When you sell real estate and engage a real estate broker, you pay for time and expertise, which is why agents want a fair commission. Experienced agents make a world of difference when selling their property, often netting a higher profit. In this episode, our hosts Valerie Fitzgerald and Bob Hurwitz talk about commissions and why some real estate brokers set their commissions as they do. Valerie and Bob also share stories about their previous clients and their properties. Listen in and learn why commissions are the bread and butter of real estate brokers.
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Getting Paid On Success: Rolling The Dice On Commissions In Real Estate
We're going to talk about money commissions. The commission is the tough one because have you seen them change over the years? They used to be a solid 5% or 6%, and nowadays people are taking them at 4%. Then you ended up with 1.5% or 2%. Do you see that happening?
When I first started, everything was 6%, or even in some cases, 7% and then you go into the high end, which back in the day was like $2 million, $3 million. Much of the business now is fueled by agents wanting publicity as much as they want to make money. In order to get some super high-profile listing, they will take a hit on the commission, which has never been my business model, but I am seeing more of that in terms of agents doing that. There's the rationale for someone who says you're getting a $20 million listing, and that's a lot of commission. If it doesn't sell, it ends up costing us a lot of money. At the end of the day, we roll the dice and so do they.
We've seen every house, from the most incredible to the most bizarre, but the people are what makes it interesting.
That's a good way of putting it because I've spent $50,000, $60,000 on a listing easily on a high-end listing and several times they haven't sold and you're out that money. I also find that the commission has changed. People are offering and sellers fall for it if it's a 1% or 1.5% commission to get the listing. To beat somebody out of getting a listing, people lower their value, then sellers fall for it.
It's interesting because I have my agents that were for me. Part of the contract they signed is that they cannot even take a listing under 5% unless there's some special approval, which I have to approve and I almost never do. I go back to when I first started in real estate. I was nineteen and my dad owned a real estate office and I wanted to take less commission on a deal. He said, “I'll go close the deal and take the extra money if you can't do it.” It set it for me. It is interesting because I took a listing and I met my photographer there and the sellers. They said the previous agent who had failed to sell it was at 4% and they were also paying for staging.
I said, “You can just take me out of the equation because I will never pay for staging. That's not my job. I'll do a better job in terms of marketing and the property and I also won't take a 4% commission. I'm not going to take it.” Two hours later, they called me and said, “Come with the property.” All things being equal, if everybody is going to take a hit, then let the seller list it for less money with somebody else that isn't going to do what you do or what I do. I happen to know that you spend a lot of money on marketing, unlike many other agents. You could probably count on the fingers of one hand the agents in town that'll spend $50,000 on a listing.
I have a property overseas in Ireland, which I itemized what I have into it and it's close to $200,000. Now it's a $40 million listing. I have my own buyer for it. We're under contract, but it's close to $200,000. I don't think most agents A) Could do that, or B) Would do it. When we've been in the business for a long time, we're used to dealing with these properties and you sell a property. You could make a $500,000, $600,000, $700,000, or more commission. You have to deliver the goods in terms of marketing in order to sell the property in most cases.
Almost on every deal that I've had or I've been involved with, there has been either a referral fee involved back to the seller or the buyer. Not to mention the seller wants a little off on the commission or they try to do that. If you sell it within a month, it's this. If you sell it within two months, it's that. The commission is an interesting thing because they're paying for our expertise where we work most of the time. We work so many years and we work hard on many different things. They're paying for our experience, our expertise, when to take something and when we know things that are happening before they would. We see markets changing before they do and all the stuff that goes into it. The internet was not piping along like it is now when we first started. Do you think the commissions have changed as a result of everybody having access to everything now online?
That's part of it, Valerie, but to me, it's a matter of the entire paradigm changing. A lot of it does have to do with the publicity that agents want to represent these super high-end properties. There are inventory brokers. They are people that want tons of inventory in a particular area. They will not take much of anything but by the same token, the sellers are going to get what they pay for. We've talked about commissions being cut, but one of the interesting things is that some of the most sophisticated financial sellers I've had. CEOs of major companies and investment advisors will do the exact opposite.
Commissions: You have to deliver the goods in terms of marketing in order to sell the property in most cases.
