Cutting back on rental commissions
Rental brokers see fees shrink well below 15 percent norm January 29, 2009 02:48PM By Candace Taylor
Marc Lewis of Century 21 said 15 percent commissions on rentals are a rarity in the new economy.
While the residential market has clearly taken a hit across the board in New York City, there are two very divergent commission situations brewing on the sales and rental sides of the market.
Although many sales brokers are seeing their commission percentages increase on each transaction, rental agents have not been quite as lucky.
In fact, with rents falling and landlords trying to attract new tenants with any tactic they can dream up, rental brokers have been watching their profits shrink.
Part of the problem is that landlords have begun to shell out rental brokers' commissions to take the financial burden away from the prospective tenants they're wooing. The landlords are themselves cash-strapped, so brokers who work in rentals are being forced to accept smaller-than-typical fees.
Meanwhile, developers of new buildings are willing to shower incentives on buyers' brokers on sales transactions, but they aren't extending the same treatment to rentals, or to rent-to-own deals.
For prospective tenants, the offering of "OP" — a commission that is "owner paid," i.e., paid by the landlord — is viewed as a powerful incentive, said Lewis Futterman, the co-founder of Uptown Partners, the developer of the Lenox condominium in Harlem.
"It's very appealing to the tenant," said Futterman, who has rented roughly 10 percent of the Lenox's 77 units. "It's saving them a month's rent or more."
Brokers say that among the rental incentives out there, throwing in the commission is extremely popular.
"There's been a flood of no-fee apartments, because a lot of the landlords are starting to pay the fees," said Christine Ra, a sales agent at City Connections Realty. "They have a lot more competition, so they're willing to do what they can do to make the deal happen."
While OPs make apartments easier for brokers to rent, the fee paid by the owner is almost always lower than the standard 15 percent commission brokers usually receive.
"It's very rare that someone's going to pay us a full 15 percent fee," said Marc Lewis, the president of Century 21 New York Metro.
"When a landlord pays the fee, they pay one month's rent," he noted. That amount (roughly 8 percent of the annual rent), is "half as much money the broker's retaining."
In recent years, landlords almost never paid brokers' fees and are reluctant to do so now, Lewis said.
"It's a lot of money they didn't have as an expense the year before," he said.
As a result, landlords want to pass some of the cost on to brokers. "They feel the broker should take less," Lewis added.
For their part, rental brokers certainly are working with thinner margins. Lewis said his company recently rented a two-bedroom on the Upper East Side for $2,850 a month. The last time it was rented, the rent was $3,200 a month and the tenants paid a 15 percent commission, netting the broker a payout of $5,000. This time, the landlord paid the broker's fee of one month's rent, which amounted to $2,850.
In the slowing market, brokers have little choice but to go along with the lower commissions.
"You have to bite the bullet and make the deal happen," said Thomas Demsker, an associate broker at Prudential Douglas Elliman. "The most important thing is renting the apartment."
In addition, to compete with all the no-fee apartments now on the market, brokers are forced to lower the commissions they charge on other listings.
"There are still apartments where the landlords are not paying the fee," Ra said. "In those instances, brokers are a lot more negotiable."
One of those non-fee-paying landlords is Icon Realty Management, which owns and manages over 1,000 apartments throughout the city.
Zach Levine, Icon's director of leasing, said that while the company does not pay brokers' fees, he's noticed a significant drop in commissions, starting with some smaller brokerages this summer. "I would say that every broker has reduced their fee to probably one month's rent," said Levine. "It would be pretty hard for them to compete in this market if they're the only one collecting 15 percent."
Ra said her company, City Connections, has dropped its minimum commission from 15 percent — to either 12 percent or one month's rent, depending on the neighborhood.
As a result, she has to do more deals to make the same amount of money.
"I'm doing just as many or more rentals," she said. "My gross income has stayed steady, but definitely the commissions are getting reduced."
Lewis said Century 21 has also become more flexible, noting that, "we tell them the fees are negotiable now."
That's partly because as layoffs have ricocheted through Manhattan's troubled economy, the rental market has suffered, landlords and brokers say.
According to the December market report by the Real Estate Group New York, a brokerage firm, rents in nearly all categories of apartments have fallen from last year. The average price for a non-doorman one-bedroom, for example, fell 6.53 percent from $2,919 in December 2007 to $2,728 in December 2008, according to the report.
The average price of a doorman studio, meanwhile, fell 9.2 percent year-over-year, from $2,748 to $2,495.
Lewis attributed the decline to greater rental vacancies.
"There are less people looking than there are apartments available," he said. "Landlords have to be reasonable."
