When my son was looking for an apartment in Manhattan a few years ago, the sticker shock of the rental prices was the least of our issues. The worst was that some brokers wanted 15% of the annual lease up front along with first and last month’s rent and two month’s security. So for a $2500 per month apartment we would have to pony up $4,500 in brokers’ fees; $5,000 in two rent payments; and $5,000 in security for a total of $14,500. Then there were added costs for credit checks and other sundry items.
Most of that is out the window now that late on Tuesday, New York State effectively eliminated brokers’ fees paid by tenants.
In an unexpected addendum to last year’s rent laws, state regulators said renters can no longer be charged broker fees, potentially upending the market and delivering the latest blow to an industry already reeling from new regulations and even bigger tenant and rent-stabilization protections. New York is one of the few cities in the country with a broker industry that has such financial leverage over prospective tenants.
Brokers can still collect a fee, the state said in the revised regulations, but the fee must be paid by the landlord unless a prospective tenant hired the broker directly to help them find an apartment.
Landlords’ and their advocacy groups can be expected to try and fight the law and lobby for amendments but that will likely not be successful. More likely is that landlords will pass the cost onto renters in increased rent, but with a current glut of available apartments after huge over-building period in Manhattan, that may not be so easy to do. Also, many NYC apartment are rent-regulated so that the rent can be increased only so much.
Brokers can expect to be pressured by landlords to take large cuts in their fees. Remember a tenant is only looking for one apartment but a landlord can be listing several with a broker so the landlord has much more leverage to negotiate a different (lower) rate with the broker.
We can also expect to see many sophisticated landlords simply creating their own brokerages to eliminate the middle man and keep the fees themselves. They had no incentive to do before with their tents forking over the cash, but now there is great reason to do so and keep the cash in the family.
The same regulations also state that a broker can charge a renter no more than $20.00 in application fees including credit checks. This cuts off another supply line of cash for brokers who made an additional couple of hundred bucks a pop on the fees and checks each time renters applied for an apartment. In June, the state legislature limited security deposits to one month. Going back to my scenario, these rules would have saved us a ton of cash!
The rental brokerage industry is the biggest loser in this obviously and many will be fighting to survive or will have to make dramatic cuts in staff. Prospective tenants will have to make sure that they DO NOT SIGN an agreement sent by a broker stating that the renter is hiring the broker themselves. That allows the broker to pass the fees on to the tenant. The already volatile world of NYC real estate just got more heated. Let’s see how this all shakes out in the coming months and rest of the year.
Follow me on twitter @oscarmichelen