The Real Deal New York

Broker vs. broker: How low can you go on commissions?

In inventory-starved market, sellers push agents to reduced fees and make other concessions
By Katherine Clarke | January 03, 2014 11:17AM

The Manhattan residential inventory crisis is forcing brokers into a tight corner when it comes to negotiating commissions and terms of exclusive agreements with sellers, brokers told The Real Deal.

With brokers competing for work thanks to the overwhelming shortage of exclusive product, savvy sellers are pitting agents against each other in an attempt to secure advantageous arrangements. Some of the things these sellers are after? Paying lower commissions, of course, and shorter exclusive arrangements (often three, instead of six, months.)

“They’ll say ‘X, Y and Z broker offered to go as low as this,’” said Ryan Fitzpatrick, director of sales at residential brokerage CORE. “‘Can you match that?’”

Brokers who are hungry for listings, particularly those without long track records or with smaller firms, are agreeing to those terms in order to break into the deal stream, sources said. But that, in turn, is putting pressure on the residential brokerage community at large.

“The brokers that are desperate are using that angle to get work,” said Mara Flash Blum, a broker at Sotheby’s International Realty who recently pitched against a broker willing to take a lower commission. “I said ‘I’m sorry, I can’t do that,’ ” she said.

The inventory crunch shows little sign of letting up. In the fourth quarter of 2013, inventory dropped to 4,164 co-op and condominium units, a 12.3 percent dip from the fourth quarter of 2012, according to brokerage Douglas Elliman. That’s the lowest inventory level since Elliman began tracking the data in 2000. The drop was even more pronounced for new development units, whose availability fell 19.6 percent year-over-year.

The situation was much better on the luxury end of the market — the top 10 percent of all units — where the listing count was 1,190, a 24.9 percent increase over the same period in 2012.

At the same time, turnover of product in the market is still happening at a fast pace. The absorption rate in the fourth quarter was 3.8 months, nearly two months faster than the 5.5-month pace in the prior-year quarter.

“There are a lot of agents competing for a small number of listings,” said Fitzpatrick. “It makes for a very intense playing field. Most sellers are savvy. They realize they have options. They realize that they can call the shots in some respects.”

The standard commission for a deal is 6 percent — 3 percent for the seller’s broker and 3 percent for the buyer’s — while for luxury properties, it can inch down depending on the price of the unit.

One broker told TRD that he’d been competing for an exclusive against a broker who offered a commission of less than 2 percent on a $2 million property, but he declined to provide specifics.

For brokers at large corporate firms like the Corcoran Group and Douglas Elliman, undercutting on commissions is strongly discouraged, if not tacitly banned.

Indeed, at a recent panel event, Elliman CEO Dottie Herman spoke out against the practice.

“If the only thing you think about is who’s the cheapest, and you couldn’t care less about the service, then I’m not really even going to have a conversation with you, because there’s nothing to talk about,” she said. “Good luck to you.”

Meanwhile, smaller companies, like Miron Properties, have more wiggle room for discussion.

“We have certainly been able to pick up listings where the corporate firms haven’t, because we were able to be creative with fee structures,” said Jeff Schleider, managing director at Miron. “If there’s some special circumstance, like the client is going to be selling and buying with us, we’ll of course work with them on commissions. Before I started Miron, I worked at Corcoran, and agents would lose deals all the time because [they wouldn’t drop their commissions]. Six percent doesn’t always work.”

But many warn that giving up too much on commissions is a slippery slope and, from a broker’s prospective, sets a dangerous precedent for future deals.

“There is a clear value in the work of a professional broker,” said Michael Graves, a broker at Elliman. “A skilled agent will deliver results far beyond the percentages of any discount. Most sellers understand that taking a discount agent is akin to jumping over dollars to reach for pennies.”

CORE’s Fitzpatrick agreed. “We’re not a discount brokerage. We’re not going to enter a race to the bottom,” he said.

“If you go into three plastic surgeons, you’re not going to barter on price. It’s about the results,” he quipped. “You want the broker that’s going to get you the highest price for your apartment. Many sellers respond to that once they understand where we’re coming from. Not everyone, but many do.”

Sellers are also increasingly asking to reduce the length of exclusive agreements to less than six months, because they think that’s plenty of time to sell a well-priced unit in today’s quick market. But experienced brokers said that despite market conditions, three months is rarely enough time to complete a deal.

“The perception is that things are flying off the shelf. But unless it’s new construction, it’s not flying off the shelf,” said Flash Blum.

If a broker is going to invest the time and, in some cases, their own money in preparing the apartment for sale and securing advertising and media exposure for their exclusive, they can’t run the risk of losing the exclusive after just three months, Flash Blum said.

“I don’t like to take a three-month exclusive,” she said. “You lose the first two weeks just getting the apartment ready for sale.”