It’s (Mostly) a Wash – The Mathematics of Broker’s Fees

Over 90% of rental and sale deals in Manhattan involve at least one broker.  Brokers and agents are licensed real estate professionals, and thus are suited (legally) to handle the marketing and processing of each transaction.  Not every agent is a joy to work with – we on the Blumstein Team feel the side effects of this everyday as we hear sob stories and have to pick up the pieces of somebody else’s mess.  But none the less like any other professional, there are many reasons our job is necessary.   And as it is a professional service, someone must end up paying for all the time and effort that goes into becoming a market savvy agent and helping ease people’s real estate pains.

  

SALES

However, who pays for the services varies.  In sales, the owner of the apartment almost always pays the broker a percentage of the sale price for listing and marketing and processing the sale.  The percentage can vary, but most often it in Manhattan and Brooklyn it is around 6%.  If the property is sold to someone who has a broker as well, that fee is split in two and half is paid to each brokerage.  This is a co-broke.  What it means is that the buyer DOES NOT have to pay their broker for a sale transaction.  Do note, this is not an absolute if you are dealing with a non-REBNY firm (Real Estate Board of New York) which may not co-broke.  95% of brokerages in Manhattan are REBNY members. 

  

RENTALS

Unlike sales where the fee is almost always paid out by the owner to all brokers involved, rental fees are much more subject to the current strength of the market.  In a down economy with a weak rental market, there will be a lot more incentives for prospective renters.  This can come in the form of a month’s rent worth of free rent or broker fees paid to your broker.  The idea is that owners need to boost interest in their place as shelling out a month’s rent will help the unit not be empty for more than a month, by which time paying a month up front could have saved you money.  In the case of a condo or coop that often requires the use of a broker, an owner may pay their broker’s fee, so that a renter has just half a fee to pay. 

When the rental market is strong (in Manhattan that is with vacancy under 1% in a given area), it is much more of a toss-up.  Fewer owners and management companies will give away a month’s rent or pay a broker’s fee, and will put that burden on the renter’s who are competing for limited supply.  In this case, a broker’s fee can be up to 15% of a years rent, or 1.8x month’s rent. 

15%?  That feels so high!

• It is a good sum of money in many cases, but again, it goes to paying for the marketing (a web presence like Corcoran’s doesn’t just happen overnight), processing and the right to the time, knowledge and services of the broker.  And as with a sale, if the prospective renter has a broker the 15% is shared.  The net result is that most agents end up bringing about 1 month’s rent back to their brokerage who takes a % and pays the agent the remainder.  This offers some perspective, as the average agent will take away half to two thirds of a month’s rent.

 

Well should I then avoid full fee apartments to have less upfront cost? (NO!  Oddly enough, you could be missing out on value)

Some renters who want to limit their upfront costs may opt to look on their own (and could still find a place with a 15% broker’s fee) or they ask their brokers to limit the search to non full fee (out-of-pocket) apartments.    This is where some math combined with our experience can shed some light on what I referred to in the title as a wash. 

Almost all full fee (15% out-of-pocket) apartments are going to be in a Condo or Coop.  This is because an individual who owns the property has retained the services of a broker.  Often this is demanded by the board of the building (thus keeping out random people off the street who are not accompanied by a professional).  However, because the property has an owner and not a faceless management company, the apartment is more likely to be updated and/or renovated to keep with the times and the owner’s personal preference.  

On the flip side, rental buildings (often owned by corporations with management companies running them) that pay part or all of the broker’s fee realize that the upfront cost is less, and thus can charge even the same amount or more for the monthly rent than a relatively equal condo/coop that has the nicer personal touches of an individual owner but a higher upfront fee. 

When it comes to practice in real life, I would think of it like this.  Imagine you are looking for a 1BR in the mid $2,000s.  If you found the same apartment with a full fee, a half fee, and no fee, you are likely to see rents and yearly all in costs are as follows:

• $2,450/mo with a 15% fee of $4,410.  For the year, that is $33,810 all in.
• $2,550/mo with a 1 month fee of $2,550.  For the year, that is $33,150 all in.
• $2,700/mo with NO fee to move in.  For the year, that is $32,400 all in.

To note, I came up with the rents alone as I have seen them play out in my professional experience.  The all in costs were figured out 2nd.  As you can see, there is a small but tangible difference at year’s end.  But what if you were to stay a second year?  Management companies do not turn around and give you an incentive like a month’s rent or broker’s fee for the 2nd year.  Thus, the new all in totals for 2 years are:

• $2,450/mo with a 15% fee of $4,410.  For 2 years, that is $63,210 all in. 
• $2,550/mo with a 1 month fee of $2,550.  For the year, that is $63,750 all in. After the first year you are paying $1200 more than the 15% fee apartment.
• $2,700/mo with NO fee to move in.  For the year, that is $64,800 all in. After the first year you are paying $3,000 more than the 15% apartment.

So what I tell my client is that if they are positive they want an apartment for just 1 year, feel free to limit the search to a certain fee level, it is practically a wash.  But if you are thinking of plunking for 2 years or more, then the amortized cost of the larger upfront fee can actually save you money in the long-term.  

Note: If you have the time and patience and wherewithall to go to buildings and ask directly if they have a rental opening, you will be paying in the $2,550 range with NO fee and this save the most money the first year. 

Here is a graph of yearly costs per year in each apartment:

**Though it says $2,400 in the graphs for the blue lines, the math used to create the graphs are actually at $2,450 as in the example above.  I labeled them wrong but producing this graph again is an unnecessary expenditure of time, given this note.

Here’s a graph of the value, which we will consider as cost per year relative to the NO fee listing ($2,700/mo):