Meanwhile, the economic situation has created a peculiar divergence between the treatment of buyers' brokers and rental agents. On the one hand, the rental market is being inundated with newly constructed condos made available for rent by both individual owners and developers. But on the other hand, developers and sponsors of new construction buildings are still anxious to sell out their buildings, so they'll do nearly anything to attract buyers' brokers, often offering 4, 5, and 6 percent sales commissions instead of the customary 3 percent.
For example, Clipper Equity, the developer of BellTel Lofts, recently offered buyers' brokers a free iPod loaded with a video of the Downtown Brooklyn building.
But those perks are almost never offered when developers, unable to sell units, rent them out instead.
"Generally speaking, [developers] don't do those kinds of things," Demsker said, adding that free rent and OPs are far more common than broker incentives on rentals. "They get creative, but they don't offer the broker anything extra."
Because developers stand to earn so much less from a rental than a sale, they're less likely to spend money on incentives for brokers, according to Futterman, who said his company has tried many different incentives for sales brokers, but never rental agents.
One rental deal he was offered in the Lenox, for $7,500 a month, would have covered only about 60 percent of the carrying costs on the apartment. "You get a much bigger profit in sales," Futterman said. "Whatever you're giving up [to pay for a broker incentive] is a much smaller piece of the profit than it is on the rental."
Many developers of new condos don't even pay OPs, making it harder to rent units in the building, said Greg Clark, a sales agent at Nest Seekers. "To shell out a month to a broker is sometimes unfathomable to them," he said.
Of course, that's not the case in every new building.
At One Hanson Place, the 189-unit condo in Fort Greene where the developer recently decided to rent out its remaining units, the sponsor is paying half of the 12 percent commission, said Steven Rutter, a managing director at Stribling Marketing Associates, which is handling sales in the building.
And at Northside Piers in Williamsburg, which gives buyers a rent-to-own option, the developer, Toll Brothers, is paying the full brokers' fee, said David Von Spreckelsen, a senior vice president at the company.
"We're paying the fee," he said. "That's the nature of the market right now."
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Comments
Anonymous
Sales brokers aren't making out as it's becomming increasingly harder to make a sale. However, a 15% brokerage commission is inherently non-sensical. There's no need to pay someone thousands of dollars to look up apartments on a database and show them to you, especially for a standard apartment. Now that its a buyers market, I wouldn't be surprised if some landlords try to cut out brokers all together since there are more cost effective ways of filling apartments.
Comment #1 Posted By: Anonymous 02/05/09
Anonymous
You can't cut brokers out entirely- at least not on co-op transactions. Someone's got to do the board package and hold the tenant and landlord's hand through the process. Owners aren't willing to do the work. And tenants don't know how.
Comment #2 Posted By: Anonymous 02/05/09
Anonymous
there is no way that you can cut out brokers as it has been proven over time that every transaction requires a salesperson to "sell" a client on a rental as human nature is such that people need a human being to help them sort out all the pitfalls of a rental. Anyone who disagrees has only been in the business for a few years and doesn't understand people don't rent an add or from a list. They need a person to guide them and there is an expertise requred for this. Only snotty sales agents who are not selling would disagree but they will be renting sooner than they think!
Comment #3 Posted By: Anonymous 02/05/09
Anonymous
#3, I'm genuinely perplexed- are you serious? Rental brokers are completely useless, and in this economy, the broker still charging a fee to the renter is actually a deterrant and will make apartments more difficult to rent. And quite honestly I do not see why more owners are not simply posting free ads on craigslist. It takes five minutes and costs nothing to the landlord or the renter.
Comment #4 Posted By: Anonymous 02/06/09
Anonymous
#4, there is and always will be a need for broker's in Manhattan. maybe you had a bad experience by one or maybe you were one of those people who paid 15% but the bottom line is that the best apartments in Manhattan are only accessible through brokers. Call it what you may but this will not change. The fact of the matter is that people who are coming from out of New York and have no knowledge of the real estate market need brokers to help them find apartments to rent. don't worry... let me know and i'll only charge you 12% :)
Comment #5 Posted By: Anonymous 02/06/09
Anonymous
The real question here is why do rental apartment seekers bare the burden of paying a commission in the first place? Office, retail, industrial, sales and/or rentals are almost always born by the Landlord or seller. Fundamentally, how is renting an apartment any different? Brokers are necessary in rental deals, however, the industry needs reorganization, as you'd be hard pressed to find an individual who has apartment hunted in NYC and speaks with a positive tone towards rental brokers and the current process.
Comment #6 Posted By: Anonymous 02/06/09
Anonymous
Outside of NY, brokers aren't part of the rental scene because they are a completely unneccessary expense. NYC brokers are delusional- a lawyer for a co-op (or renting directly from the owner) is done every day, everywhere else. Get real.
