Greg: Welcome to this edition of the Louisville Luxury Homes Podcast Series brought to you by Jon Mand with Lenihan Sotheby’s International Realty. Today, we have both Jon Mand and Jake Tidmore in the studio. Good to see you both today.
Jon: Hey, Greg. Good to see you.
Jake: Great to see you, Greg.
Greg: I am hoping we can pull back the curtain a little bit today and sort of get into that touchy area about commissions and how real estate agents get paid. Is that all right?
Jon: Oh, hot topic.
Jon: Yeah. It might be time for me to step out.
Jake: Sounds good. Sounds good. We’re open for anything.
Greg: I’ve always found it sort of a hard topic to talk about because it deals with money, yet I find that a lot of people, a lot of consumers, don’t fully understand how agents get paid and then the consequences of actions and how that sort of works its way down the line. So I’m hoping we can politely and educationally, if that’s a word, sort of walk through this a little bit. So I don’t where you wanna start, but maybe on the buyer’s side. How does an agent get paid? So if you show someone one home or 10 homes or 20 homes, are you getting paid by the house or you get paid by the one that’s sold? Why don’t one of you explain that for us?
Who Pays For What?
Jake: Yeah. I think I’ll take this, Jon. It’s amazing to me. I mean, at the point these folks are making one of the biggest investments of their lives and they have no idea their representation gets paid. It’s pretty incredible. The commission … I’ve had several times where I’m showing folks houses and we get five or six houses in and they come to me and ask me what do they owe me. And the answer is nothing. I get paid when they purchase the house and the house closes. And the commission comes out of the seller net proceeds, obviously, so it’s … And the commission is typically set or set on the front end between the listing agent’s broker and the seller. So that commission is negotiated upfront and a lot of times it equally amazes me how folks think that if they don’t hire representation that they’re saving themselves 3%, but that is entirely untrue. That commission is set on the front end and that listing agent will just collect the entire or what’s typical-
Greg: That is a huge misconception, isn’t it?
Jon: It is. It is. Yeah, that listing commission’s, the listing contract’s legal document, legal agreement between the seller and the listing broker. And so, a buyer has no ability to come in and influence a contract that they’re not a party to. So that is a kind of a misconception that buyers think, “Well, if I come in without an agent, it’s a 3% reduction off of the sale’s price automatically.” Instead, they’re ending up walking into a situation where it’s like going to court without an attorney. You’re walking into a situation where there’s professional representation on one side. It’s gonna be an existing relationship there. It’ll be an asymmetrical negotiation a lot of times in those circumstances. So you wanna make sure that you have somebody involved that’s gonna your advocate through the process.
Greg: So a buyer has a right to do that. They just ought to know what it is that they’re doing.
Greg: And so it doesn’t matter how many homes you show, as a buyer, right? We’re still talking on the buyer’s side?
Greg: How frustrating, well I don’t know how … What happens to you guys when you have a client who looks at a lot of homes, whatever that number is, a lot of homes and then jumps ship and buys a home for sale by owner, they jump ship and buys another home? You’re out in the cold, right?
We Only Get Paid When The Transaction Closes
Jon: Yeah, we sure are and that’s something we obviously try to protect ourselves or insulate ourselves from. And it’s gonna be based on the fact that we’re providing value to their home search based on our relationship with that buyer client, in this circumstance. That sort of thing just doesn’t happen very often, if at all, because they understand that we know the business, we know the market, even if it’s a for sale by owner, there’s gonna be value add with us involved in the process, getting them from, first of all, pricing the property, making sure that what the owner is asking is reasonable, and then just getting through the entire inspection, appraisal, repair request process to closing. There’s a tremendous amount of value for having us involved in those transactions. So thankfully, in our position, being full-service brokers, that doesn’t come up very often because our clients appreciate what we do for them.
Greg: And you’ve established a relationship, right? I think we’ve talked on several of your past episodes of your podcast. It’s a relationship based business.
Jon: Yeah. And I think, touching on that, these aren’t … We’re getting paid on a transaction selling the house to a person or selling a house for a person, but that workload as it were, goes on throughout the length of our relationship with them. I mean, we’ve had clients, they’ll buy a house, and five years later, “Hey, we’re gonna remodel the kitchen. We want you to come over and tell us what do you think we should do, how much should we spend, what’s it gonna be worth when we’re finished?” And we’re not charging fees to come in and do these things. It’s all part of the service model that we have in the relationships that we’re cultivating over years and years with these folks.
Greg: Which is hard to explain to someone because a lot of consumers will ask or push back on commission, but it’s hard to explain that this is ongoing, right? That you kind of earn it, year after year after year after year, providing services that are “for free.” But it just keeps going, right? And Jake, you touched on this in an earlier episode talking about remodeling or rehabbing property. Someone calls, like Jon just mentioned, years after a transaction, you pick that phone up and you’re still a pro, right?
