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From 2021 to 2024, the number of NAR members naming both commercial and residential as their primary specialty rose by nearly 50,000. A conversation with commercial brokers about residential agents representing clients in commercial transactions typically elicits a litany of why it’s a bad idea and a corroborating story.
The practice is not uncommon, however, especially in small markets where sector lines are more blurred. Low housing inventory may drive residential agents to pursue commercial deals, especially with the sale and leasing of small office, retail and multifamily properties.
While doing business in sectors without experience or training is legal, it may not be wise and risks violating Article 11 of the NAR Code of Ethics, which prohibits REALTORS® from providing professional services outside their field of expertise without engaging assistance or disclosing the facts to the client.
This article explores risks associated with residential specialists practicing commercial brokerage, misconceptions on both sides of the representation “aisle,” and best practices for co-brokerage to facilitate a smooth transaction and achieve your client’s goals.
Goal: Getting the Deal Done
Tony Pearson, owner of True North Real Estate in Grand Rapids, Mich., finds himself in a co-broke scenario with a residential agent who lacks knowledge of commercial transactions two or three times a year. He recalls a buyer who approached him about a commercial office listing and, after explaining his fiduciary responsibilities to the seller, showing the property to the would-be buyer. A week later, the buyer called to tell him that the agent who sold her home would represent her.
“It was obvious the agent had never done a commercial transaction before,” says Pearson, citing a lack of knowledge about timelines, financing and due diligence. “You never want to embarrass another agent, but I tried to invite questions from the buyer,” he says. As the transaction’s complexities became apparent, Pearson offered to take over the deal and pay a referral fee, but the agent declined.
“My responsibility was to my client, so I told the agent everything that I needed and how to get it,” said Pearson. “I literally dragged the deal across the finish line.”
Residential Knowledge Gap
“Many residential specialists don’t appreciate how different commercial brokerage is,” says Duke Gray, an associate broker at Bluhouse Properties, also in Grand Rapids. Gray actively practices both commercial and residential brokerage, having started his career on the commercial side before shifting to residential. Today, his business is roughly 60-40, with residential as his primary specialty, but he remains current in the commercial sector.
“I don’t want to be an agent who dabbles in one field or the other,” Gray says. “I’m an active member of our local commercial REALTOR® association, pay commercial MLS dues, attend commercial meetings and stay current on all forms and processes.”
Residential agents may be unfamiliar with commercial forms. “If I think it’s a strong buyer, but the offer comes on a residential purchase agreement, I may offer to transfer it over to a commercial form,” says Pearson. “My commercial title agent is not going to want to look at a residential purchase agreement that’s been chopped up,” he adds.
Training Is Key
Gray advocates for those who want to practice both, with the caveat that they invest in training, which he acknowledges not all residential agents do. A lack of knowledge creates risk for the agent and their managing broker, invites disputes or claims and does a consequential disservice to their client.
While some earn industry designations, including from NAR commercial affiliates (CCIM, SIOR and IREM), metro Houston broker and instructor Michica Guillory, C2EX, GRI, owner of The Guillory Real Estate Firm, Inc. and The Guillory Group School of Real Estate, notes it can be difficult to find basic commercial education offerings and encourages real estate organizations to offer more commercial training.
Guillory uses real-world stories to help residential agents understand their knowledge gaps and their potential impact on clients. Among them is an office lease contract that included a $65-per-hour fee for after-hours air conditioning, required by the client on weeknights from 6 to 9 p.m. To the residential agent, $65 didn’t seem like a deal-breaker. In class, Guillory runs the numbers to show that, on a five-year lease, the client actually paid an additional $234,000.
Referral Fee Arrangements
Most commercial specialists happily pay referral fees to residential agents who bring a buyer to a commercial deal. “I present the option in a way to make it easy for them to save face with their client,” says Pearson. “If they don’t want to admit they are out of their lane, they can say they are too busy and want the client to get the best service.” He estimates that 60% to 70% take him up on the offer.
Pearson has also worked with residential agents who list commercial properties. “If I can coach the agent along to get the income and expense information I need for my client, I’m willing to move forward,” he continues. “If it’s clear that they can’t do that, I’ll offer to list it and pay a referral fee.”
