Demystifying the rental market

BROKERS' FEES! NO FEES! LOW FEES!
What's it all mean?

If you've ever ventured into the rental world of New York City, you know that it's full of surprises not seen in other markets. Apartments last mere days; every neighborhood has its own quirks; and then there’s the broker’s fee. Being from Southern California, I was floored the first time I ventured out with an agent, only to find that I was expected to pay a fee upon lease signing – on top of my first month's rent and security deposit to my landlord. Excuse me?! Shouldn't the landlord be paying that fee? After all, the seller pays the broker's fee in a sales transaction; why would it be any different here?

Now, as a Licensed Real Estate Salesperson myself, the oft-misunderstood world of renting is slowly coming into focus, and I want to share some insight with you all to help with your hunt.

What You Need Before Starting Your Search
One of the most important things to do before starting your search is getting your paperwork ready so you can jump when you see “the one.” Great apartments don’t last long in this city; really, nor do just OK apartments. With tons of potential renters and relatively low inventory, you have to be prepared so you don’t miss out. So, make sure you have the following squared away and ready before you head out to look at apartments:
 
Will You Qualify?

• Income Requirements – Most rentals require that you make 40x’s the monthly rent. e.g. A $2,000/month would require a minimum annual salary of $80,000.
  • Not quite there? Some buildings allow guarantors, who will also be included on the lease and be liable for any defaults. A guarantor generally must make 80x’s the monthly rent, so on that same $2,000/month apartment, they’d need to show income of $160,000/year.
  • Your broker should help you identify what the restrictions are for guarantors in any building you may be looking at: some require NY state residents; others any US resident; and anything in between.
• Credit Score –Every landlord will run a credit check, so make sure you know your credit score. If there are any marks on your record, or your score isn’t very strong, be sure to talk to your broker about why so he/she can explain it when you put in your application. Don’t try to hide anything and wait for it to come out in the credit check.

 
Have These Documents Ready

• Bank statements – Bring your most recent bank statement(s) with you, and make sure there’s enough in there to cover the building’s requirements at signing: generally, 1st month, 1 month security, and a 15% broker’s fee.
• Tax Returns – Last two years (1st & 2nd pages only)
• Letter of Employment – on company letterhead, with your title, length of employment & salary
  • If self-employed, you’ll need a letter from your tax accountant
• Paystubs – two most recent (consecutive) paystubs
• Landlord Reference Letter - stating address, monthly rent, length of tenancy, and landlord’s contact information.
• Application / Credit Check Fee – be prepared to pay an application and credit check fee, usually per tenant.

 
Now that you have all your paperwork ready, know your credit score, and satisfy the 40x’s requirement (or have a guarantor that meets the 80x’s rule), let’s talk about the dreaded BROKER’S FEE.

Real Estate 101: How Agents Get Paid
Let's start with how agents get paid, because everything comes back to the money, whether you're paying a commission fee or not. As independent contractors, agents work purely on commission, and like anyone else, most of us don't like to work for free. There are 2 ways a broker can get paid when renting an apartment:

1. The landlord/developer pays them a commission
2. The incoming tenant pays them a commission

What's a Typical Broker's Fee in NYC?
The standard broker's fee in NYC is 15% of the annual rent (or 1.8 months' worth). This fee is generally split 50/50 between the listing agent (the agent representing the landlord) and the tenant’s agent, so each typically receives 7.5%, or just shy of 1 month's rent.

Why Does the Tenant Pay in NYC?
NYC is unique in that the incoming tenant generally pays the commission. This is primarily driven by the basic economic concept of supply and demand: the city has very tight inventory (low supply) and tons of renters (very high demand), which translates to landlords refusing to pay a broker for a hot commodity that renters want and need.

But Aren't There "No Fee" Apartments? What Are Those?
This wouldn't be the NYC rental world if there was a simple explanation here. The "No Fee" designation can actually mean multiple things, and it is a very important topic for renters to clarify with their agents before beginning their search. It is prudent that you have an honest conversation with your broker about your expectations and willingness to pay a broker's fee so that there are no surprises at closing. 

