What are commercial real estate commissions

Broker commissions: whoever buys pays

Real estate agents could soon be massively intervening in their business: The turquoise-green government wants to introduce the ordering principle for commissions. More details are not yet known, the government program simply states: "As is usually the case with services, the costs of the broker when arranging rental apartments should be borne by the person who placed the order."

The model for this is Germany, where the ordering principle was introduced in 2015 - in its most stringent version. Since then, German brokers have only been allowed to demand a commission from tenants if they went looking for a property on their behalf and the rental property offered later was actually only "found" in the course of this search, i.e. after the prospective customer was contacted.

Lower supply in Germany

Christian Osthus, Vice President of the IVD, explains how the ordering principle has changed the German market. "Around 30 percent of all rental apartments are no longer offered through brokers, but rather via online forums, among the acquaintances of the moving tenant or through other channels." So many German tenants no longer have to pay a commission, but they also have a much smaller selection of rental apartments.

Many German brokers have therefore given up the rental business entirely. However, according to a survey by the German Federal Statistical Office from the previous year, this was not necessarily to their disadvantage. Despite the ordering principle, the German brokers have made more sales every year since 2014 than in the previous year. Because of the sharp rise in purchase prices. In doing so, they easily made up for lost income in the rental business. The property management business is also doing very well.

In the search for rental apartments on behalf of prospective tenants, however, hardly any German broker has specialized, says Osthus. The reason is the strict interpretation of the customer principle, which he also calls the "exclusivity principle". The broker must obtain permission from the apartment owner to broker the apartment. If the apartment hunter, on whose behalf he was looking for the apartment, then does not take it, then it is "burned" for the realtor, as Osthus calls it. It may no longer be offered to another prospective tenant subject to commission. The German brokerage representative therefore does not consider the German ordering principle to be recommended. "It is definitely not for export to Austria."

SPÖ wants "first customer principle" and ...

At least the SPÖ would like to have almost exactly the same system in Austria. In her parliamentary motion, building spokeswoman Ruth Becher calls it only a little differently, namely the "first-party" or "first-time client" principle. As (theoretically) in Germany, tenants should continue to pay commission if they contact an agent of their own accord and he then actively searches for apartments for them.

It will probably not be easy to define in a legally correct manner when the landlord is the client and when the apartment hunter is. It depends on the details if you want to prevent circumvention attempts - as there were numerous in Germany at the beginning - from the outset. For example: does there have to be a written brokerage order for a landlord to be considered the client, or is it enough if a realtor just knows that a landlord has an apartment available? Attempts to work around it are otherwise quite obvious.

... abolish double brokerage

Another question is arguably even more important for tenants. The SPÖ application is directed explicitly "against the double brokerage", as Becher tells the STANDARD, that is, against the legally defined property of a real estate agent as an agent working for both sides (from which the mutual commission claim arises). Exactly that, the abolition of the dual brokerage, want to prevent leading representatives of the real estate industry. Also because otherwise tenants would find themselves "in a legally free space" with the ordering principle if brokers were only liable for their client (in most cases: the landlord).

This was also feared in a statement by the Ministry of Justice in the parliamentary treatment of a citizens' initiative for the ordering principle in 2017. "If the broker were forbidden by law to demand remuneration from the apartment hunter (future tenant) for his work, he would not be willing to conclude a brokerage contract with him only to represent the interests of the landlord, "it said. On the other hand, a double broker is fundamentally obliged to both parties to the business "to honestly and carefully protect interests" - including the resulting liability to the tenant.

Becher, chairman of the parliamentary building committee, wants first and foremost "to provide financial relief for those looking for accommodation who are already confronted with high housing entry costs". Especially now, in times of Corona. She does not believe that real estate agents will then no longer take care of the tenants. "You still have to work correctly," and there are also numerous contact points for tenants, such as the Chamber of Labor.

Selling commission is difficult to enforce

The relief of the tenants was already the main reason for the reduction of the tenant's brokerage commission in 2010. Under Red-Black, it was reduced from three to a maximum of two gross monthly rents (in special cases, only one or half a month has been allowed since then). Nothing changed on the donor side; Brokers are still allowed to demand up to three gross monthly rents from the landlord.

The main problem for brokers then, as now, is that the latter is difficult to enforce on the market. "If a broker says he demands a commission from the seller, then the seller just goes to the next one," complains one broker of his suffering. "There is no consensus in the industry." Landlords can all too easily get rid of their commission payment obligations if they want to. In order to finally be able to enforce the surrender commission, not so few brokers are fans of the ordering principle.

Is the "redemption nonsense" coming back?

In 2010, the Remax brokerage network was already thinking about something in this regard. The "FairMietWohnService" was introduced, the aim of which was to obtain at least one gross monthly rent from the landlord. This was achieved on average across all apartments, says Remax Austria boss Bernhard Reikersdorfer today. Among other things, with various package offers for landlords.

In principle, Reikersdorfer does not expect any relief for the tenants through a customer or client principle. At least not in the long term - the abolition of a one-off payment at the beginning of the lease simply cannot do that.

With the ordering principle, however, the "redemption nonsense" of the 1980s could also spread again, he fears. In Germany, many tenants moving away are now suggesting a new tenant to their landlords and can then demand higher payments. Wibke Werner from the Berlin tenants' association also confirms that this is a problem. But it is all an outgrowth of the generally very tense housing market, she says in an interview with STANDARD. "Someone is moving out, the landlord is not interested in 500 applicants - so the tenant can look for a new tenant himself."

German ordering principle is evaluated

The German ordering principle will soon be evaluated - five years after it was introduced in summer 2015, says IVD man Osthus. He can already guess how that will end. "You will find that the goal has been achieved. And that meant that tenants no longer have to pay a commission." However, many German landlords have priced the costs for the broker into the rents. In Austria this would also be possible, at least in the non-price-regulated new building, but not in the popular old building segment.

Reikersdorfer observes that even in Austria some brokers are keeping their hands off the rental business. He himself thinks that this is too short-sighted. "A tenant to whom I broker a rental apartment may later buy a condominium from me at some point."

Speaking of which: the German government is also planning an experiment in sales, the so-called commission sharing. Brokers will soon only be able to ask as much from the buyer as they do from the seller. According to Osthus, this will be the next challenge for the brokers. "But at least the dual broker principle can continue to exist here." (Martin Putschögl, May 12, 2020)