To Fee, Or Not To Fee

…that is the question!

There are two general sources representing rental apartment listing information: apartment owners or management companies working on their behalf, later collectively called “landlords”, which we would also call the “direct leads”, and licensed real estate professionals, also known as brokers, or sometimes, less favorably, the “middle men”, who represent the listings (exclusively or not) on behalf of the landlords and based on the listing agreements.

The landlords usually advertise their listings as “no fee”. In terms of the brokers, it is usually divided between a “fee” and “no fee”.

And by “fee” we mean “broker’s fee”.

Landlords do not charge fees since they rent directly. The rent they collect from their tenants covers their compensation. But when the broker is involved in the transaction, so is the fee (in some way, shape, or form).

‘Broker Fee’ and ‘Broker No Fee’

The former is easy to understand: the broker charges a fee for her services from the prospective tenant. Now the later is a bit trickier: why would the broker, who makes a leaving out of commission, charge her client “no fee”? The answer is: because she is being paid by the landlord, who in fact is, in this situation, her client (by the way, New York State law requires real estate licensees who are acting as agents of landlords and tenants of real property to advise the potential landlords and tenants with whom they work of the nature of their agency relationship and the rights and obligations it creates. When you first speak to “your” broker, make sure she gives you this form). The fee here is an incentive some owners are willing to provide in a competitive market, in order to fill in their vacancies quicker.

But make no mistake: this incentive is an expense that will need to be covered somehow. One way to look at it is by the prism of time value of money: by offering an incentive, the landlord rents quicker, therefore is reducing his vacancy time. This creates savings in pure dollars and cents, and in such case, in all fairness, an incentive should not affect the tenant’s bottom line. But one may argue that “owners paid commission”, or “OP” as brokers often call it, can also be rolled into higher rents (one indirect example is when the landlord is offering “owners paid commission” to brokers OR “free month rent” to tenants, but not both). So in this case it will be on the tenant to bear the burden in the end. The truth is probably a combination of both.

So what does it all mean in terms of “getting a deal”? Is it just as simple as to say that 1) “for rent by owner” are the best deals out there because they are direct, with no broker being involved, and no broker’s commission needed to be paid; followed by 2) “for rent by broker, no fee”, where the broker is being paid by the owner; and finally 3) “for rent by broker, fee”, where the commission needs to be paid by the tenant?

We think the real answer lays in the recent comparables, and will vary in different market conditions. The calculations will also change based on your time horizon.

The reality of a deal as well as the math behind it will look different in the busy spring and summer, and the slower fall and winter rental seasons. It will look different in more and less desirable neighborhoods, and in apartment buildings with a few, and those with many vacancies. And the initial costs of securing the apartment of your liking will also look differently from a perspective: if rolled into one, two, or more years of staying in the apartment.

Therefore, we advise you not to limit yourself just to one category. Check direct listings, which you may find many (even on our own website), but be open to working with the real estate professionals as well. Sometimes they might be offering something truly unique (especially when they represent the owner exclusively). And sometimes this “uniqueness” is worth paying a premium for.

And if you choose to work with the broker, be sure to ask her the following questions: 1) whose interest she represents in the transaction (you should receive it in writing); and 2) how she is being compensated. Look for potential conflicts of interest and straighten them out before you sign anything.

So, to fee, or not to fee? To good choices, and to better deals!

Next time on “Rental Navigator”: Choosing a broker. The right one.