Co-Brokerage Best Practices
When residential agents decline a referral fee, the commercial agent must decide how best to serve the client’s interests. In many cases, that means co-brokerage. Consider these best practices for a commercial-residential co-broke arrangement.
- Document the transaction. Pearson documents all details in writing and makes no assumptions about the agent’s knowledge or actions. “I protect my client and myself by ensuring there is no confusion or room for accusations,” he says.
- Control underwriting standards. Residential agents may be unfamiliar with NOI, LTV ratios, cap rates, break-even occupancy and other commercial underwriting standards. “I sometimes get a ‘deer-in-the-headlights’ look when talking about income analysis,” Guillory says. “Agents must demonstrate skill and knowledge before taking on that role.”
- Set seller expectations up front. Clients represented by residential agents are often surprised by the extended timelines of commercial transactions. Setting expectations up front will make the transaction smoother.
- Define roles and present unified messaging. Clearly defined roles for client communications help avoid confusion if the client assumes both agents are jointly responsible for all aspects of the transaction. Position a co-brokerage as a strategic advantage to build client confidence and credibility for both agents.
- Describe the compensation structure. Document the compensation agreement and associated responsibilities. “Even if you have a good relationship with the other broker, put the terms of the agreement in writing,” Gray advises. “Otherwise, if things go awry, reaching a resolution will be more difficult.”
Despite best efforts, problems can arise in a dual-practice co-broke situation. Shari Veldman, executive director of the Commercial Alliance of REALTORS® in Grand Rapids, advises her members to contact the agent’s managing broker, who is ultimately responsible for their salesperson’s actions. “While the broker may not be able to provide CRE guidance, they want to find a way to work things out to get the deal done,” she says.
Benefits of Working With a Residential Agent
While commercial specialists may be wary of a co-brokerage agreement with a residential specialist, residential agents can uncover opportunities in select asset classes, including small multifamily, mixed-use, single-family rentals, owner-occupied small businesses and redevelopment. Experienced residential agents are typically tuned into community networks and may have a pool of “investor-curious” clients unknown in commercial circles and, they can tap into small landlord networks.
Broadly speaking, residential agents also possess a high degree of emotional intelligence, which can aid in negotiations. “There is a warmth that my residential colleagues bring, that I think is a real plus to any transaction,” Guillory says.
Gray recalls a seller of a land tract considering rejecting a fair offer because she didn’t like the buyer, willing to forgo the sale out of spite. “I spent a lot of time listening to her talk about why she didn’t like this guy and acknowledging she could derail his plans by refusing to sell,” he says. “Then I took a ‘life-is-too-short’ approach, reminding her that she could use the money. Eventually, she signed, but I think my residential background enabled me to help her work through her emotions.”
Build Relationships Across the Aisle
Whether seeking referrals from residential agents or co-brokering a transaction, building relationships with residential specialists can boost business opportunities, especially in smaller markets. Earlier in his career, Pearson attended residential firm office meetings to solicit paid referrals. “The invitations often came from someone I had previously paid a referral fee to, so it was a good strategy,” he says.
In a co-broke situation, Guillory encourages commercial specialists to take time to explain the processes and discuss key aspects of the deal, where things could have gone better, and why. Guillory says a failure to do so is the biggest complaint she hears from residential practitioners in her classroom. “Teach, and you’re more likely to get the referral in the future,” she says.
While many commercial specialists say it’s not their job to train a residential agent, Gray sees an opportunity. “If I need to assist an agent to help a deal go smoothly, I’ll do it to help the client,” he says. “And, down the road, I might have a new colleague.”
Be Collaborative but Mitigate Risk
While there may be residential agents who conduct commercial transactions without adequate knowledge, commercial specialists who reject out of hand the idea of engaging in these situations deny themselves opportunities to grow their business through referrals or co-brokerage arrangements.
By adhering to best practices that include guardrails to protect clients and mitigate risk and liability, and by working collaboratively with residential counterparts, CRE specialists can raise their market profile and become the go-to commercial expert for residential agents.