Comment #7 Posted By: Anonymous 02/07/09
Jesse Rhinier
Rental brokers will always be needed in NYC. Most of the owners here are older owners that own buildings scattered all throughout the city. They can't walk around to all their buildings in all these areas showing apts. They need brokers to do this or it simply wouldn't get done. Also, they need someone to handle all the phone calls. Basically, owners NEED an office, but they aren't going to go through the hassle and expense of owning and operating one, not to mention hiring and managing a staff. The rental broker handles 100% of this, including the leasing, application processing, advertising and appointments 7 days a week until late at night. Owners in NYC simply cannot do this and therefore rental brokers are absolutely necessary. Yes, many are scumbags, but if you use the right brokerage, you will have a good experience.
Comment #8 Posted By: Jesse Rhinier 02/07/09
Jesse Rhinier
(Continued) My company, DSA Realty (www.dsarealty.com) operates with a 100% honesty policy and only hires honest agents and only deals with honest landlords. We've never had a complaint to this day. Also, we'd never dream of charging 15%. We rarely charge a fee at all and if we do it's one month only, which is almost nothing if amortized over 3-5 years of occupancy. DSA also owns over 20 buildings and all of these are no fee by Owner. Those of you that hate rental brokers used the wrong ones and probably got suckered in by fake ads posting unrealistic prices and amenities and then got forced into paying a high commission for a totally different apt. Find an apartment through a reputable company. This is the best way to have a good experience and to not overpay!
Comment #9 Posted By: Jesse Rhinier 02/07/09
Anonymous
I used this guy and all I paid was the application fee. I moved here from out of town and the process was pretty painless. www.theburkhardtgroup.com He even followed through when we had some problems on move in day, the apartment wasn't cleaned.
Comment #10 Posted By: Anonymous 02/08/09
Anonymous
The commissions are getting to be 1 month rent now ie about 8%.
Comment #11 Posted By: Anonymous 02/08/09
Anonymous
iceberg straight ahead.
Comment #12 Posted By: Anonymous 02/08/09
Anonymous
Why do people keep saying rental brokers will always be needed? I have found plenty apartments in of luxury doorman buildings by going directly to no-fee landlords like Rockrose and Avalon over the years, and these days with Streeteasy is easier than ever to find owner-owned no-fee condos for rent all over Manhattan. Anyone who has a weekend or two to look can EASILY find there own no-fee apartment in this dire market.
Comment #13 Posted By: Anonymous 02/09/09
Anonymous
Smart landlords are beginning to realize that realtors and their ridiculous fees are presenting barriers to letting apartments. Apartments in NYC, when priced right, rent themselves. It is ridiculous to think that somehow a broker holds any sway over a potential renter's decision.
Comment #14 Posted By: Anonymous 02/10/09
Anonymous
#10, I realize that business is awful, but your spam here smacks of desperation. Pathetic.
Comment #15 Posted By: Anonymous 02/10/09
Anonymous
I mean without brokers, who would kiss the owners a$$ ? Certainly you can't expect the Renter to pay and kiss a$$. THERE HAS TO BE A MIDDLEMAN!
Comment #16 Posted By: Anonymous 02/12/09
Anonymous
The prospective renter needs a broker,do you know how many times On site leasing agents have to deal with walkins that waste thier time beacuse these people have no idea of the market, or where to start, without a broker you can look for weeks for an apt, with one 2 hr they should show you everyhting suitable and you can just pick...
Comment #17 Posted By: Anonymous 02/12/09
Marc Lewis
There has never been a better time to use a Broker to rent an apartment in Manhattan as if you pick the right one you are getting the benefit of their experience and relationships that in some cases have taken decades to form. The big plus is most realistic Brokers are charging nothing for their services these days. Its a win win for the Tenants to use a good Broker for Free. Beware of the ones who are still trying to charge you a 15% fee.
Comment #18 Posted By: Marc Lewis 02/13/09
hkman
I cannot understand in this mrket why anybody would pay a fee at all especially 15%. That aside brokers are needed more than ever right now BY OWNERS!!! The market is so soft right now that unless an owner has a broker working hard with regular ads the apartment will just sit empty, which many are. The days of showing a place 2-3 times and then getting applications are over. Renters know that they can be very picky right now and a good broker better know what needs to be done and be prepared to work twice as hard for the owners OP not some tenant paying 15%.
Comment #19 Posted By: hkman 02/14/09
Anonymous
The point isn't that it's a good deal to use brokers in this market. It is, since they are essentially free. The point is that this is an excellent time to re-evaluate whether brokers are needed at all. The brokers in NYC hold way too much power, and there needs to be a reorganization, NOW.
