As new development projects continue to hit the market, some residential real estate brokerages may be experiencing growing pains.
Because selling a new development relies heavily on the organizational strength of a brokerage and involves not only closing the sales of individual units, but taps into years of accumulated data and the knowledge of an entire marketing department, compensation for these sales is measured differently than the standard 6 percent commission typically seen for resales.
A handful of agents who have worked at larger residential firms said they have felt pressure to lower their commission splits as resale brokers working on new development projects.
“I don’t think they’re offering higher splits, these larger companies, and I think they’re looking for the top brokers to cut splits, because that’s where the bulk of their income is coming from,” says Shaun Osher, a top-producing agent who left Prudential Douglas Elliman last spring to form Core Group Marketing.
Agents working in development marketing divisions within brokerages typically draw salaries, rather than getting commissions. Since the best resale brokers can earn more doing resales, those being hired by development marketing divisions may be less skilled or experienced than this top tier of brokers, Osher maintains.
Another broker who left Douglas Elliman, AnneMarie Alexander, who now markets properties at the Heywood in Chelsea, says agents also have experienced “double dipping” – being asked to pay a fee to the in-house development marketing groups at larger brokerages.
“Normally, in sales, you’re compensated for bringing in business and high volume,” she says. “In larger firms, the trend has been to cut back on your split levels the more volume you’re doing on these buildings. In some instances, you were asked to take a reduced split and then pay a sort of service fee to the development marketing groups.”
As new developments hit the market, brokers who typically handle resales want a piece of the action. But some residential brokerages whose new developments business is growing say it’s hard to figure out how to compensate resale brokers, development brokers, and onsite marketers.
“When you had very few buildings coming online, this was not such an issue,” said Dawn Tsien, a Coldwell Banker Hunt Kennedy president who formed the company’s development marketing division last spring, after working in project marketing at Douglas Elliman, the Sunshine Group, and for Zeckendorf Development. “Now you have a lot of buildings coming online, and you need more expertise to differentiate each one.
“If a broker is a good broker,” she says, “they’re bringing in multiple buildings [to sell on behalf of the developer], but where are they going to fit? You want them to bring in the buildings, but if they expect to be selling all of them, then you start to run into the frustrated expectations of the developers.”
The attributes that make the best resale brokers don’t always translate to similar performances in marketing new developments, Tsien said.
Douglas Elliman executive vice president Andrew Gerringer, who formed the company’s development marketing group in 1990 and runs it today, said the firm offers lower commission splits to resale brokers who bring in new projects, because the development marketing group needs to compensate its salaried employees.
“Let’s say their split is 70 percent,” he says. “If they bring something in, their split, instead of 70, would be 60, but they’re involving a whole other division of a company that has to pay their people for the services that they’re giving.”
Not all resale brokers quibble with that form of compensation. Barrie Mandel, a 22-year veteran of the industry at the Corcoran Group, said resale brokers who do project marketing would have little credibility with developers without the services of a marketing division behind them.
“I’m the only person in Corcoran who actually has a seat at the table in both the marketing division and the resale division,” she says. “I’m always rather stunned that when [resale brokers] work with a marketing division, they don’t understand that they are pulling the special talents of the division to support their work and that has to be paid for as well.”
Other brokers were surprised to hear about the whittling down of split levels and the charging of fees by the project development divisions of some firms. They also said it is not happening at all large residential brokerages.
“That’s outrageous,” says Bruce Ehrmann, a long-time broker with Stribling & Associates who does some marketing of new developments. These agents “are providing a service for the brokerage. Not the other way around. They work for free, they get a commission if they sell, and they don’t get anything if they don’t sell.”
A fellow broker at Stribling, Michael Chapman, who attracts a lot of new development business, agreed. “I would imagine if they’re generating the business, they should be in control of it,” he said.
Coldwell Banker Hunt Kennedy tries to avoid these types of conflicts by paying resale brokers who bring in new projects a referral fee, and then assigning the project to the new development division.
“People who bring in jobs get a referral fee, and can earn more income by bringing in clients to the sites,” Tsien says. “For the purposes of being on site, other individuals are committed to that site for a year. That’s because the best use of a successful broker’s time is not having them sitting on site.”
Nancy Packes, president of the project marketing division at Brown Harris Stevens, said the firm has a similar structure.
“We don’t permit people to use the Brown Harris Stevens project marketing banner unless we’re running the project,” she says. “Our brokers can refer the project to us, and they can be compensated for the referral, but they’re not handling the project. It’s a very specialized undertaking.”
The use of salaried employees in project marketing divisions within firms alarms some brokers, who fear “managed brokerage.” They’re concerned it may signal the start of a trend toward brokerages converting to salaried compensation.
“I’ve heard it’s coming to the general brokerage industry, and by that I mean co-op, condo, and townhome sales and resales,” Osher says. “It’s much more cost-effective, and there’s a larger profit margin for the company. Good agents cost more. So if the company can get away with paying a less-seasoned agent to sit on site or sell the property, they wouldn’t have to pay them as much.”
But Steven Spinola, president of the Real Estate Board of New York, said the theme was not being discussed by the heads of large residential firms in New York City.
“We’ve spoken to a few of the firms, and nobody’s even thinking about it,” he says.
Pamela Liebman, president and CEO of the Corcoran Group, agreed. “I can’t see any of the big ones going to salary models,” she says. “Let me tell you, the companies would love it – they’d make a fortune. But the brokers are not going there.”
Stribling’s Chapman agreed with that assessment.
“I just don’t see people willing to do that,” he says. “I could understand the firms trying to make more money and doing it that way. But I really don’t see that happening in New York.”
Gerringer of Douglas Elliman said there has been some discussion about using some version of a salary model for new brokers. Many years ago, new residential brokers sometimes received draws, which is done commonly in commercial brokerage.
But there hasn’t been any structure developed along those lines on the residential side, he said.
“Managed brokerage from the regular resale brokers’ side is something they’ve been talking about for a long time that nobody’s done,” he says. “It’s a long and deep plan to implement, but it’s something that’s very possible…down the road.
“But it would be mostly for the newer brokers,” he adds, “who need to plant the seed and have some money behind them to pay the expenses.”