One quick example. I had a guy and he ran a big hedge fund out of Texas. He lived in Montecito. He contacted me and he had his property on the market for almost two years with one of the top agents in Montecito. He flew into town with his wife, who used to work with Mossad, believe it or not, in Israel. Although he was not Israeli, she was. He asked me to see whether I thought I could sell the property. I said, “I could.” He had done his own research already in terms of what I do and what my history was. He said, “Here's the thing, Bob. What's your normal commission for a property like this?” It was a $15 million property. This was years ago. I said, “5%.” He goes, “I want to give you 6%.” I said, “Really?” He goes, “Yes. I want you to focus on my property more than anybody else's. I want to pay you 6% and if you want, give 2.5% to the other agent or whatever, and you take 3.5% but it's going to be 6%.”
Obviously, it's a very incentivizing thing. The other side of the coin, which is funny, is he referred me to another friend of his, who was a doctor whose wife owned an oil company just down the road from him. That person had an amazing property on a golf course and he wanted $20 million for the property. He had 30% into it, but I met with him and he said, “What do you think about the property?” I go, “It was unique that there is a hidden tunnel went to this guest house. It was bizarre. I can sell this." He says, “You'll do what the last agent did?” I go, “What's that?” He goes, “It's 4%.” I said, “No, I can't list it with 4%.” He goes, “What do you mean? The other agent did.” I go, “He didn't sell it, did he? How can I take your listing for 4% when the person that referred me is giving me 6%?” He said, “This is a $20 million property. That's an $800,000 commission.”
I said, “Give it to somebody else or give it back to the same guy for 4% and then when it doesn't sell, contact me. I'll list your property for 5%. You don't need to give me 6% like your friend, but that's my standard and if it doesn't work, let's move on.” He gave me the listing and I ended up selling it. If you're strong and have a history of selling high-end properties like you do in the market and you do, which other agents don't do, it puts you in a position of power.
You can walk away because you've got other things in the pipeline and other things going on, but I've been shocked that many people you and I know are successful brokers. When the seller tells me, "So-and-so will take 1% and I'm thinking 1%," how do you work on 1% of anything? 1% of $100 million, maybe.
I've brought this guy before. I'm not going to mention his name, but you know him as well. He called me and had he had these two properties. Between the two of them, it was about $200 million worth of listing on two properties. He owns a huge commercial real estate firm. I flew out on his private jet, checked out the one property out of state and then checked this one and then he said, “What's the commission?” First of all, he said, “Will you list this for $105 million?” I said, “No, I won't because it won't sell.” He said, “What's the commission?” I said, “5%.” He was blown away. He goes, “Are you kidding?” In commercial real estate, they're used to giving out like 0.75% baseline. I said, “No, that's my fee.” He goes, “That's ridiculous.”
If a buyer is represented by an experienced agent, they're going to end up getting a better deal.
I said, “If I ended up selling his properties, you pay me that 5%. That means I made you a ton of money and I will not take the listings for less than that. You can go with previous people. You're the one that came to me. You saw the marketing that I do. You did your research.” He said, “I'm not arguing. List them.” If you have something to offer other than the by rote agents that think, “I'm going to get as many lists as I can, put them in the MLS, go with the third-party aggregators like Zillow and I'll get my 1%.”
They're going to get what they paid for, not the experience that you and I have. You know how to make deals. You and I have worked on stuff. You are not a standard agent like many agents. I don't care if they're on TV or lecturing or whatever. You know how to market, spend the money marketing, have a whole team, and then know how to close the deal. That has the value that transcends some amount in the seller's mind that they thought they should pay.
During COVID, I had one that I did with a well-known agent who's on TV here. He didn't show up one time. His assistant does the negotiating. He didn't shop at any of the meetings with the seller. He didn't show up ever. That's the inventory type broker you're talking about. The commission was fair. My client wanted some money back. Commissions are interesting conversations because everybody says, “The commissions are going to change in the future because the clients don't need you anymore.” Clients are always going to need us, Bob. Buyers and sellers are always going to need a broker.
Anybody can get information from the internet. Even when I take myself out of the equation on something like I don't want a listing or I don't think I can sell it, having an experienced agent will make the difference 9 times out of 10, where the seller is achieving a lot more money for their property. On the flip side, if an experienced agent represents a buyer, they're going to end up getting a better deal. The idea that this is like buying groceries stamped with a barcode is erroneous and the people who know how to make deals are getting what you pay for. A seller, especially on a high-end property, is making a huge mistake if they do not hire the absolute best person who has the experience.
