Brokerages on rental application fee cap: “It hurts”

Nooklyn agents and CEO among first victims of $20 limit

TRD New York /
Oct.October 16, 2019 12:00 PM
Brokerage firms are strategizing ways to make up losses after the cost of application fees was capped at $20. (Credit: iStock)

Brokerage firms are strategizing ways to make up losses after the cost of application fees was capped at $20. (Credit: iStock)

Since lawmakers clarified last month that agents and brokerages can only charge up to $20 for the preparation of rental applications, the pain has been felt acutely by some.

The cap, which was part of the rent law passed in June and applies to brokerages and agents representing landlords, claimed its first victim last week when Nooklyn founder and CEO Harley Courts stepped down amid backlash over the firm’s slashing of commissions and delaying of payments to make up lost revenue.

“Every rental company out there is going into cardiac arrest,” said Eddie Shapiro, president of New York-based brokerage Nest Seekers International. “Like, every single one of them.”

As of last week, 383 companies (including owners and brokerages) were handling exclusive rental listings in Manhattan, Brooklyn and Queens, according to a Perchwell analysis of the Real Estate Board of New York’s Residential Listing Service.

Shapiro said the fee cap will typically hit brokerages, not agents, because firms often use fees to cover administrative costs and sometimes to pay third parties who compile financial documents, such as credit reports, for applications.

“It hurts the house,” he said, adding that he wasn’t drawing on personal experience because Nest Seekers hadn’t built out a rental infrastructure at the expense of sales.

David Schlamm of City Connections is experiencing the crunch first-hand. Before the cap, his application fees totaled $125, including credit checks. Now he charges $20.

“The immediate effect is that the company will make less money,” he said in an email.

Schlamm hopes to make up for his losses by hiring more high-producing brokers and helping existing agents close more deals.

“In many cases I am now losing money on the cost of the credit check,” he said, “and more damaging is that I still have to pay someone seven days a week to run and organize these reports.”

Schlamm said he had heard talk in the industry about finding loopholes to the law, but decided not to go down that path.

Such loopholes include requiring tenants to sign forms that turn an owner’s representative into the tenant’s agent, circumventing the requirement for agents to adhere to the $20 cap.

Schlamm argued the law should be uniform for all agents because the current distinction “creates confusion and causes bad behavior.”

Several brokerage leaders acknowledged that the fee cap benefits renters that the industry had some bad actors who charged hundreds of dollars for a rental application. But many also argued that applications are a business expense that fees should cover.

“There’s costs of running a business,” said Gary Malin, head of Citi Habitats. “[The law] misses the boat that brokerages do have expenses.”

Douglas Wagner of BOND New York said the cap has turned a profit source into a potential money-loser.

“It’s not a huge revenue source but it’s income that we rely on and now we don’t have,” he said. “In some cases, it actually ends up putting us in the negative.”

Wagner said BOND had a group of salaried administrators responsible for application fees and they would try to customize applications to proactively address any concerns a landlord might have about a potential tenant’s finances.

He said the firm represents about 2,000 landlords on rentals and typically at least two agents split a commission for each deal. Until September, the firm charged $125 per application.

At Oxford Property Group, where the firm collects a desk fee from agents instead of splitting their commission, Adam Mahfouda said they used to charge $75 to $100 for application fees.

“If you don’t make another $50 it’s not life-changing for an agent or brokerage company,” he said. “If you run on a really slim margin … it could be really, really meaningful. For us, it’s not really the case.”

He also noted that Oxford’s 600-agent workforce handles residential sales and commercial transactions.

Jordan Sachs, the founder of brokerage Bold New York, also said the cap hadn’t led to any changes at his firm, though he said it is frustrating to pay out-of-pocket for credit reports.

“It certainly would never be something we would penalize our agents for,” he added.

Developers and landlords who manage rental listings in-house also report a shortfall between what they pay for screening reports and what they can recover from applicants.

One industry source who declined to be named pegged the discrepancy at around $40, which for a building might be a couple of thousand dollars annually. That wouldn’t be significant for a high-performing asset, but would be for a building that is “scraping by,” the person said.

BOND’s Wagner said it’s too early to tell how the month-old cap might affect firms’ rental businesses.

“We’ll have to wait and see,” he said.

Write to Erin Hudson at [email protected] and Sylvia Varnham O’Regan at [email protected]

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