Commercial Classroom: Agent – “Broker in the Middle” - by Edward Smith

This column is offered to help educate agents new to commercial and investment brokerage and serve as a review of basics for existing practitioners.

Like commission rates, all co-broke splits and referral fees are negotiable. Typically in co-broke agreements today, one brokerage firm represents the listing side and another firm represents the buying or tenant side and the commission amount is divided equally between the firms. The basis for this split should be based upon supply and demand. I remember a time when there was a lack of inventory in the market, and splits changed for a while, to 60% for the listing side and 40% for the buying side.

On occasion an agent becomes aware of a potential match between another broker’s listing and another broker’s customer (client) requirement. This agent “broker in the middle” known as the “coordinating broker” can bring the two parties together and a transaction may happen as a result of that introduction to each other. How should the agent in the middle (coordinating broker) be compensated if a deal occurs? What is fair? Should each of the three brokerage firms get a third of the commission?

Whenever I look at commission splits, I ask the question who is doing the work? In this case we will assume the majority of the work is being done equally between the listing broker and the broker representing the buyer or tenant. However, if it were not for the introduction by the agent in the middle they would not have this opportunity to do a deal. Fair compensation for the “coordinating broker” may be agreed at X% of the gross commission; with the other firms splitting the remaining fee. For example if 10% was the “coordinating brokers” referral fee, each brokerage firm would pay the “broker in the middle” 10% of the monies they receive and retain 90% of their side of the commission.

When it comes to referrals, again who is doing the work?  Also consider in a referral, the broker receiving the lead may need to co-broke with another broker to make a deal; so only one side of the transaction may be available to be divided. A residential agent gives a lead to a commercial agent what’s it worth? For a name and a phone number, one might consider that worth 5%-10% of the side. If the residential agent actually introduces you to the potential client in person, that may be worth 25% of the side as their referral fee. Remember you will be doing all the work!

A similar circumstance arises when an agent needs to refer a commercial lead to an experienced commercial agent, either because they do not do know one or the requirement is out of their area. This could be to list property or a customer requirement. They ask another agent “broker in the middle” to recommend someone to them. What should the “coordinating broker” be paid for introducing the two other agents (brokerage’s) to each other?

Again the question is who is doing the work? In this case the majority of the work will be performed by the agent getting these referrals. A typical referral fee is 25% of the side. But if it were not for the “coordinating broker” introducing them, they would not have met each other. For example, if a deal occurs as a result of this introduction, fair compensation to the “coordinating broker” may be agreed at 5% of the gross commission received by each of the agent’s brokerage firms. The referral brokerage would pay the “broker in the middle” 5% of the 25% they receive, retaining 23.75% of the fee. The firm of the agent doing the work would pay the “broker in the middle” 5% of the 75% of the commission they receive, retaining 71.25%. Everyone involved gets a fair split of the fees with the agent doing the work receiving the majority of the commission.

This could also develop into a long term referral relationship between these agents (brokerage firms). If these two agents do additional deals together in the future, should the “coordinating broker,” who originally introduced them, be further compensated? Perhaps this is an area for discussion and negotiation.

Edward Smith, Jr., CREI, ITI, CIC, GREEN, MICP, CNE, is a commercial real estate consultant, instructor and broker at Smith Commercial Real Estate, Sandy Hook, CT.