PMG pilots 100-pct commission at contract to entice brokers to sell preconstruction

Paying brokers commissions at the time of contract is unique in the South Florida market

Jul.July 25, 2013 02:00 PM

Craig Studnicky of ISG and a symbolic check

At Echo Aventura, a luxury 190-unit condo tower whose conceptual architect is Uruguay native Carlos Ott, developer Property Markets Group is paying brokers full commissions for contracting sales on units that won’t be ready for move-in until 2015.

On Wednesday, Philip Spiegelman, a principal of International Sales Group, which is working with PMG on the Echo Aventura project, handed out about $16.4 million in commissions at the all-but-empty site, where construction began two weeks ago.

PMG principal Kevin Maloney credits the unique commission strategy with the 110 units that went under contract – effectively, when buyers deposited 40 percent of the average $2 million sales price – in the first six months of sales.

“With this deposit structure, there’s almost no risk the project won’t be completed,” Maloney told The Real Deal.

The broker incentive led to “tremendous velocity of sales,” Maloney said.

Maloney and the head of PMG’s Florida operations, Ryan Shear, introduced the model after Related Group started offering brokers 75 percent of their commissions at the time of contract.

“As developers, there’s always a degree of gambling. Paying brokers about 7 percent of their commissions, prices would have to fall 33 percent for us to lose money. We’re betting they won’t,” Shear said.

Developers worry it could incentivize brokers to oversell the merits and reliability of pre-construction projects.

“In the last downturn, some brokers got in trouble for recommending projects to buyers where they got the best commission but were not necessarily the best developments,” said Avra Jain, a New York City-based developer with projects underway in Miami.

“Because there are so many foreign buyers, the broker community feels like it has more control over buyers than it typically would,” said Jain.

During the last cycle, developers would pay brokers as much as 75 percent of their commission with only 10 or 20 percent of the sale taken as a deposit. Thousands of units defaulted, with buyers walking away from whatever was not in escrow.

After South Florida’s real estate industry collapsed in 2007, a “clawback” rule was introduced industry-wide, clarifying that if a unit did not close, a developer could recall a broker’s commission.

Recently, developers have been removing that caveat as well as beefing up broker incentives to entice top agents to bring wealthy clients to their projects.

Once the brokers receive their commissions, they no longer have a clear incentive to stay with the sale until its closing date, which in the case of Echo Aventura and many new projects, is years off.

That doesn’t trouble Spiegelman. “After the deposit is in, I don’t need them,” he said.

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