Broker-fee ban could boost some startups, doom others
Rental industry disruptors say ruling validates their business model
As rental agents descended into apoplexy after a state agency ruled that tenants need not pay their fees, one corner of the industry quietly cheered.
Startups pursuing various strategies to help renters find a home saw the Department of State guidance released last week as a validation of their businesses, some of which aim to circumvent agents or eliminate broker fees.
“Exclusivity agreements are kind of becoming radioactive,” said Lee Lin, founder of listings platform RentHop. He predicted landlords would gravitate toward open listings, where no single agent has an exclusive.
A temporary restraining order issued Feb. 10 has put the new broker-fee rule on hold until at least March 13, when both sides will be back in court.
But most of the startups contacted by The Real Deal believe they are ahead of the curve and that a change to the system where tenants pay broker fees is inevitable.
“It reinforces our business model and reinforces what we’ve thought about tenants not having to pay for it and having landlords cover those costs,” said Nicole Fishman, head broker at the real estate startup NestApple, which shaves a third off the standard broker fee of 15 percent of the annual rent.
“Real estate brokers in New York have not changed their business model for dozens of years,” she continued, “and it’s about time that things begin to change and get up to date to what consumers want.”
RentHop and NestApple are just two of many real estate companies founded over the past decade with the goal of disrupting residential brokerages.
Proptech companies focused on rentals are “one of the most active” niches in the industry, according to Michael Beckerman, CEO of CRETech. He predicted that if the courts allow the guidance to stand, a wave of new companies would swoop in.
“That’s where tech goes — where there’s inefficiency or some disruption of the normal process,” he said. “Trust me that the proptech world’s going to keep a very close eye on how this develops.”
Some companies already trying to shake up the way rentals are transacted have called the guidance a boon to their operations.
“Check us out at transparentcity.co for a list of apartments AND landlord contact info so you can rent direct from the property manager and not pay the fee,” tweeted one, just hours after word of the state’s guidance got out.
Check us out at https://t.co/wFTkYSQAzc for a list of apartments AND landlord contact info so you can rent direct from the property manager and not pay the fee.
— transparentcity (@transprentcity) February 6, 2020
The problem isn’t so much the ‘fee’ but the fact that there is broker involvement. This legislation does not remove the broker from the equation. Because supply is so low, any broker involvement would force the fee to be baked into the rent. Likely leading to higher rent
— transparentcity (@transprentcity) February 6, 2020
Elien Becque predicted a similar boost for RoomZoom, which she launched in 2015. It aims to help renters find compatible roommates.
“Our assumption is that either landlords will encourage renters to use these platforms because landlords will not have as much extra help from the brokers,” she said, “or renters will just come straight out without the middle person.”
Stephen Kalifowitz, president of Localize.city, which uses data to inform home hunters about the neighborhoods they are considering, said that property owners would “still need to have their vacant (or soon to be vacant) properties photographed, marketed and rented. The question is who will do it and how much will landlords want to pay.”
Lin, who said that two-thirds of listings on RentHop have no fee, believes the guidance is another step in that direction.
“A lot of that comes down to the fact that ‘no fee’ is probably the greatest marketing gadget that’s ever come out,” he said. “In all reality, the fee is getting paid somehow.”
“We might shut down”
Startups that cater to no-fee rentals could face a rougher environment if the state’s broker-fee rule stands.
Some — like Listings Project, which launched 17 years ago as a “free weekly compilation of vetted real estate listings” — could face new competition if not paying a broker fee becomes standard practice in New York, rather than something renters must search out.
But Listings Project founder Stephanie Diamond maintained that her site is established enough to withstand a shift in the marketplace.
“People have used Listings Project because there were no broker fees,” she said, “and they will continue to because they will find the apartments that they’ve always found: apartments with no fees.”
Ori Goldman, who in 2015 co-founded Loftey, which guarantees tenants lower rents, wasn’t as confident.
“I don’t know,” he said, when asked whether Loftey would need to change its business model if the broker-fee ban is upheld. “We might just shut down.”
The company counts fee-avoidance as one of its major perks. Its website advertises that if the broker charges a fee, customers can pay it off over time rather than up front. And although Loftey mostly represents tenants, not landlords, the Department of State guidance could still upend its strategy for no-fee buildings, according to Goldman.
“If we went to a no-fee building, and we didn’t get paid by the building, then we wouldn’t just turn to you and say you now owe us $5,000,” he said. ”We would just work for free. However, depending on where things end up, that might not be a viable model anymore.”
And the winner is … StreetEasy?
After an Albany judge temporarily blocked the guidance from taking effect, sources said one of the oldest proptech companies may be the greatest beneficiary.
“The biggest losers are the brokers, and the biggest winners are StreetEasy since they control most of the listings,” said Yale Fox, CEO of Rentlogic, which grades apartment buildings. “This will only increase their hold, which is already a quasi-monopoly.”
Under the guidance, startups that capitalize on broker fees would be in a tough spot, he continued.
“It’s not going to send more people to you,” Fox said. “It’s going to send more people to StreetEasy.”
StreetEasy has riled residential firms in recent months by insisting they manually enter listings, and last year it began requiring agents to submit their exclusive listing agreements for verification. Brokerage executives accused the Zillow-owned listings platform of using confidential information to go after landlord clients.
That strategy, and the state guidance, both minimize the value of agents to rental transactions, argued Donna Olshan, founder of Olshan Realty.
“The DOS guidance channels confusion in the marketplace and messages that brokers have limited value,” she said. “This is the narrative of websites like StreetEasy, Zillow, Trulia and other aggregators, which are really nothing more than virtual brokers masquerading as websites.”
StreetEasy said that last year, 55 percent of apartments on its site were listed as no-fee and the remainder had a fee. But a week after the state’s ruling, the portion of no-fee listings had climbed to 64 percent.
“The big change for many rental portals will be that the percentage of ‘no fee’ listings will go up dramatically,” said former agent Phil Horigan, an outspoken critic of StreetEasy who launched a free rental marketplace called frēlē.com in 2018. He’s also behind Leasebreak, which helps tenants find renters to take over their leases.
“I believe agents add tremendous value to the rental process,” he added. “But now, more than ever, landlords will be forced to calculate this value.”