At some point in early February 2020, word quickly spread that NYS put up documentation that effectively banned one of the most hated things in the history of the state: The unpopular BROKER FEE. That broker fee that averages a few thousand dollars, sometimes ranging in the tens of thousands. It has affected millions of renters over the years, equating to billions in sunk costs over the same period. With that kind of money being spent, it is easy to assume the provided service in return must be some of the best in the world. Unfortunately it usually mounts to nothing more than the Landlord's Agent opening a door, signing a few papers and spending a couple hours. This broker fee is looked as a true bane of NYC's existence.
Fortunately for prospective New Yorkers, the Department of State is trying to do something about it. Here is the subsection of the famous fine print signed off on by Andrew Cuomo and Rossana Rosado:
5. CAN A LANDLORD’S AGENT COLLECT A “BROKER FEE” FROM THE PROSPECTIVE TENANT?
No, a landlord’s agent cannot be compensated by the prospective tenant for bringing about the meeting of the minds. NY RPL § 238-a(1)(a) provides, in part, “no landlord, lessor, sub-lessor or grantor may demand any payment, fee, or charge for the processing, review or acceptance of an application, or demand any other payment, fee or charge before or at the beginning of the tenancy, except background checks and credit checks….” The fee to bring about the meeting of the minds would be a “payment, fee or charge before or at the beginning of the tenancy” other than a background or credit check as provided in this section. Accordingly, a landlord’s agent that collects a fee for bringing about the meeting of the minds between the landlord and tenant (i.e., the broker fee) from the tenant can be subject to discipline.
Review the full documentation on the DOS website
The 5 Main Parties affected by The Housing Security & Tenant Protection Act of 2019 and The Housing Stability and Tenant Protection Act of 2019 are:
- Prospective Tenants
- Rental Brokers
- Owners/Landlords/Property Managers
- Website Aggregators
Prospective Tenants - Win
Over the last decade with the popup of aggregator platforms, the vast majority of apartment hunting in NYC starts online where prospective tenants are scouring the web and consuming hoards of information on a daily basis. Meaning prospects are starting the apartment hunt on their own and putting in the hard work and research. It has become a rarity for the apartment hunting process to start with getting any type of service help from a broker. Also, the vast majority of prospects are doing their own outreach: Emailing listing contacts, showing up at open houses, calling property managers. If all the ground work is already being done by the tenant, why should they be the ones to pay the upfront broker fee without utilizing any broker service? A huge loophole in the market that has infuriated millions of renters over the years. The new law aims to put the kibosh on that for good.
- A Major Upfront Cost Has Now Gone 'Poof' - Mandatory broker fees that run in the thousands of dollars is a huge barrier of entry to renting an apartment. Removing that mandate combined with the ongoing trend of removing security deposits, NYC is slowly becoming one of the more progressive cities. What was formerly the standard upfront payments of first and last months rent, security deposit, broker fee (~4 months) is now down to 1 months rent upfront and 1 month security.
- Increased Tenant Mobility - Prospective tenants will be less tied down to an apartment over the long term. There is a wide array of reasons for wanting to move: Hate the building, neighborhood is too loud, next door neighbor is crazy or simply want a change of scenery. A mandatory broker fee is a big enough reason to stop anyone from moving to a new apartment. With that gone, tenants actually have the ability to make a choice which is something they didn't have before. There are possible positive side effects of this legislation too. Will we see an uptick in better customer service and relations from landlords to keep tenants from moving around? Especially if the cost burden now falls on the landlord to fill the apartment? They may not have a choice but to keep their tenants as happy as possible.
- Less Uncertainty & Less Frustration In The Rental Process - Think of the horror stories of the last minute gotchas where a broker fee is brought up as a lease is about to get signed. If the new laws are followed, it removes that layer of confrontation and feeling of being blackmailed. It makes for a better experience for all parties involved in the transaction when all of the costs are known upfront.
