates used by everyone in the industry. Commercial leases and purchase contracts are typically negotiated formats and are not templates. By example, a commercial lease is written from the landlord’s perspective and delivered to the tenant. It is up to the tenant and its broker (and attorney) to carefully read the document to be sure the terms are market competitive and in the best interest of the tenant.
Longer sales cycle. Negotiations in a commercial transaction take longer due to many factors. Often the buildings themselves are more complex and the costs are substantial. Real estate is typically one of the top 3 costs of a company. The contract documents are not templates and so there is a longer and more iterative process to get to the negotiated final form. Then there are the other team members in the transaction including architects and contractors to get the space ready for the specific use. Whereas in a residential transaction, negotiations typically are just changing ‘fill in the blank’ terms in a template. Those conversations occur over phone and email, and often come to agreements within a day or two. And you are not getting the space ready for many employees—so move-in happens upon closing!
Team Members. Commercial transactions involve multiple players. The broker advises on the business terms and an attorney hired by the client advises on the legal terms of the lease or purchase agreement. Oftentimes the client will also have multiple decision makers within their company in the form of a board, committee or department. In a residential transaction the decision makers are traditionally a single person, or a couple making a decision together with advice from their sales agent
Whether you’re a buyer, seller, landlord or tenant there is some level of representation offered to you in a residential or commercial transaction. That representation is built on the foundation of the same fiduciary duties and acting in the client’s best interest. The difference shows up in how the transaction comes together and the team members involved.