New York City Renters Say Goodbye To Broker Fees, Leaving Landlords To Pick Up The Slack
With one simple clarification of months-old regulations, New York’s Department of State essentially upended the entire New York City apartment market.
According to a statement issued by DOS this week, New York City renters will no longer face sky-high broker fees when attempting to lease an apartment. Instead, those costs will fall on the landlord’s shoulders.
It’s a reversal of practice that could have a sweeping impact on both New Yorkers’ pocketbooks, as well as the local real estate industry as a whole.
Traditionally, New York landlords would hire brokers, who would then list their properties and market it to tenants. Prospective tenants who wanted to lease the property would then need to pay the broker a fee—usually between 12% to 15% of one year’s rent. They also faced security deposits, first month’s rent and other costly expenses.
Back in June of last year, DOS released new rent regulations capping security deposits to one month’s rent and application fees to just $20. At the time, it was unclear if broker’s fees would be impacted by the changes.
According to this latest statement from the department, they most certainly are, and prospective tenants can now pay no more than $20 for anything—including credit and background checks—regardless of whether a broker is marketing the property or not.
Here’s how the statement explains it: “The $20 limitation applies to licensed real estate brokers and salespeople acting as an agent of the landlord, lessor, sub-lessor or grantor. A licensed agent that collects a fee greater than $20 or fails to advise the landlord that such fees are prohibited may be subject to discipline by the Department … A landlord’s agent cannot be compensated by the prospective tenant for bringing about the meeting of the minds.”
Of course, landlords can still use brokers—and given the complicated nature of New York City’s real estate market, they probably will. They’ll just need to pay the fees themselves. The only way a tenant will pay a broker’s fee now is if they hire one directly.
DOS is calling the changes, as well as the other newly enacted regulations, “a sweeping and comprehensive collection of new provisions that strengthen tenant protections for all New Yorkers.”
According to Housing Justice for All, a coalition of tenant organizations from across the state, they could also help alleviate New York’s growing homelessness problem. On Wednesday the organization tweeted, “Eliminating brokers fees and limiting security deposits will make it easier for 92,000 homeless NYers to find a home.”
The larger impact
Petro Zinkovetsky, a longtime real estate attorney in New York, says the new regulations are “logical, fair and much overdue.”
“First of all, the law does not forbid tenant’s agents from charging tenants a commission for their services. What the law does is shift the landlord’s real estate agent commission back to the party that should have been covering it all along.” Zinkovetsky says. “Landlords pay their broker fees almost all over the U.S. and the world. NYC was an abnormality in that sense. After all, landlords are the ones choosing and hiring their agents to represent them, not tenants.”
But others in the community worry about the trickle-down impact the regulations could have—on brokers, landlords and even tenants in some cases.
For landlords, Warburg Realty’s Steven Goldschmidt says there will be “unintended consequences,” particularly for smaller-scale operators.
“The major landlords will usually find ways to adjust, hire staff to handle their rentals in-house and absorb some or all of the cost,” says Goldschmidt, senior vice president and director of sales at Warburg Realty in New York. “The impact will truly be felt by small property owners—or owners of individual condo units—who need agents to find qualified renters and who can’t afford to absorb the extra expense without increasing rents.”
Andrew Barrocas, CEO of MNS—a New York City-based real estate brokerage—says landlords paid the commissions in 98% of his firm’s rental transactions last year. But that approach has historically not been the norm in New York City—and it could come with some serious hurdles for those looking to pivot.
“While I believe most owners will end up increasing rent, there is always the option of creating an internal infrastructure to handle leasing on their own,” Barrocas says. “However, if you want to operate on the level we do, it’s going to have a heavy cost associated and take a lot of time.
Most in the industry say it’s tenants who will feel the real burn. Though tenants with rent-controlled apartments don’t have much to worry about (their landlords can’t increase rents anymore than 1.5% annually, per last year’s new regulations), free-market tenants are another story.
For those residents, Compass broker Jed Wilder says, “Rents will go up. Now instead of paying a one-time broker fee, the fee will be added into the monthly rental price, a price that will continue to rise each year as it usually does in NYC and will be continued to be paid as long as the renter lives in that apartment.”
Currently, there are over a million rent-controlled and -regulated apartments in the city. Approximately 936,000 properties are considered “free-market” and would be subject to larger rent hikes as a result of the changes.
But what about the broker?
Brokers, of course, are struggling with what amounts to an about-face in the local market.
Though some New York City brokers focus on sales, most have their foot in the rental market at least partially. Eric Brown, a broker with Compass in New York City, says he “feels bad” for brokers who are solely working in the rental space.
“First, they have to deal with daily StreetEasy fees, and now their income has been significantly cut,” Brown says. “It’s going to have a profound effect on the livelihoods of a lot of hardworking people.”
Still, at the end of the day, brokers still have plenty of opportunity in the New York City rental market—they’ll just need to work with more flexible landlords or connect with prospective tenants directly.
“Tenants may still hire their own agents if they want to, but they no longer have to pay for someone who is hired by a landlord,” Zinkovetsky says. “The system where each party pays their own costs works everywhere else, and it will work in NYC.”