The conflict-of-interest conundrum

By Candace Taylor | October 01, 2010 07:00AM

The mid-2000s real estate boom created a special kind of chaos in the new condo market, as established brokerage firms, resale agents and boutique companies competed to cash in on the new condo craze.

The industry is now left with the lingering effects of that gold rush: competing fiefdoms, with no standard business model — and perhaps more important, a number of baked-in conflicts of interest.

When brokers pitch new development business, they are often competing not only with the other agents, but with the development divisions within their own firms. This creates incentives that don’t always work in developers’ favor, sources say. Moreover, firms have a financial interest in selling units only to buyers represented by their own agents. Finally, brokers tasked with marketing new developments sometimes end up selling units in other buildings to customers they meet at on-site sales offices.

“There’s an inherent conflict of interest between talented, savvy brokers and the development divisions inside those companies,” said one developer who requested to remain anonymous. “They fight for market share.”

This state of affairs went mostly unquestioned during the boom. But since the financial crisis, many developers have been firing their on-site sales and marketing teams. Some, unsatisfied with the big companies, are now hiring their own in-house sales staffs, while others are turning to firms that specialize exclusively in new development.

“In this market, you really have to coddle the buyer,” said Gina Reidinger, marketing and sales manager for Time Square Construction and Development. Reidinger worked at a real estate consulting firm in San Francisco before she was hired directly by Time Square to handle sales at the 33-unit One Vernon Jackson in Long Island City. “Developers are concerned — they want to know that their teams are focused on just that product, rather than going out and representing different products on the side.”

When new co-ops and condos first started to appear in Manhattan, they were mostly marketed by specialized firms that focused solely on new development, like the Marketing Directors, founded in 1980, and the Sunshine Group, founded in 1986. These firms operated by hiring and training teams of salaried staff whose only job is to sell one particular development.

But with multimillion-dollar condos selling like hotcakes in the mid-2000s, resale agents and traditional brokerages wanted a piece of the pie.

“Brokers who were excellent brokers in the resale market saw the opportunity to multiply their earning capacity tremendously by taking on larger developments,” said Nancy Packes, who is president of Brown Harris Stevens Project Marketing and head of her own, independent development marketing firm, Nancy Packes Inc.

These brokers formed teams that specialized in new development. Meanwhile, firms acquired or started their own development marketing departments, which often competed with these broker groups. In 2005, the Corcoran Group and the Sunshine Group merged to create one marketing arm, while Prudential Douglas Elliman (then Douglas Elliman), Halstead Property and other firms formed development marketing divisions.

Typifying the often confusing landscape that emerged from these hasty unions is Brown Harris Stevens. Packes — who had worked as a consultant to developers — formed a partnership with the firm’s owners to help the company get into the new development game, creating Brown Harris Stevens Project Marketing in the mid-2000s.

Once BHS became more active in new development, it attracted brokers like Shlomi Reuveni and Wendy Maitland, who formed their own groups within the company. Reuveni’s Brown Harris Stevens Select and Maitland’s ID Marketing Group both focus on new development, but they don’t fall under Packes’ umbrella. Instead, they are technically part of a parallel division, Brown Harris Stevens On Site Marketing and Sales.

Much of the confusion stems from the fact that brokers are independent contractors, who can court developers’ business independently rather than waiting for their firms’ new development divisions to request their services. The result is an industry where firms and broker teams all have very different methods of staffing sales offices and structuring compensation.

Those differing systems inevitably lead to conflict, often within firms.

“You have brokers transitioning from [selling] eight-figure apartments to being developers’ brokers,” said one industry veteran. Meanwhile, the marketing divisions at their firms “[are] saying, ‘Wait a minute, that revenue stream … should be coming into the development side of the company, not going to an individual broker.'”

Brokers sometimes resent being told what to do by sales and marketing executives at their companies, whom they often feel have lost touch with what’s happening on the ground.

“As brokers, we’re not used to working for someone other than our client,” noted Elliman agent Terry Naini, who handles both resales and new developments.

