Enough Commission Incentives - Just Drop Prices!
(Toes here! I've been really busy lately, my apologies for the length of time it has been since I last posted!)
Lately, I feel like developers and owners are trying to bribe me at every turn. Particularly since Bear Stearns went under, my email inbox is flooded with commission incentives:
"2 months broker's fees and one month's free rent at Dwell by Starck!"
"6% broker commissions at Atelier!"
Rental Market
The NY Times called it - this summer's rental market is soft. Management companies are offering tons of incentives like one or two month's free rent and "OPs" ("Owner Pays" broker's fees). Usually there are a few OPs in places like the Financial District, Midtown West around 10th Ave, Harlem, and Roosevelt Island. This year, there are OPs all over Manhattan. 89 Murray in Tribeca is paying one month free rent and one month OP and giving a $200 Amex gift card to the broker at the lease signing. BLDG, one of the largest landlords in NYC, offered OPs this summer for the first time I can remember. And not in undesireable locations - in buildings on the Upper East Side & Upper West Side, in Midtown East & Midtown West, and even in the Village! OPs in the Village?! Woah.
I realize that it makes owner's rent rolls look better to keep rents high and just pay the broker's fee to get a tenant into the apartment. But it would be far more effective if landlords did not try to raise rents 10%-15% this year. The last two years saw huge rent increases & I think that renters are just saying "enough!" Renters aren't upgrading to a better apartment. They're sitting tight because they would have to make a huge jump in price to get something better than where they are now. People are watching their wallets. Maybe they are worried about layoffs, next year's bonuses or high oil/gas prices. Maybe they're entering a holding pattern because it is a Presidential election year. Whatever the reason, owners should keep rents the same as they were last year if they want 100% occupancy in their buildings. Maybe a 5% increase. Maybe.
Sales Market
New developments typically pay between 2.5% and 3% commissions upon closing of the apartment. Sometimes they pay 4% commissions. Recently, developers are offering to pay commissions in advance and 4%, 5% and 6% commission emails are popping up in my email twice daily. Here are some examples:
1. "4.5% commission for the first apt sold at 45 John; 5.5% commission for the 2nd apt sold in the building"
2. "6% broker commissions at Atelier!"
3. "Earn Green When Your Clients Buy Green! 1% upon contract signing; 3% commission upon closing at Visionaire (total 4% commission)"
4. "Earn a $10,000 AMEX Gift Card plus 3% Commission at 34 Leonard"
5. "4.5% Commission at m127!"
6. "4% Commission and Chance to Win Dinner at Ago in The Greenwich Hotel" (Riverhouse Condo)
7. "1% at signing and 3% at closing at 166 Perry St"
What I find interesting is that when the Manhattan market started slowing down a few months ago, I was inundated with emails for broker's previews, cocktail parties, champagne open house tours and luncheons. The developers realized that they might need us so they went for our stomachs :) ! Now that things have gone a bit further downhill, they seem to be throwing money at us.
What I would love to see instead is... Price reductions! Or at least closing cost incentives; pass savings on to the buyer! Most real estate agents who love their jobs want to pair their customer with the best apartment at the best price. Offering commission incentives does nothing for me. I will offer to lose the extra commission to try to get my customer a better price on the apartment every time. But I wont bring a customer to a building where prices are completely out of their budget.
If a building's inventory is completely over my customer's budget, it wont appear in the search I created for them in my database. Rather than making me call every new development to figure out if they are paying the closing costs, extra commissions, giving out AmEx cards, etc, it would make my life much easier if developers would just bring the prices down.
I realize that dropping prices causes the need for the developer to file extra paperwork with the Attorney General's office. I am sure that filing a price amendment with a downward trajectory is depressing for a developer and investors. I suspect that other buyers who may have purchased at a higher price will be annoyed. When the building closes & the sales become public record, those buyers will know that you sold the apartment upstairs from them for $2.15M instead of $2.3M anyway.
Which leads me to my next point: negotiability. Prices in many new developments (and rental buildings) have finally become NEGOTIABLE! It's amazing! Last year, I'd bring a buyer to a new development and we were lucky if we got $10K off the price of a $1M apartment. Or we were lucky if the developer split the transfer taxes with the buyer. This year, developers are negotiating more on pricing and closing costs.
