The Real Deal New York

Splitting the (commission) difference

November 27, 2007
By Alison Gregor

Manhattan’s real estate practitioners have always been slow to embrace new business models, and a reluctance to offer high commission splits to brokers is no exception.

But with the successful entrance of national brokerage RE/ MAX into the city’s insular market, at least one brokerage has taken a gamble on change.

David Schlamm, president and founder of City Connections Realty, decided just over a year ago to move to a structure that offers brokers almost all of the sales commission on a property typically 90 percent.

In exchange, brokers must pay for their cubicle and most of the office services they would receive gratis at other Manhattan real estate companies. Schlamm said he needed to take a huge leap of faith to make the switch, but it seems to be working, he said.

“We are the only one in Manhattan doing this,” Schlamm said. “It took me two, three years to have the strength, the hope and the money to do it. But we’re in the black now.”

Most Manhattan residential real estate brokerages allow their agents to keep roughly half of a sales commission that is about 6 percent of the sale price in the current market. In return, the firm pays other expenses, namely the office services associated with marketing properties and branding the firm, as well as training.

After 17 years in the Manhattan real estate industry handling mostly rentals, Schlamm said he got weary of high turnover rates among agents fed by a constant in- flux of inexperienced brokers into the market.

Now, as his mid-size firm tackles sales as well as rentals, Schlamm said he’s recruiting only top producers from other firms. He has one office, and, of its 55 positions, 48 were filled in early September.

Schlamm said he’s thrilled when industry skeptics say his new business model benefits only experienced brokers with contacts already in place.

“There are way too many brokers out there,” he said. “I don’t want someone who’s new to the business. We’re looking for someone who is experienced and will have their own business within a business. In the long run, it will be extremely profitable.”

A business model with high commission splits for brokers is nothing new outside New York. RE/MAX, which has two Manhattan offices and plans to open several more, has pioneered the high-split model, and now allows brokers to keep 100 percent of the sales commission, charging its brokers for expenses. Though not on the tip of Manhattanites’ tongues, RE/MAX has a presence nationally and internationally.

“We have a national advertising campaign that’s the biggest in the industry today,” said Henry Weber, president of RE/MAX of New York, based in Garden City on Long Island. “Some people call what we do ‘rent-a-desk’, but we don’t call it that, because there’s a lot more offered to sales agents than just space.”

Besides marketing and branding, that includes training opportunities, which Schlamm’s firm also offers.

“We operate the same way an attorney or a doctor or an accountant might run their firm,” Weber said.

Some movers and shakers in the real estate industry said they don’t believe a RE/MAX-style business model will catch fire in Manhattan.

“People are going to do this, because they’re trying to figure out how to compete,” said Dottie Herman, CEO of Prudential Douglas Elliman, a giant in Manhattan real estate. “But it’s like being a broker going into business for yourself you’re not going to be able to compete on your own with big companies.”

Herman said larger companies take the portion of the commission they reap from brokers and use it to create a valuable individual brand name within a company. In a city with exorbitant expenses, it wouldn’t pay to go to a company with high splits but little name recognition, she said.

Roberta Benzilio, COO at Century 21 Kevin B. Brown & Associates, owned by the real estate mammoth Cendant, said brokers may leap at the higher splits, but they have to remember to reinvest in themselves. Failure to do that could mean the company would provide wildly inconsistent services to consumers.

“It’s a classic situation where brokers hear 90-10 and think, ‘Great, I’ll keep more of my earnings,’” she said. “They’re not going to want to spend that money on marketing the property, and the company, retaining only 10 percent, is not going to want to spend it on marketing either.”

Schlamm said his company, which is actually a hybrid that gets half of commissions on many of its 200 exclusive and co-exclusive listings, has launched a branding effort with those proceeds that includes signs on exclusive buildings. While agents use their discretion on how much to spend on marketing properties, they’re encouraged to reinvest at least 5 to 10 percent of their income into the business, he said.

On another level, Schlamm said he cuts overhead by forgoing costly street-level retail space, allowing him to focus on marketing strategies that have a higher return.

“There’s no way my competitors can offer the splits that I can, and one of the reasons is they’re paying upwards of $200 a square foot, close to 10 times more than I’m paying, for office space,” said Schlamm, whose office is on the 10th floor of a building in the Flatiron District.

“I’m in the business of pleasing the brokers, whereas my competitors are in the business of making a lot on each deal,” Schlamm added.

That claim resonates with some real estate agents.

Shaun Osher, who recently left Prudential Douglas Elliman as a top producer to form his own boutique real estate firm, said sometimes the large firms forget that brokers are their bread and butter.

“For a top-producing agent,” he said, “the RE/MAX model is not a bad one, because in the Prudential and Cendant models, from my experience, you have the top-producing agents carrying the bulk of the firm.”

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