- Listed Rent Prices Will Increase - Economics of supply and demand work in the favor of landlords. For those who elect to continue using a broker for their services can completely bake the fee into the rent. For those landlords/property managers who decide to rent it out on their own, they can increase rent prices slightly as well because the rent for the entire market has just gone up. However, this is still an easy trade off for prospective tenants because it is easy to cover the cost of a few thousand dollars over monthly installments versus an upfront payment. It is a no brainer.
- Unintended Negative Impacts - It is still too early to tell but there are always unintended repercussions after large scale changes such as this are implemented. What new tactics will brokers use to collect their fees? Perhaps an increase in bait and switch listings? Will exclusive listing brokers force tenants to sign the 'tenant agent' paperwork before showing exclusives? Fortunately tenants already have the choice of bypassing brokers entirely by leasing directly from landlords and property managers on platforms like transparentcity.
Rental Brokers - Loss
The losses keep piling on the NYC rental brokerage industry. For an industry that has already shrunken over the years, has a reputation worse than the IRS and DMV, and just got a new policy shoved down their throats without warning that cuts off an entire revenue stream of commissions, it looks like an inevitable shake out will take place. This is one of the biggest policy changes to EVER take place. The shocking portion of this whole fiasco is, unlike the taxi industry getting upended by the private sector, it's the policy makers doing the whacking! The addressable market for exclusive commissions just shrunk by an enormous percentage because collecting a commission from the never ending supply pool of prospective tenants is MUCH easier than collecting a commission from the landlord. Some landlords will pay, some won't. The competition for the ones who are willing to pay a commission will intensify. Is it even worth to stay in the industry anymore? Is it worth it with all the negative publicity that comes with it? Will that section of the industry move towards gig pricing where thousand dollar exclusive commissions get replaced by hourly wages?
- More Rental Brokers Become Tenant Agents - The unfortunate reality is there isn't a true positive outcome for rental brokers here. However, the silver lining is there is still a market for the tenant agent because the reality is there are plenty of prospective tenants who want help. Tenant agents have a better image when renters seek help on their own accord. The reputation takes a huge hit when tenants feel bait and switched and the service of the broker is being pushed on them. There is an opportunity here to divert more resources to tenant agents where more time is spent providing services to a prospect who is actually looking for it.
- Addressable Market For Commissions On Exclusive Rentals Just Shrunk - The new law shrinks the revenue stream of the rental market for exclusives. Landlords who signed exclusive agreements where the fee was previously paid by the tenant may not agree to sign a new agreement where they now have to pay out the commission. Landlords are now considering taking the leasing operations in house, removing themselves from the market for rental brokers. It was difficult enough getting the exclusive from the landlord. Now you have to go back and ask for money? It's a difficult dynamic.
- Competition Intensifies | Margins Get Thinner - There are more rental brokers than there are landlords who need their services. For the landlords who decide to accept the fee and retain broker services, there is no doubt they will have the ability to pick and choose who to use. This places more bargaining power in the landlords' hands and extra pricing pressure on the brokers to offer better services for less money. Brokerages are left competing over a smaller pie.
- Rental Broker Reputation Can Still Get Worse - The general public is ECSTATIC over the policy changes. Any reversal in policy is going to cause a MASSIVE uproar. This policy is VERY popular with the public. Any new ways or methods that keep the fee intact will make matters worse. For example, check out this plot already set in motion by brokers meant to skirt the law.
Owners/Landlords/Property Managers - Loss
Rarely does an entire business model do a 180 change overnight the way it did. When it does and the whole fee structure gets diverted from one side to another, it is clearly a negative outcome. Think of it as waking up one morning to find out you've been given an entirely new job, as an add on, only to be paid the same amount. Or you have the option to offload the task to someone else, except your pay gets docked to pay for the extra help. It's not the end of the world for but the change sucks for landlords. Add it to the running list of 'cost of doing business' items.
