How broker fee bill would change NYC

A New Yorker searches for an apartment, finds one and signs a lease — then has to pay the landlord’s broker 15 percent of the annual rent to get the keys.

This is what New York City Council member Chi Ossé is trying to prevent. His bill, being debated today at City Hall, would require whoever hires a rental broker to pay the broker’s fee.

That sounds simple and reasonable. But like every regulation, it would have trade-offs and unintended consequences — not all of which are predictable.

Thousands of New Yorkers have strong feelings about the issue and will voice them today at rallies for and against Ossé’s bill. Some will testify at the Council’s hearing. Few if any will take an objective or comprehensive view of the matter.

However, if Council members listen to all the arguments, they will realize this is more complicated than it seems.

My initial reaction to the bill was that Ossé is right: Tenants should not have to pay a broker they didn’t hire. Last year I called Andrew Barrocas, CEO of the brokerage MNS and an opponent of the bill, to hear why tenants should ever have to do that.

They don’t, Barrocas said.

“You don’t have to rent that apartment,” Barrocas explained. Instead, they can find a no-fee rental.

This is how markets work, he noted: Landlords compete and tenants can choose what suits them — for example, a $3,000-a-month apartment with a broker fee or a $3,150 apartment without one.

Over three years, both apartments cost the same, so a tenant expecting to stay longer should opt for the lower rent with the upfront fee.

Ossé disagrees, because he doesn’t think broker fees affect rents. “If your landlord could increase your rent tomorrow, they would have done so yesterday,” he said.

Not necessarily. Many landlords undercharge for rent, which is why RealPage and other tech companies pitch software that suggests the highest feasible rent.

Landlords sometimes charge below-market rents for tenants they especially want to keep, or just because of inertia. But generally they charge enough to make a profit, if the market will bear it, and thus would charge more if their broker fees or other expenses went up.

Barrocas believes Ossé’s bill would reduce the incomes of his agents, who handle leasing for 20,000 apartments. But just because he has a vested interest doesn’t mean we should disregard his arguments.

He draws an analogy to middlemen such as Ticketmaster. Nearly all sports teams route ticket orders through such services, which tack on a surcharge that fans pay. That might seem unfair, but outsourcing this task saves money for teams, who lower the face value of tickets accordingly.

The total price — face value plus surcharge — is what matters. It’s how fans decide whether to go to the game, watch it on TV or do something else. Teams can’t charge more than fans are willing to pay.

If Ossé required teams to pay Ticketmaster’s fee, they would raise ticket prices. The total cost would be the same as it is today.

By that logic, requiring landlords to pay their brokers won’t save renters money overall.

But some individual renters would benefit — the ones who are paying broker fees every year or two because they keep moving. The money they’d save under Ossé’s bill would be offset by increased rents across all market-rate rents.

Basically, frequent movers would be subsidized by all other renters.

That’s probably unfair to stable tenants, but it’s not a horrible outcome. Frequent movers tend to be folks living on the margins. And a lower cost of moving would give renters flexibility and make the market more efficient.

But the Ticketmaster analogy suggests that tenants as a class would not save money.

They might lose something else, though.

Brian Hourigan of Bond New York says about 75 percent of his brokerage’s rentals in the city are open listings, in which the landlord shares its list of available units with brokers and offers then an OP — an owner-paid commission — if they can bring in a tenant. In about half of those, the landlord stipulates that the broker can represent the tenant in lease negotiations.

In those cases, the tenant is being represented but the owner is paying the broker’s fee. Tenants love that, even if the rent is a little higher than it otherwise would be (see above). So do brokers. Landlords are essentially paying for brokers to procure the tenant.

Under Ossé’s bill, this would be illegal. More tenants would go without representation to avoid having to pay for it.

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Once you start thinking through how the legislation would play out, these and other ramifications become apparent. Other consequences might be wholly unexpected. Some people would be hurt by the bill and others helped. We just don’t know who or how much.

But the laws of economics make it clear that regulating who pays brokers is not going to make housing any cheaper. Flexibility to move within New York City means a lot less when the vacancy rate is 1.4 percent. Which brings something to mind.

What if thousands of brokers and tenants rallied at City Hall for more housing rather than about who pays broker fees? Ossé supports adding supply. Perhaps he should shift his focus to that.