I'm not talking about hundreds of properties to get their name on them and then you'll see an email from that agent with a list of twenty listings that is reduced. That's their marketing. Get listings at any price. Take a low commission if need be and then reduce the price. That's not at all the business model that I use. I know that's not the way you operate as well.
Commissions: Everybody says, “The commissions are going to change in the future because the clients don't need you anymore.” Clients are always going to need us.
When you go on the listing appointments, I'll give a price, which I think is even higher than what I believed, and yet the goal was so-and-so and they said, “It was $1 million or $2 million more.” Nothing suggests that that house could be worth that. 9 times out of 10, I'm right. They never sell it. It sells where I told them it's going to sell. I see that and go, “Look at that. They didn't listen and they wasted all that time.”
That's the thing I tell people, too, because I go out on a lot of expired listings that failed to sell with other agents and they could be good agents. Some of the agents, they're good. For some reason, the property didn’t sell, no matter what. The truth is some people will take a listing at any price to get the listing with the hopes of maybe they get lucky, like winning the lotto or the seller will eventually reduce. Not only is it unethical to my mind, but it's also stupid in the long run because you're just going to end up making it easier for the next agent in because the sellers will realize, “This first person, they didn't know what they were doing or they're just lying to me.”
I know you have these same stories, but to me, the truth of the matter is it's not about how people are always trying to hammer us on commissions. If you do well by someone, then they can also give you a bonus or whatever. I swear to you, I made one guy so much money. I sold him a house in Beverly Park, and then I sold it for him about a year later. I made him so much money that he gave me his yacht and I picked it up at Nice with a crew of four and sailed all around the course in the Italian Riviera. He was so happy. They paid like $7.64 million, and I sold it for $15 million to some plastic surgeon a year later. The other side of the coin is that. If you do right by someone, not only will they be your client forever, but they're also going to have to bonus you out a lot of times, which is great.
We met the boat over at Nice and I was with my wife, my young son, my brother and his wife. My brother was a postman. We're sitting at the marina and the crew is getting the boat already. We're seeing that people are coming by and looking at us because it was a sick-looking yacht. It was a schooner. It was unreal. I said to my bro, “Do you think there is one person that's walking down there looking at us that knows you're a mailman?” It was a great trip, though, but those are the good times. Those are the good deals. A lot of the time, we work our butts off. We spend a lot of money and for whatever reason, it doesn't sell. That's why we get paid well because it is hard to succeed.
It is hard and it takes time. It takes a lot of years to be skilled and to have the experience through the good and the bad and through the market changes and all that. Did you ever feel that when the market took a nosedive in 2007, 2008, 2009 period of time? Did you change your commission positions then?
No. The truth is I have never changed my commissions ever. The thing is, I'm in a weird situation because I have my own company. I am an outlier in terms of how I do things with the properties that I represent both here and overseas. I do turn down a lot of properties to somebody. Sellers are disgusted, too, because I can't sell it for what you want. I don't want you to be upset and I don't want to waste a bunch of time and money, but I never did. All things being equal, if it was a level playing field, then that would be more of an impact personally, but how did you change? What did you see because you're more in the mainstream than I am?
We get paid well because it is hard to succeed.
During 2007, 2008, 2009, it was hard to sell listings at the time. The world and companies were falling apart. Everybody was going bankrupt and people were losing their jobs right and left. People had to sell their homes and it was much harder. I had a beautiful inventory of homes that weren't selling. We came up with those little tricks, “You do this, you do that. A seller will carry,” whatever you could do to make it easier for the consumer, for the buyers. The commission didn't change at all. They're harder in good times. Commissions are much harder in good times than they are when the market’s more difficult.
The thing is when the market is hot and things are selling easy, then sellers have a tendency to think that you're not working. One interesting story about commissions is I have this property. I swear. You sold this. I might've said I sold this house twice before. It's on Stone Canyon, but what happened is, as far as commissions, I took this listing. It'd been on the market for about a year and a half. The owner was a cool Russian guy and his wife.