Jake: Absolutely. It goes well beyond closing and especially at the point that you are helping, like Jon said. You develop a relationship with these people and you become friends and you wanna see them make the right decisions and moves on their house especially at the point that they’re gonna sell it in a few years and you’re gonna get that listing so you wanna make sure that they’re in a good position. And I get calls all the time after closing asking for referrals for contractors, for subcontractors, and often times, I’m at that point, roped in and I typically meet the contractor or subcontractor and homeowner together, and this is after closing, after I’ve been paid. Nothing is charged. There are no fees. It’s just about being there for your clients and helping them make the right decisions.
Greg: It’s about building that relationship, right?
Greg: Being of service.
Greg: So I wanted to touch real quick where we mentioned for sale by owner a couple times. And since we’re talking the subject, right, how do you get paid if you’re working with a for sale by owner, right? ‘Cause it happens that buyer’s agent will-
Jon: We work regularly within for sale by owner situations. Same sort of, I guess two different options there. We’ve had it in circumstances where we negotiate with a seller of the property that at the point our client purchases it, we’ll be paid a buyer’s agent fee on that. I’d say the vast majority off for sale by owners in this market understand and expect that there’s typically going to be a buyer’s agent involved. In a extremely desirable or hot little sub-market or neighborhood around Louisville, there’s certainly cases where they say, “Look, this is principal’s only. No brokers involved. I’m not paying any fees.” And even in those situations, our clients will still sign buyer agency agreements with us and bring us into the transaction. It doesn’t affect the seller’s net. They’re just paying us outside of closing for our services.
Greg: So can you explain what that contract is real quickly? The buyer agency that you just spoke of.
Jon: It’s just an agreement stating that we’re gonna be the exclusive representative of a buyer and work to identify a property for them and then at the point that we’ve identified and closed on a transaction that compensation’s going to be paid either by the listing broker, by the seller in the case of a for sale by owner, or if neither of those circumstances apply, by the buyer directly. So again, we’re happy to help in those situations and I think, again, it speaks to the relationship and the value that we bring to our clients that they wanna pull us into those transactions.
Greg: All right and then I wanna jump back to the listing commission. Jake, you talked about this just a minute or two ago, and you were saying that’s negotiated or determined at the very beginning of getting your house on the market, and yet, I’m reading in national news and maybe y’all can tell me about local news, it seems like sometimes in that listing commission negotiation people are offering less than prevailing, I don’t wanna get in trouble and say the wrong word, but less than market commissions for the buyer’s agent. And I’m wondering if y’all have an opinion about that and what that actually does or doesn’t do in the marketplace.
Jon: Yeah, absolutely. We’ve seen a recent trend in our market of listing brokers that … Putting properties out on the MLS, it’s obviously a, as everybody reads the newspaper, pretty hot market. Inventory levels are lower in a lot of areas and so the thought process on some of these listing brokers’ parts is that they can reduce the buyer’s agent compensation to kind of below the prevailing market rate and the home will probably still sell.
As we look at the business, in our eyes, it’s really penny wise pound foolish to go down that road. We understand the work that buyer’s agents put into these transactions. I mean, we’re buyer’s agents half of the time, and we certainly understand the value that a buyer’s agent brings along. So at the point you’re reducing your compensation you’re offering to that buyer’s agent, you’re providing reasons for that agent to not sell your home, to not sell that listing. So for the seller, it may be the case that they reduced the overall commission with their listing broker and consequently, the listing broker’s offering less money to the buyer’s agent because they cut a bad deal with the seller and they’re trying to make up for that. That’s where you’re tripping over a dollar here to pick up a nickel for the sellers because for that differential of a half a point or percent or whatever the number is, that buyer’s agent now has a big reason to try to steer their clients to other properties that are offering more compensation to them. So that’s a concern and something that we certainly council our seller clients against.
We’ve also seen this trend recently where the listing broker reduces the buyer’s agent commission while keeping their normal listing rate intact. They’re just trying to adjust the compensation so that more of it lands on their side of the ledger at closing. And again, that’s just a practice that we haven’t employed, that we think is not in our client’s best interest. And often times, I questions if these sellers are even fully briefed or if it’s fully disclosed that, “Hey, I’m gonna negotiate a commission of X percent with you, but I’m actually only gonna offer out Y percent, some fraction of that, to the buyer’s agent.” I’d be shocked if these sellers are going into these situations fully informed of what that means and how that’s perceived by the buyer’s agents that they’re relying on to sell their property.
Greg: And then just to spell this out, when a seller signs a listing contract, typically they see it, their agent, and then the broker sees it. So three, four people and that percentage doesn’t show up, really, on the MLS.
Greg: It’s the percentage that the agent then or the broker decides to share with a cooperating agent that shows up. So you never know really what the listing contract is or says. You just see the portion of that that they’re willing to share to bring a buyer.
Jake: That’s correct. That’s correct, yeah.
Greg: Okay. And so like you’re saying, the seller doesn’t even know what they’re offering to sell their house.
Jon: Or if they’ve signed the paperwork that percentage is gonna be on the MLS input form that the seller’s will sign in our market, but I doubt that much time is dedicated by the listing broker explaining what that little field on the form means to the actual marketing of their home. But yeah, that’s been a trend that’s come up pretty recently and I think one that really runs counter to the interests of the sellers.