On the flip side, development executives complain that individual brokers take on projects they can’t handle, damaging the firms’ brand in the process.

Because of all the competition for projects, brokers — especially those who traditionally focus on resales — sometimes make promises to developers that they can’t keep, or agree to represent two or three developments simultaneously without having enough manpower to staff each sales office, industry insiders said.

All this tension can ultimately work against the client. For example, rival brokers — who compete for commission splits and status within their firms — may conveniently not return each other’s calls when it’s time to show listings in projects they represent, sources said. In the reverse scenario, brokerages are sometimes tempted to only sell units to buyers represented by brokers from their own firms, which doubles the firm’s profits.

The most prevalent conflict that arises in development marketing, however, is the temptation for agents to poach clients from the projects they’re representing.

“You do see developments where the sales teams are bringing clients to other buildings,” said Reidinger, who was struck by the practice because it is rare on the West Coast, where she previously worked. “Some developers are quite concerned about that.”

Packes said while she does not allow the practice at either of her companies, it is common here — especially by brokers who also do resales.

These brokers “take the customers who are judged not to be potential buyers for that particular development and they sell them something else,” she said, adding: “The value of the on-site representation for them is to generate customers.”

Sometimes this happens behind the developers’ back. Naini said at one project, the developer fired the exclusive agent after overhearing a phone conversation in which the broker said, “‘This is overpriced; let me show you something else.'”

But often, this kind of arrangement happens with the full consent of the developer, since brokers can offer to take a lower commission if they know the project will lead them to more customers.

“It’s done with the knowledge and consent of the developer, but with the idea that it’s going to be done wisely, and only with people who are really not interested [in their project],” Packes said.

Of course, that is easier said than done. Since few buyers make a purchase on their first visit to a new development — especially in today’s rocky climate — it’s often hard to tell who the eventual buyers will be.

In today’s tough market, developers are balking at the status quo, demanding that their projects receive more attention than in the past. As The Real Deal has reported, many are attempting to accomplish this by firing their sales agents.

Some developers are jumping from one large firm to another, from one broker team to another, or from large companies to boutique firms they feel will provide a dedicated staff for their project.

This spring, the developer of BellTel Lofts in Downtown Brooklyn fired Elliman’s high-profile Bracha Group, and hired lesser-known Elliman agents Michael Ettelson, Mordy Werde and Nishila Mustafa, who are based in Brooklyn. Stonehenge Partners, meanwhile, ousted Corcoran Sunshine Marketing Group from the Merritt House condo conversion at 167 East 82nd Street and hired BHS’s Reuveni. And 650 Sixth Avenue has seen four different exclusive sales and marketing firms, moving from the Shvo Group to Corcoran to top Elliman agent Leonard Steinberg and finally to boutique brokerage Core, which changed the building’s name to the Cammeyer earlier this year.

“Given today’s market climate, developers are doing themselves a disservice if they are not employing a dedicated … sales and marketing team,” said The Marketing Directors’ Andrew Gerringer, who recently left his post as the head of Elliman’s new development marketing division. “Rogue brokers cannot provide the same level of service to a developer as would be provided by sales and marketing professionals.”

Sometimes these hirings and firings are more of a reaction to the down economy than anything the broker did wrong. But some large firms appear to be retooling their strategies in response to the bloodletting.

Dottie Herman, Elliman’s president and CEO, recently hired Corcoran Sunshine’s Charles Russell and tasked him with “creating a cohesive brand identity for Douglas Elliman Developments,” she wrote last month in a company-wide memo, as well as establishing “a list of services” that the team can provide to Elliman agents who are handling new developments.

Some developers are forsaking large firms and are hiring their own sales team — previously a method employed mostly by very large companies, like Related.

Kevin O’Sullivan, president of Time Square Development and Construction, said he interviewed “four or five big firms” to market One Vernon Jackson. After thinking it over, however, he decided to assemble an in-house team instead, in part to ensure that agents would devote enough attention to buyers in today’s tough market.

“We wanted to have in-house [staff] so the people who are selling are not offering any other product,” he said.