Comment #20 Posted By: Anonymous 02/17/09
Anonymous
I'm a small LL & use brokers. I need them because they advertise apt, qualify tenant, get Tenant's paperwork, prepare lease, have tenant sign, get tenant keys. That's a lot of work; I'm too busy running my business to do all that. So, I need rental brokers.
Comment #21 Posted By: Anonymous 02/23/09
Anonymous
it depends on the demographic you are working with. The renter paying up to $2800 per month can do it alone...easily. The busy professional that is seeking a higher priced apt. will just pass the work onto a broker as he/she does not have the time or inclination to search on their own; these renters are happy to pay the fee. If I have to do relatively little work I charge no fee. When the renter is surprised I say "just refer me or when you are ready to purchase I would be happy to find you a home." I have been pretty successful using this approach. It may take several years but they do remember. Also, one item that was not touched upon is brokers ensure the apt. they are renting is done legal. There are many horror stories in the news where tenants that have tried to save money by not using a broker have lost their first and last month's deposit, app. fee, move-in fee and other ancillary fees charged...which can top $10,000. We make sure all deals are legitimate and most of all legal.
Comment #22 Posted By: Anonymous 03/01/09
Anonymous
as a owner renting a brand new condo, with 50% of the units unsold and still on the market, has being quiet a saga. My apt in a pretty sunny upper east side location with lots of extra amenities which was in the market for over 8 months, finally got a broker with an offer for one of his client. He's offer was far less than expected and for more than I try to talk the broker to lower their commission it was impossible, they still ditch me out a healthy 15% which I found it abusive and unprecedent in the crisis we are living; not only that I pay for the broker fee, I gave a 1 month free, and pay for ALL their moving fees,which at the end the tenant is getting the a brand new 1 bedroom apt for the price of an old studio.
Comment #23 Posted By: Anonymous 03/01/09
Anonymous
to number 23 and 24 - it depends on the situation. if you are acting as a broker and working direct with the owner the broker can offer, with the permission of the brokerage, a lower fee. In a co broke - meaning broker A represents the tenant and broker B represents the owner, one cannot lower the commission because the broker B - representing the owner will just hold out until he/she finds someone willing to pay the full fee. Many of the posters here simply do not know how real estate works. In a co broke, the broker representing owner will go with the highest bidder. We do not make up the rules, unfortunately we have to follow them.
Comment #24 Posted By: Anonymous 03/01/09
Anonymous
yes, many on here are clueless. If rentals were so cut and dry we could charge much less. Renters/clients are so phony, dishonest and show no decency to the broker. Like #25 said, we do not make the rules, we follow. So many of you renters waste the brokers' time. After showing them 20 or so apt's they make up random baseless excuses why they don't like the apt's. and then decide not to move. If we rented all the clients we deal with we would probably cut the fee drastically. Until renters become honest and decent, mechanisms are in place to make up for the wasted time. I know some brokers that take clients around for days and then client just disappears. Also remember, the 15% fee goes to the brokerage and broker receives no more than half the 15% commission and 30% tax.
Comment #25 Posted By: Anonymous 03/01/09
Anonymous
Used Century 21, they got one month free OP from landlord & still charged me an additional fee to bring the total up to 15%. I will never use a broker again. If I had gone to this apartment on my own I would have had one month free rent & no fees. They also mark up the application & credit check fees as well.
Comment #26 Posted By: Anonymous 07/01/09
Anonymous
Icon Realty behind in the scenes is giving a month free rent. Most of the whole industry is offering that incentive, By the way Craigslist has a lot of the offerings that are on the market without advertising fees. Didn't Icon get burnt by over paying in 2006 for a package of property that is now hard to rent. It appears that they are down 25 to 30%, so I guess ICOn lost approximately 50 million in market value, Watch and wait when all those five year loans come due in two years.
Comment #27 Posted By: Anonymous 08/19/09
Anonymous
I can't believe Century 21! Marc lewis above said "beware the broker that tries to charge 15% and yet #26 said they marked up the fee to get to the full 15%. They tried to do that to me too! I guess there standard is to list apartments as "no fee" when they get OP and then try and get the rest of the 15% from the tenant.
Comment #28 Posted By: Anonymous 09/08/09
Anonymous
What are my rights...I moved into a unit and I am meant to pay my broker's fee after I moved in to save on costs, also when I moved in my unit was disgusting unclean (even though they claim I have to pay a cleaning fee when I move out). Ok so I have already paid my broker way too much money and I want to know if he can enforce the rest of his fees and also when I move out can I argue I shouldn't have to pay a cleaning fee as when I moved in it wasn't cleaned. Let me know all your thoughs. Thanks, Ms Canada.
Comment #29 Posted By: Anonymous 04/29/10