What Is Meant By Brokerage In Real Estate?
Brokerage In The Sale and Leasing Of Real Estate
In real estate, brokerage most often refers to the business of an intermediary acting on behalf of a principal to market, sell, or negotiate the sale or lease of real property.
Brokerage in Mortgage Financing And Capital Markets
Brokerage in real estate can also apply to the sourcing of financing, typically in the form of a mortgage for the purchase of residential or commercial properties. However as real estate financing has become more sophisticated for large projects or institutional level clients, capital structuring and access to capital markets has become an essential component that high end brokerage services need to offer to sophisticated clients.
Brokerage In The Sale Of Businesses
State licensees in the U.S. may also be authorized to sell businesses. Smaller business cannot trade on stock markets like publicly held companies. Since commercial brokerage firms are experts in the needs of their clients and in contact with the business community, real estate firms and professionals also have the capacity to market and negotiate the sales of non-public businesses.
Brokerage Fees
As an intermediary, brokers receive a commission or fee for their services. The commission is generally a small percentage of the sale value or sum of the lease payments. By law, fees and commissions are negotiable.
In practice, acceptable fees and commissions are maintained, but vary by market and transaction type. Sales commissions may be agreed upon at 6% in a certain market while lease commissions may run 2% for a given lease term for a given product type in a certain market. Some experienced landlords and sellers may cap commissions for the sale or lease of properties with large sums involved.
Brokerage Representation
In a sales transaction, the broker can act as an agent of either the buyer, seller or both. In a lease transaction the broker can represent the landlord, tenant, or both as well.
As an industry, real estate brokerage can be broadly categorized as 1) residential or 2) commercial.
Residential Brokerage
What Is Residential Brokerage?
Residential real estate consists of any type of individual residential property type that will be used as a dwelling. Examples include single family homes, townhomes, and apartments. This is contrasted against an apartment building, which would be classified as a multifamily property. Larger multifamily properties are considered a commercial level investment.
The sales and leasing of residential real estate typically involves individuals, couples or families that will use the dwelling as a personal residence, although some may purchase individual residences as rentals or vacation homes. Since residential home buyers and tenants are not necessarily sophisticated professionals in business and real estate, residential real estate transactions can be subject to many protections, disclosures, and requirements by convention or by law.
Residential Real Estate Financing
The financing of residential real estate is distinct from other types of financing. Residential lending has evolved to encourage homeownership. There area many programs, subsidies, institutions, and mechanisms that revolve around lending for residential real estate. For example, Fannie Mae and Freddie Mac are institutions that act as a secondary market for residential mortgages that meet certain criteria to ensure liquidity for buyers of their home.
Residential Real Estate Is A Specialized Industry
Because of the attributes and needs of the clients, the distinct use of the product, the regulation of the industry, and the specific types of financing involved, residential real estate brokerage is a very specialized industry unto itself.
Commercial Brokerage
What Is Commercial Brokerage?
Commercial Real Estate Brokerage is the business of acting as an intermediary in commercial property transactions on behalf of businesses, investors, institutions, governments, or other organizations.
Commercial brokerage encompasses a broad spectrum of real estate transactions. It is effectively any sale or lease transactions that is not a single family residential real estate transaction.
Traditional property types in commercial real estate brokerage include office, industrial, retail, hotels, and land. Commercial brokerage can also focus on specialty property types such as mines, brownfields, or golf courses.
Commercial Brokerage Clients
Clients in commercial brokerage can range from small businesses to large multinational corporations. The local neighborhood dentist would be a commercial brokerage client. An example of a large multinational corporation that would be a commercial client is Toyota as they look to set up manufacturing facilities around the world. Governments and any other large organizations also fall into the category of commercial real estate clients.
Commercial brokerage also encompasses investment transactions. Commercial brokerage serves investors who range from private individuals looking to invest in a rental property to large institutional investors and retirement systems such as CalPERS or Japan's Government Pension Investment Fund.
Because clients in commercial brokerage are active in business and investment, they are treated as more sophisticated participants in real estate transactions relative to residential homebuyers and sellers. Clients of commercial brokerages generally hire attorneys to draft, review, and advise on leases or purchase and sale agreements.
Commercial Brokerage Financing
Financing options in Commercial Brokerage transactions can also be more comprehensive. There are a broader set of options to finance commercial real estate transactions in response to the need and level of sophistication of the property, project, buyer, investor, tenant, or developer involved.