The True "No Fee"
For some apartments listed as "No Fee," the landlord is paying the entire 15% fee and both agents will be compensated. You will not fork over any money at the lease signing.

The "You May Still Owe a Fee"

1. Other times, the landlord will cover the listing agent's fee only. If you're working with your own agent, they will not be paid a commission by the landlord, and you will still owe a fee to them. These are known as "Collect Your Own Fee" apartments, which is a term that generally will only be available for your broker to see. You may also see this shortened to CYOF.
2. And still other times, the landlord will pay a reduced fee (e.g. one month vs. the standard 15%). In these cases, you may still owe a fee equal to the difference between the standard rate and the landlord's payout, which you'll need to discuss with your agent. These will sometimes be labeled as "Low Fee" or "Reduced Fee" apartments.
   
   So how can they market these as "No Fee?!"  Well, if a potential renter were to walk in off the street without their own broker, they wouldn't need to pay any fee. Since the listing agent is already being covered by the landlord, and (s)he's the only party involved, there's no additional fee to be paid, thus the "No Fee" designation.
   
   So then why would I work with a broker on these types of "No Fee" apartments? Good question! And really, the choice is completely up to you, but I implore you to read to the bottom to understand the value that a broker can provide. That being said, you can specify to your broker that you don't want them to alert you to, or show you any, "Collect Your Own Fee" or "Low Fee" listings. The onus is then on you to find these listings yourself and make the appointments to view them. Depending on if you've signed a commission agreement with your broker, and the terms of that agreement, you will typically owe a fee to the broker if he has connected you to the property in any way, even if that’s just by emailing you the listing or telling you the address. So be very clear if you don't want your agent to send you certain types of properties.

The Hidden Costs of "No Fee" Listings
Nothing comes for free, and when the landlord is picking up the tab on the broker's fee, you can rest assured he's making up for it elsewhere: higher-than-market rents, amenity fees, etc. For many people, the allure of not shelling over an additional couple thousand at the signing table for a broker's fee is enough to overlook these tack-ons, but it's prudent to understand that they're there.
 
I’ll Just Find an Apartment on My Own and Avoid the Broker's Fee
Thousands of New Yorkers do it every year, and it's not an impossible feat. But the task is daunting, and apartment hunting can be a full-time job. As an agent, let me explain how we help the process and earn our fees:

• We pre-qualify you. We take a look at your finances beforehand to make sure you'll qualify for that dream apartment. Is your income not 40x's the rent? We'll explain other options for you to consider. Is your credit not up to par? We'll be prepared to explain why.
• We then do the legwork for you:
  • We scour the listings to find that perfect 2-bedroom, 2-bath in the West Village for $2,000/month that you've always dreamed of (Spoiler Alert: we won’t find that)
  • We schedule all the appointments for you. While some rentals do open houses, many are only available for viewing by appointment.
  • We understand your time is valuable, and we maximize your free time by creating an itinerary to ensure you can see the most number of apartments in the shortest time possible. 
• We negotiate on your behalf. We know the market, the comparables, and the trends. We will work to negotiate a fair price for the apartment of your dreams.
• We guide you. Questions about a lease? Never filled out a board package before? (Co-ops are for another blog, another day, but if your dream apartment is in a co-op or condo, you will generally need to fill out a board package -- and possibly even go through a board interview). Want to make sure that that exception you discussed actually makes it into the final lease? We review all the documents with you, and we advocate on your behalf to ensure all your concerns are addressed before signing.
• We coordinate for you. We can help coordinate your move-in for you or provide any guidance post-closing.

 
The goal of this post was to begin the process of demystifying New York’s rental process, and I hope I’ve helped clear things up some. If you have any questions or want to start looking for your own apartment to rent, please contact me any time:

Matt Martin
Licensed Real Estate Salesperson
831 Broadway, New York, NY 10003
O: 212.521.5704 | C: 323.790.6288
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[email protected]  |  Halstead Property, LLC