Cutting back on rental commissions

Rental brokers see fees shrink well below 15 percent norm

Jan.January 29, 2009 02:48 PM

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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