Toes says: Developers and owners of rental buildings: Incentives are just not as effective as making prices more realistic for the current market conditions.
Toes says: Don't be afraid to make a low offer. Definitely ask for the developer to pay the transfer taxes. However, if a building is selling well, don't be surprised if they won't take your offer, either.
Toes says: If you see an apartment that you love, be it a new development or a resale - make an offer! You never know where someone is in their selling cycle - you may bring them to that 50% point where they can declare their offering plan effective. They may only have a few units left in the building. Maybe their goal is to sell those units quickly so they can stop paying their sales team and stop spending marketing dollars. It never hurts to try. For a rental, don't expect to get an apt listed for $3000 for $2500, but $2800 is not inconceivable.
Toes says: If it is unique or in a fabulous location, it is still selling/renting. Cookie cutter apartments that are not very well priced or that need renovations are more likely to sit on the market right now.
Comments (16)
Over on streeteasy, there are a good number of condos at Trump Place for sale offering the buyer a free 42 hd plasma television. Personally, I think such an incentive is lame because only a sucker would buy a condo just for a free plasma television.
Posted by Donald | June 30, 2008 11:49 AM
Here in Tucson Arizona, we have seen the same thing as the market gets worse the bonuses to selling agents get higher. One builder is paying for trips around the world, others are paying out 4-6%. A couple years ago when the market just started to make its decline I saw 10% commissions being paid out, this just isnt as effective as a lower price dollar for dollar. I guess some builders just want the oportunity to get peopleijn their door to sell them so in that aspect it does bring the traffic.
Posted by Michael Oliver | June 30, 2008 1:28 PM
Toes, great post. Most developers don't get it. I have looked at a number new developments, and they are not flexible right now. LCOR is one of the few developers that took proactive price action on its remaining units. Guess what...they are selling (Charleston sold out) while other developments are at a standstill.
Posted by JT | June 30, 2008 1:53 PM
If things got jittery after Bear Stearns... I dread to think what might happen if Lehman Brothers hits the wall. Check out LEH stock today.. rumors of it being bought out for less than market-value
Posted by uwsider | June 30, 2008 3:06 PM
you have good contacts uwsider...however, do not discount the possibility that stocks rally if LEH is taken out slightly under the last trade before news...a BSC like scenario and a LEH takeunder at say $10, will very much hurt this market even at these levels. But for me, if its taken over at $20, financials will rally as that disaster could have been way worse.
great post TOES! Im getting the eblasts too!
Posted by Noah | June 30, 2008 3:29 PM
Toes,
Developers lower their prices as a last resort. It looks bad on their lender's spreadsheeet.
Posted by Developer | June 30, 2008 3:48 PM
Hallelujah! Hoping this message gets out to more developers. Btw Toes - whatever happened to your buyers from your last post (the ones with purchase power b/t $800K-1.05 million)?
Posted by newbie2008 | June 30, 2008 4:27 PM
Lehman could be bought for high, low, middle, it doesn't freaking matter. A 5% bump in the stock market won't mean diddly if its yet another 5,000 layoffs of the kind of folks who used to be able to afford $2-5 mil for a place.
Its 50k+ layoffs and counting, and the $$$ left for the rest 'aint gonna be pretty. And guess what happens with 30% of all of NYC's income takes a MAJOR haircut...
All I can say is, you'll be getting 100 TVs thrown in if you buy an apartment at these rates in 6 months.
Posted by Eddie Wilson | June 30, 2008 5:59 PM
In southern California, one builder is holding a "buy one get one free" sale. If you buy a $1.6 million McMansion, you get a "free" $400,000 house.
Posted by Donald | June 30, 2008 8:04 PM
Hi guys! Thanks for the comments. I got a "5% commission at Platinum!" email just as I was reading them:)
Developer, when you say it looks bad on their "lender's spreadsheet," what is that used for? To update their lenders/investors with the building's progress? To keep construction loan funds coming? When they go for financing for a new project? I would love to know more about exactly when this comes into play. Can't developers just acknowledge what's going on in the market right now, drop prices and get their apartments sold? Wouldn't a lot of developers save enough in soft costs by selling out faster than by dragging out the sale of the building by trying to get unrealistic prices?