That's so ironic that you and I are so connected because I sold that twice, once for Jim Weller in the ‘90s and then once for this Russian guy, which was weird. The funny thing is with the Russian family, I went in and I listed it. The very first day, I'm on the phone and I'm pitching people and calling it. I get a call from some agent I'd never heard of. She goes, “Bob, can I show this listing?” I go, “When do you want to show it?” She just, “How about today?” I go, “Let's do it.” She goes, “I've been trying to get in that property for a month.” I'm not going to say who the previous agent was. I actually like him. She said, “The assistant to this agent never got back to me. I called a bunch of times. I wanted to see it and it's for my husband and me.” I go, “Let's go show it.”
I had another show in the same day and it's the same thing. This person couldn't get in. I swear to you, this was the first day I got the listing. I show the property. Understand that this guy, the Russian family, had maybe a couple of showings in the previous six months for a good reason. He was bleeding money, like $20,000 a month. I had these two showings on the same day and they each wrote an offer on the property. I didn't do anything other than show the property. I presented the offer. We presented in person back in the day and then each person left. The guy signed off the better deal, but he said, “What are we going to do about the commission?” We're sitting at the kitchen table.
I said, “What do you mean? Are you going to give me a bonus or what?” He goes, “No, you didn't spend any time.” I said, “I don't get paid by the hour. That's when you work at Ralph's. Do you realize you've been thrown away $20,000 a month for the past year? I sold your property. I saved you so much money. I got you almost full price for your property the first day. I'm not going to take less for that. I get paid based only on success.” The guy was taken aback, “I'm sorry. I thought that's how it works.” That's not how it works. We only get paid based on success, not by the hour.
I've had 50, 60 showings on a house that didn't sell and they gave it to somebody else, then it’s sold because they changed the price. They wouldn't listen to me to change the price.
You brought up that when the market gets tough, this may be another subject for a different episode, but it's interesting. When there are tough times, you got to get creative. I remember in the late ‘90s, it got bad and I had all this inventory like you but nobody had any money. I started trading properties, like major houses for other properties. I had people offer gemstones. I did a bunch of deals. A lot of my commissions, I had to take some cash and some paper, too, because you had to get creative. I started a division of my company called the Hiroshima Equity Exchange Group to trade property. You got to get creative and most agents don't have any clue how to do that. I know you did one of the biggest trades of all time, didn't you, in Beverly Hills?
It was Merv Griffin or Fred Rosen from Ticketmaster.
What’s that trade?
That was the Rosen Estate in Beverly Hills. It was a big property, a couple of acres. It's North of Sunset. The house had a guest house. I had the guy from Herbalife, too. We were doing a three-way trade because Merv Griffin had that big land up at the top of the tower. He was going to build a 54,000 square foot house up there. He had this massive crater at the time. It’s going to be a one-person property with massive views and all that. They subdivided all that into lots. That was a crazy trade, then something at the lower tower. It was a three-way property trade. I tried to get paid on those, too. Money's not exchanging hands, but the numbers are big.
Commissions: The truth of the matter is it's not about how people are always trying to hammer us on commissions. If you do well by someone, then they can also give you a bonus or whatever.
It was early on in my career, so it was a little hard to grasp, but it happened with three smart men. I find that I learn things along the way about people and about how things are done and how to do things the next time. I go to conferences because I like to learn something and learn something new about what we do. That was pretty insane.
Trading was interesting because there was a learning curve. I had all these listings and I started advertising in The Wall Street Journal. In the first six months, I realized how many bogus people are trying to trade stuff. They trade stuff they don't own. One guy showed up to trade gemstones. This guy was full-on directly out of San Quentin. I have a lot of interesting stuff. It was a learning curve. It's like one guy who was a good client of mine. He started Maxicare. He was brilliant. I traded his house. It was on the corner of Roxbury and Sunset. I had traded Marlene Dietrich's house that he owned for mini storage stuff up in Fresno. It was a very convoluted deal, but you learn a lot. These people are sharp and that's what's fun. We've been doing this so long. We've seen every house, from the most incredible to the most bizarre, but the people are what makes it interesting.
Readers, we love sharing our real estate stories with you. If you liked this show, please go to Apple and give us a review or you could even share on your social media. I'd love to see some of the pop-up, wouldn’t we?
Yes.
I love talking to you as usual. It's something I look forward to every single episode and we've got a couple of good things coming up down the road. We're happy with all of our readers and we'll continue to do that. Until the next episode, Bob.
Valerie, it’s a pleasure as always. Readers, it’s going to get even crazier so hang in.
We've got some good stuff coming up. See you in the next episode.