New discount brokerage looks to succeed where Foxtons failed

Aligned Real Estate rejects 6 percent commission model

TRD New York /
Jan.January 19, 2010 06:42 PM

At a time when a bevy of new business models have sprung up to capitalize on the real estate downturn, a residential brokerage launched by two former Core agents has revived the idea of discounted commissions.

Steve Ganz, a former Core managing director, and Jonathan Isaacs, a former Core vice president, left the boutique brokerage in December 2009 to launch a new company, Aligned Real Estate. Based at 315 Fifth Avenue at 32nd Street, the new firm has a total of five agents, Isaacs said, though he expects the company to grow.

Aligned has dispensed with the 6 percent commission model that real estate brokers historically receive for each sale, the founders said. Instead, they’ve devised a complex fee structure based on factors like the size of the apartment, how long it takes to sell, whether it sells above the asking price, and whether the customer chooses to pay the full commission at closing or in monthly installments.

For example, a homeowner who sells an apartment for $2 million with another brokerage would pay a $120,000, or 6 percent, commission. At Aligned, that same client would pay between $62,000 to $90,000, or 3 to 4.5 percent, according to the new firm’s Web site, depending on the factors above.

To make these lower commissions possible, Isaacs explained, the firm pays its agents in regular installments, rather than compensating them with one on lump sum when a deal closes. Then, in addition to those payments, agents receive a bonus from the proceeds of the sale if they unload an apartment faster, or for more money than expected. He would not elaborate on the installments.

The prospect of the bonus will help motivate agents to get the highest possible price for the seller, Isaacs said. “They’re going to fight to get an additional dollar amount from the seller because there’s a bonus for that,” he said. “We’re linking the performance of how we do to the fee structure.”

Isaacs declined to reveal what percentage of the proceeds the brokerage will take.

Agents who represent buyers will still collect a fee for their side of the commission, Isaacs said, though in some cases that fee will be 2.5 percent rather than the more common 3 percent.

Isaacs said the company, which officially launched this week but has been in business for several months, already has six contracts out.

But how will the company be able to survive with smaller commissions?

Ganz said he believes Aligned will attract a large number of clients because of its innovative approach, especially in the current climate.

“For a market where people may be selling for less than what they paid, the $30,000 to $40,000 they save [in brokers’ fees] ends up being real money,” Ganz said.

Moreover, the firm has looked for other ways to do business cheaply.

“We’re looking at every dollar spent to run our business differently to pass on the savings to our clients,” Isaacs said.

Their office, for example, is a 1,500-square-foot space on the ninth floor of an office building, rather than the storefront offices that many city brokerages employ.

“Retail space is extremely expensive in the city,” Isaacs said, noting that pricey office space has dealt the final blow to many city brokerages over the past year. He believes that the firm’s low commission prices will do more to attract clients than a storefront office.

“Foot traffic isn’t what’s going to push somebody to sign up with Aligned,” he said.

Aligned is not the only new business looking to capitalize on the downturn. Former Prudential Douglas Elliman brokers Meir “Mickey” Roth and Lenny Sporn recently formed their own company, Park River Properties, which aims to organize international buyers into purchase groups for discounted new development condos.

Ganz and Isaacs’ old boss, Core CEO Shaun Osher, knows a thing or two about striking out on his own. Formerly a top Elliman broker, he started his own business in 2004.

“I always applaud the entrepreneurial spirit, and I wish them the best,” Osher said of Ganz and Isaacs.

But industry experts note that the low-commission model has already been tried in New York.

Discount real estate brokerage Foxtons North America filed for bankruptcy in 2007 after making a splashy entrance into the New York metro area in the early 2000s. The brokerage started by offering a 2 percent commission, then raised it to 3 percent and finally 4 percent, before going out of business amid criticism that the low fees didn’t provide enough incentives to co-brokers, and that the firm didn’t provide a high level of service.

The Foxtons example shows that when consumers choose real estate brokers, much like attorneys and doctors, they are willing to pay a premium for good results, said Kathy Braddock, founder of real estate consultancy Braddock + Purcell.

“A seller is interested in one thing — getting the highest and best price,” Braddock said, adding that Foxtons’ demise demonstrated that “the consumer wasn’t interested in the lower commission; they were interested in getting the right person for their property.”

Braddock co-founded the New York City branch of Charles Rutenberg Realty, a brokerage that also deviates from the traditional way brokers are paid. Unlike Aligned, however, Rutenberg hasn’t changed the amount clients pay; rather, it reduces the firm’s percentage of each transaction, charging brokers a monthly fee instead.

When Aligned is representing the seller, it will need to make sure it’s paying buyers’ brokers enough to get them interested in the firm’s properties.

“You want to make sure that the brokerage community is very excited about your listing,” she said.

Overall, “it’s very hard to play around with the commission structure,” she said.

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