Big news broke out yesterday, announcing that the infamous New York broker fee is no longer allowed to be collected from renters. If you’ve rented in NYC, you probably paid a 12–15% broker fee off the annual rent (for example, a $3,000 per month apartment will cost you $5,400 in broker fees). If you are planning to rent in the future, this may seem like good news! And if you are a broker or a landlord you might feel spooked and livid. However, we want to break it down and offer our opinion on what it really means to each party in the short-term and the long run.
Renting? there’s some good news and some bad news
Let’s start with the bad news. While the upfront cost of moving in has been lowered, what will most likely occur is that landlords will trickle their new cost of paying the broker fee down to the tenants. So while you might not pay for it upfront, it will be amortized during the monthly rent. More significantly is that if you live for more than one year in an apartment you will be paying higher rent. In one of our past blogs (5 reasons Why You Should Use a Real Estate Broker in New York), we argued that typically ‘for fee’ apartments are on average cheaper than ‘no fee’ apartments, and if you stay in the same apartment for more than one year, you will reap the benefits of lower rent in the following years. Now, if landlords embed the fee they need to pay out to brokers, then you will be paying a higher rent. And not just in the first year, but also in the following years. According to the New York Times there are about 900,000 Market Rate apartments (for fee), for which landlords will most likely just increase the rent for now.
Ok, so what’s the good news? Well if you are struggling with your cash flow, this will really help you get into the apartment of your choice whether there’s a fee or not. Compound this with the recent law that limits landlords to collect only one month worth security deposit (or find a Deposit Free apartment) and you could potentially find a great apartment that requires you only to pay first month’s rent upfront. That is a major reduction from when you had to pay first month’s rent, a broker fee and then another month or two for security deposit. So $3,000 upfront for an average apartment versus over $11,000 to move in.
Another added benefit is that you will no longer feel sketched out by some brokers and have to wonder if they are charging you a fair and lawful fee or not. With the new law, you don’t have to worry about hiring and paying a broker and can leverage the full benefit of their knowledge of the city, which buildings are well maintained, which landlords to watch out for, etc. without having to shell out extra cash out of your own pocket. If you decide to do your own search and find an apartment without a broker, most likely you’ll still pay a higher rent with the embedded broker fee. This is the same as already happens today with all the ‘No Fee’ buildings.
Is the NYC broker going away?
Absolutely not! If you are a broker, while in the short run you might feel frightened and may lose some income by this new, law we think that in the long run you will not experience a difference in income. Actually, we maintain that you might actually benefit from increased volume of rental deals. Why you ask? Well today a lot of renters shy away from using a broker because of the fee, especially when they know that there are ‘no fee’ apartments out there. Now if you form a relationship, the renter has no reason not use your services for any type of apartment and has no incentive to try to undercut or circumvent you. It will be quite apparent for renters that it will be much better to let a broker do the heavy lifting at no cost to them, while you still can collect your broker fee. The only difference will be that going forward it will be the landlord that will cut you a check. Also, there will no longer be the risk of a deal falling apart because of shortness of funds by the tenant.
So are you worried the landlords won’t pay you? Well landlords that elect not to pay brokers, either upfront or shortchanging them after a deal is closed, will ‘earn‘ a negative reputation and brokers will simply avoid taking clients to their buildings. So you might get screwed on a few deals by shady landlords in the beginning, but after the dust settles, either all will play by the new rules or you’ll already know who to avoid.
So who loses the most?
We think that the most impacted by this new law are not going to be the brokers, but actually the landlords. There is going to be a shift of who carries the burden of financing a rental deal from the tenant to the landlord. For those landlords that already pay broker fees (what’s known as OP, ‘owner Pays’) such as in ‘No Fee’ buildings there will be no difference in terms of costs. However, they may see an uptick in demand for their apartments because now all rent prices should even out since we expect landlords that don’t pay broker fees today to raise rents in response to the new law.
On the other hand, landlord’s that don’t pay OP and own rent stabilized apartments will see increased costs. Either in the form of now paying broker fees, or deciding to market their apartments themselves which includes maintaining a leasing office, advertising their vacant listings via various rental search platforms, online and physical ads and so forth.
Landlords that don’t currently pay OP and are not restricted by rent stabilization laws, are free to choose to raise rents to offset the cost of a broker fee. In terms of demand it’s not clear if renters will see their listings as more attractive now at a higher rent with no broker fees. What is clear is that for any tenants that stay for more than one year, they will earn more in rents over the years than they would have if they rented an apartment at a fair market rate and the tenant picked up the tab for the broker fee.
It will be interesting to see how it will all play out, in the coming months and years, but we maintain there are no clear winners or losers here, just a bit of added transparency and hopefully a clearer set of rules.
Do you agree or disagree? Let us know what you thing and leave a comment below.
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