- Landlords May Potentially Make More Money In Year 2 And After - Prior to the law, the broker fee was a one time upfront payment that had no bearing on the rent. Now that the broker fee is going to be baked into the rent, rent prices will increase by 8.3%, equivalent to the average broker fee percentage of 1 month. The broker fee is recouped after year 1 of the lease and then starting year, even if the the rent is kept the same amount, that 8.3% increase in initial rent is higher than the standard 2% - 5% year over year increase.
- Ability To Squeeze The Broker Fee Margin - Even though the fee has been diverted to the landlord, simple economic supply demand places the bargaining power in the landlord's hands. Landlords own the supply, which is low, and the supply of brokers are plentiful (though maybe not for long). Can landlords push the fees below the standard 8.3% (1 month)? Most likely yes.
- Online Marketing Platforms Are Available - This is an opportunity to further utilize the web. Every prospective renter is searching online for an apartment. There will not be a shortage of leads if the proper marketing channels are utilized. Streeteasy, apartments.com, renthop, transparentcity, craigslist are all there to be used.
- Recalculate That NOI - For those who took advantage of what used to be a free service will now have to revisit their operating margins analysis to see how much the added fee will affect the bottom line. It doesn't matter whether you're a large property manager or an individual owner of an apartment, adding on an expense of a few thousand dollars per apartment rental is no chump change. For any property manager handling rent stabilized apartments where the operating margins are already razor thin, this may have a negative impact on the upkeep of the properties.
- Pay The Piper Or Learn To Do The Unwanted Job - For those individual landlords who have never marketed or leased out their own properties are in a for a rude awakening. What previously came as a free services will now either cost a few thousand dollars for the continued outsourced service or in the form of time where the operation is taken in house. Problems that didn't exist in the previous life.
- Recouping The Broker Fee Over Time - Even though the landlord will make up the upfront broker fee cost in the form of higher rent, the cost still comes out of pocket at the beginning. It's similar to handing out an interest free loan that gets paid back in 12 monthly increments. What used to not cost a thing is now a negative cash flow scenario.
Policymakers - Win
Knocking out the mandatory upfront broker fee removes a HUGE barrier of entry to housing. Everyone can more easily stomach a higher monthly rent rate versus an upfront fee. The policy makers stepped up to the plate and passed a very popular law.
- Doing What The Public Has Always Wanted - Again, this is a very popular law they are pushing through and it will surely do more positive for the general public than negative.
- Jobs Will Probably Be Lost Here - It's unfortunate but the reality is there are real people being affected by this. There are brokers who depend on commissions to make a living or make ends meet. Job less is never a fun outcome. Generally the free market dictates how business shakes out. Instead, policy took over. Did politics overstep this time?
Website Aggregator Platforms - Draw
Aggregator platforms do not own or manage any of the properties they advertise. However, platforms do bear a level of responsibility to disseminate accurate information. What was surely just another random day turned into an absolute circus. Any policy changes surely forces platforms to make adjustments in order to properly reflect the market. It's not so much a drastic blow of any sorts but more of a nuisance that has to be accommodated for.
- Influx of Potential Landlords Posting Ads Online. For those who decide to take the leasing and marketing operations in house, they will have to look at the multitude of marketing platforms out there and get their apartments in front of as many viewers as possible. There will be a cost comparison between paying out a broker the commission rate versus increasing online marketing spend. Online marketing spend costs MUCH less than the broker fees. This should lead to a boost in Landlord online Ad spend.
- Decreased Ad Revenue Stream From Brokers. Platforms that depend on brokers as a revenue stream is surely taking a look at the effects of the policy. If there are less brokers in the market, it is likely to translate into less Ad dollars spent on aggregate platforms. This part of the market will shrink. It is especially problematic because brokers are quicker to make decisions on Ad spend and tend to spend more freely on advertising because the ROIs are so high. There is a chance the decrease in this revenue stream outweighs the increase in Ad spend from landlords.