What is the Difference Between Commercial and Residential Real Estate Brokers?

What is the Difference Between Commercial and Residential Real Estate Brokers?

by Anthony Seruga and Yolly Bishop

If you are considering getting involved in real estate investing, you will have the choice to invest in commercial real estate, residential real estate, or maybe even both. However, there are actually many people out there that do not realize that a real estate broker who has been trained in residential real estate is not going to be capable of handling commercial real estate transactions. Before you get started in the field of investing it is important that you understand that the commercial real estate market is much different than that of residential real estate and the possible risks and issues involved in commercial real estate are much more complex. So, it only makes sense that there would be quite a few differences between commercial and residential real estate brokers.

Methods of Property Valuation One of the main differences between residential and commercial real estate brokers is the way that the properties are valued. When it comes to residential real estate, usually the properties are valued by using comparable sales. However, when it comes to commercial real estate, the income valuation approach is the common method used, with the exception of valuing raw land. Most of the time commercial property is purchased for investment purposes, so the valuation is usually based on an analysis of the investment potential.

This analysis of commercial real estate usually takes into account both the operating income as well as the operating expenses of the property. Then, the value of the property is calculated from the net operating income as well as the factor known as the capitalization rate. In some cases comparable sales are used to value commercial property; however, this is primarily used to determine the value of raw land, while most commercial properties are valued with the income valuation approach.

Different Issues When it comes to commercial real estate, there are very different issues to deal with for each property, which is another reason that there are differences between commercial and residential real estate brokers. There are far more issues to deal with when you are working with commercial properties. The broker will need to have extensive knowledge on each commercial real estate property type and various factors associated with that type of property. Some of the factors they must know include business trends, utilities, leasing practices, job growth, environmental impacts, regional transportation, and local zoning planning commission requirements.

Promise to Purchase Another difference between commercial real estate agents and residential real estate agents is that they have to be prepared to deal with very different issues when it comes to promise to purchase and how that promise may be terminated. Terminating the promise to purchase is much more difficult when it comes to residential real estate. Usually the conditions of a promise to purchase residential real estate include various financing conditions as well as the inspection. In some cases, the buyer may be able to cancel the promise to purchase by following a procedure that is quite strict and may include terminating the promise if the inspection reveals problems with the property.

When it comes to commercial real estate, the buyer has much more leeway when it comes to the promise to purchase. After the promise to purchase is made, the buyer goes through a period of due diligence, in which the buyer has various verifications of the property completed, including condition of the property, zoning, permits, verifying financial results, and going through environmental inspections. If the buyer is not satisfied with the outcome of the due diligence period, he may terminate the promise to purchase with no consequences.

As you can see, there are definitely quite a few differences between the practices that occur in residential real estate and practices that occur in commercial real estate. If you want to be successful, you will need to use a broker experienced in the type of property you are planning to purchase. If you are interested in commercial real estate, then you'll need a seasoned commercial real estate broker for the best results.