Greg: All right. Since we’re talking about commissions and how realtors get paid, I’ve always found this to be sort of a tricky one. Let’s say you list a house and the first person who comes through the house buys it. It’s been on the market for an hour. Do you find that some people say, “Hey, it wasn’t on the market that long. We’ve already negotiated the commission, but now I wanna change it because I feel like you didn’t work.” Does that come up? That someone says, “I don’t think you worked very hard for it.”
Jon: Yeah, that’s interesting. That does come up and at the point, we do our jobs perfectly, that we execute. We get the exact exit strategy that we discussed with the client and gotten them full price or above ask offer immediately upon putting it on the market and they get all the terms and conditions they want. And then-
Greg: That’s just a sign that it was too easy.
Jon: We’ve done our job right. Yeah, that’s when people then go, “Well, geez. I think we should readjust that” and it’s, “Well, would you rather me drag this out for a year and you get beaten up by a buyer on the offer and the repair request and everything else just so that you can feel that I ‘earned it’?” I mean, we’re not being paid by the hour. We’re not being paid at the point that we sell a home that was on the market for an hour or we sell a home before we put it on the market. I mean a lot of our transactions are private sales and in those cases, it’s easy for a seller to look at it and go, “Well, gosh. You didn’t have photos and videos and you weren’t running ads ’cause it wasn’t on the market and you sold it in the first showing to somebody.”
Well, we’re not being paid for the one showing that we did on the property. We’re being paid for the resources, the experience, the expertise, and the access to buyer clients that we can sell a home in one showing or we can sell a home in the first hour. I mean, that’s what we’re being paid for is all of this years of experience and hundreds of millions of dollars worth of transactions and that experience that comes along with that that we can come in and say, “This is the price. We know the right buyer. We know all the things that you need to do to get the house positioned the way it needs to be done.” That’s what we’re being paid for, but it is funny because when we do a really good job, people come in and say, “Well, you made it look too easy.” Well, yeah. Lebron makes basketball look easy, right?
Greg: Very nice.
Jon: But you know-
Greg: And he gets paid all right, doesn’t he?
Jon: Exactly. I wonder what his per hour compensation is.
Greg: Well those are out there, right? They’re fun to look at. But Jake, you were talking about earlier also there’s the uncertainty of the business that you’re not guaranteed a paycheck and you can still put all this time in it. So it’s sort of a balance sometimes.
Jake: Yeah, absolutely. It’s a beautiful thing when you list a house and you show it one time and it sells, but that’s often not the case. I mean, there’s countless times where we spend months with people and show them dozens of houses and they never find anything they like or they just change their mind and switch gears and we never make any money. And so, it goes both ways. And at the end it kind of balances on average.
Greg: And the same’s true with the seller, right? You can list a house and you can spend the money on photography and advertising and online ads and it’s not guaranteed. You don’t get guaranteed a paycheck in this business.
Jon: In this kind of trend towards the compression of these commissions on the listings, there’s online brokerages, there’s a lot of different business models that have come into the industry and they’re all designed to kind of compress the listing commission and the buyer’s agent commission a lot of times. Again, going back to the service model, if all we’re doing is putting a lockbox on the house and putting it on the MLS, well then that starts to make sense, but for us at Lenihan Sotheby’s, we’re investing heavily in print marketing, paying for all sorts of premium online distribution. We’re showing up every time the property’s … I mean, by the time we get into a listing agreement, we’ve put in a tremendous amount of work just getting the property to the market with professional photos and videos and 3D tours and all that. And then during the marketing timeframe, I mean, we’re heavily invested in these properties at the point we have one on the market.
So our business model is just a little bit different in that regard. That most agents’ listing brokers don’t have any skin in the game. It’s easy to cut the fees when you don’t have any cost or time invested in it. At the point that we’ve made a full-service commitment to a client and we’re doing all the things that we say we’re going to do, our pricing is based on that. We’ve made service commitments, marketing commitments to our client, and the pricing is set with those expectations in mind. So it can be somewhat unfair at the point we get down the road and we get an offer that may be the highest and best offer that the market will bear for their property, but it’s not what the sellers want. They often look to us and try to renegotiate the commitment at the front end. But again, our pricing is based on what we commit to do for our client.
Greg: And your full-service often means something different than some other brokerages’ full-service, as you discussed, in some other podcast episodes.
Jon: We aren’t looking for listings. I mean, we’re looking for sales and that our business model is not to generate dozens and dozens of listings and leave them just sit out there and home that a couple sell. I mean, we are actively marketing, actively selling, and heavily invested in each and every property and it’s success-based compensation. If we don’t sell it, we don’t get paid so we’re pretty motivated.
Greg: Well, I appreciate both of you letting me talk about sort of this touchy subject. I know it’s that something a lot of people aren’t, a lot of people are curious about, and a lot of people don’t like talking about. So thank you both and we’ll see you on the next episode.
Jake: Sounds great.
Jon: Thanks, Greg.