I know some people think brokers are greedy, but good pricing/value is so much more important to brokers than free food & commission incentives. If someone wants to live on the UES, I am not going to drag them to Atelier in Midtown West just because they're offering 6% commission... But if Atelier had an AMAZING deal on an apartment that was exactly what my buyer wanted (just on the other side of Manhattan) I might drag them over there, even if the commission was 2.5%.
Newbie: thanks for asking:) My ~$1M buyers are getting married so they decided to postpone the apt search until after the wedding. We will be back in the hunt in about 2 months. They could have purchased at a fabulous interest rate. Although prices might be down a little bit right now from when we were looking (or at least more negotiable), rates have gone up AND it is harder to get financing. So I suspect it will end up being a wash for them as far as what kind of "deals" we find & what their monthly payments end up being.
Posted by Christine Toes | June 30, 2008 11:50 PM
Toes,
It's easy to find room in a construction loan budget for things like free rent, gift cards and increased commissions.
However, when it is all said and done, a lender's financial analysis is all that matters in real estate development. If the numbers look weak it will be difficult to convince other funding sources to get involved in a project.
Posted by Developer | July 1, 2008 12:32 PM
Developer - then why not help out the buyer - i.e. help with closing costs, mansion tax, or other fees. Give the buyer a bit of an incentive to pull out their wallet? Isn't that a win-win situation? I would think the costs there would be just the same as offering add'l broker incentives.
Posted by newbie2008 | July 1, 2008 7:47 PM
One of my colleagues had a good point which is that when something has 6% commission, he feels that he has "more to play with," meaning he knows he can take 2% and offer to put it towards the buyer's closing costs, or try to take it off of the price. He says he likes the flexibility. I hear what he's saying, but I would wonder if my buyers would think "why is Christine bringing us to this building where the apts are out of our price range or thats not in the location we wanted," and then when they found out about the 6% commission, they might think I am trying to pad my own wallet. He also mentioned that the 6% commission makes the building really stand out, but with so many buildings offering these incentives, I am not sure how true that is any more.
Developer: thanks for the clarification. So you're saying that investors don't really pay attention to the construction loan so little "extras" can get hidden there.
Got this one in my email yesterday: We cordially invite you to come to an exclusive event showcasing our wonderful Penthouse at 25 east 67th Street TONIGHT. Wine and Cheese will be served. As a bonus incentive we are also offering ONE MONTH FREE rent on a two year lease plus a 52” HD FLAT SCREEN TV to the Broker who brings the Tenant.
Clearly they haven't seen my Manhattan apartment! What would I do with a 52" flat screen TV?! So funny...
Posted by Christine Toes | July 2, 2008 10:25 AM
Great Blog! I have been selling real estate in Bend Oregon since 1981 and find it refreshing to find a helpful blog like yours! Keep up the good work!
http://www.bendoregonrealestateexpert.com/
Posted by Jim Johnson CRS | July 5, 2008 6:43 PM
Toes,
Great info. You and Noah have a long-term approach to how you treat clients and you recognize that if you bring value to clients you will flourish no matter what the market brings. My guess is developers are focused on the other 90% plus of brokers, who would like the freebies or extra comish in the short-term. Developers don't want to lower prices and then have their bankers/partners plug the new $ per square foot numbers in for every condo yet to be sold. Instead if they just have higher marketing costs (but get the same prices) they can pretend like things may get better later. With the market generally tight in New York and new supply apt to dry up going forward maybe this actually makes sense, although I'm skeptical. As ex stock jocks Noah and I would say, first sale is your best sale...mark em down and blow em out, because it will only get worse later. Different strokes!
Posted by Jeff | July 6, 2008 4:33 PM
Thanks for the kind words!
More good deals abound this week: 255 E 74th St is offering 5% commission, 1% paid 60 days after contract signing.
And we can get reimbursed for cab fare to one rental building in the Financial District:)
Posted by Christine Toes | July 8, 2008 11:32 AM