The commission split dance

Brokers and firms ended the year by negotiating new splits in a tough market

Jan.January 01, 2017 01:00 PM

Kathy Braddock and Tal Alexander

Before ringing in 2017, many of the city’s residential agents were furiously trying to ring up a few more sales. Adding to their urgency was the fact that a number of brokerages “roll back” agents’ commission splits at the end of the year if they come up short on performance benchmarks.

“For a lot of people, it’s a time to reevaluate and renegotiate,” said Kathy Braddock, managing director of William Raveis New York City.

One firm’s head said he does not cut agent commissions by more than 10 percent in one fell swoop, particularly at a time when the market is dipping.

Typically, commissions are tied to an agent’s productivity, with agents keeping a percentage of each commission check based on their gross sales from the prior year. Splits often increase in 5 percent increments as the agent racks up deals, but firms can also downgrade — or roll back — agents to lower commission brackets at the end of the year (or on a rolling basis) if they haven’t hit their projected gross commission income.

Generally speaking, a soft market gives the high-producing agents leverage when negotiating with firms. And this year, sources said firms were especially eager to retain top-producing talent.

“The strong and dominant agents are more in demand,” said real estate attorney Terry Oved of Oved & Oved. “That’s what usually comes when you’re toward the end of a boom cycle.”

Warburg Realty CEO Frederick Peters noted that the entire conversation around splits has changed, given the intense competition for agents (see related story on page 66).

“We’ve all made deals around marketing,” he said, describing higher budgets firms give to sought-after agents.

“It’s an interesting problem because adjusting the splits basically means you are undertaking more for your agents, while guaranteeing … that the company net is smaller,” he added.

Bond New York is one of the firms that has recently increased the cut it gives agents.  The change goes into effect on Jan. 1.

Now, agents with annual gross commission incomes of $120,000 are at a 55 percent split, meaning they take home 55 percent of every commission check while 45 percent goes to the firm. Meanwhile, brokers at $180,000, $240,000 and $300,000 GCI are at 60 percent, 65 percent and 70 percent, respectively.

“[The] aggressive compensation packages have in turn increased the number of experienced agents in our sales department,” said Bond co-founder Noah Freedman.

Either way, the commission conundrum comes on the heels of a year that, overall, saw fewer sales, not to mention a slowdown in the luxury category thanks to an influx of pricey new development condos.

In fact, there was an 18 percent year-over-year drop in the number of contracts signed on properties $4 million and up in 2016 versus 2015, according to Olshan Realty. There was also a disconnect between buyers and sellers: Even as the average asking price  for that luxury category rose — to $8.1 million in 2016 from $7.9 million in 2015 — buyers were less active.

According to Olshan, buyers went into contract on 1,102 properties with a total asking price volume of $8.9 billion in 2016 compared to 1,344 contracts asking $10.7 billion in 2015. Co-op sales were particularly sluggish, with 25 percent fewer contracts signed in 2016 than i n 2015.

Still, agents said the market picked up in the last several weeks of 2016, giving them confidence heading into the new year.

In general, industry sources said, the mid-December interest rate hike, along with the presidential election in November, nudged buyers and sellers into action.

And many brokers said they expect that to continue this winter.

Zach Ehrlich, CEO of Mdrn. Residential, predicted that buyers would be ready to pull the trigger on purchases in the next few months, especially among “those looking to lock in rates before future 2017 increases.”

Freedman echoed the sentiment: “Sellers are becoming a little more realistic, and buyers are being motivated by [the] threat of rising rates.”

For its part, StreetEasy projected 0.6 percent price growth for 2017, predicting a median resale price of $985,585 by November 2017.

Krishna Rao, a StreetEasy economist, characterized that growth as “recalibrating” after an “overload” of luxury inventory.

Still, it many ways it’s a tale of many markets.

Properties below $4 million are performing well, while the $5 million-to-$15 million category is sluggish. Sales above $15 million have picked up — if the condo is available immediately. “The owners can take occupancy right away,” said  Douglas Elliman’s Tal Alexander.

“The wealth is still out there, there’s no question,” he said. “A lot of these penthouses that are sitting, they are in projects that are a year or two out. They’ll eventually sell, as they get closer to completion.”

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