It's official! Tenant-paid rental broker fees in New York City are history.

Yahoo

a day ago

A longtime scourge of New York City renters — paying a hefty broker fee to move into an apartment — is officially a thing of the past.
The city's FARE Act — which prohibits landlords from passing broker fees to their tenants — took effect on Wednesday after a judge denied a petition from a real estate trade group seeking to block the law.
It's expected to dramatically lower the up-front costs of renting an apartment in one of the nation's most costly and competitive real estate markets. The change is taking effect just as the city enters its leasing high season.
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Many tenants are cheering the changes, while others in the real estate industry are noticeably less thrilled. Landlords are fretting about their thin margins getting even thinner, and brokers fear their earnings will fall.
'I think the days of paying high fees are going to be over,' said Micky Lalchandani, the managing broker of Undivided Real Estate. 'It may also open up avenues for different business models.'
Until recently, around half of the 2.3 million rentals in the city's five boroughs required tenants to pay a fee to the rental broker hired by their landlord when they signed a lease. Fees varied, but were typically between one month's rent and 15% of the annual cost of a lease.
That meant tenants had to pony up thousands of dollars in addition to the standard start-up costs of the first month's rent, application fee, and security deposit. For example, a renter hunting for an apartment that costs $3,850 a month — the city's median rent as of April — could end up paying $14,630 in up-front move-in costs, with $6,930 of that sum going toward a nonrefundable 15% broker fee.
New York City Council passed the FARE Act last fall with a veto-proof majority, putting an end to tenant-paid fees and requiring more transparency around rental costs. Under the law, tenants are still permitted to hire and pay their own brokers if they want apartment-hunting assistance, but no longer have to pay for the brokers that landlords hire. Violators, who can be reported via a complaint to the city's Department of Consumer and Worker Protection, face city fines of up to $2,000 and a potential additional $2,000 fine from the state.
StreetEasy, the Zillow-owned New York listings platform, estimates that the broker fee ban will drop the up-front costs of renting a formerly fee apartment more than 40% on average — from nearly $13,000 to $7,537.
'I think that's really significant for people," said Christian Emanuel, a real estate agent at Brown Harris Stephens who had primarily been working with no-fee rentals before the FARE Act. "You're already lopping off all of this money that has to come out of people's pockets up front."
Rental brokers work all over the country, helping landlords with the administrative aspects of finding new tenants. In the pre-Internet days, they could effectively be gatekeepers to little-advertised listings. But now, many tenants turn to listings sites to screen potential apartments and may not interact with a broker until they request to tour a unit.
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Everywhere except for New York and Boston, it's been standard for landlords to pay the brokers they hire. The changes in New York are poised to bring the city more in line with how rental markets work elsewhere in the country.
But in many ways, the New York rental market is unlike any other. For one, 70% of residents rent, and more than half of all households are considered rent-burdened, meaning rent eats up more than 30% of their monthly income.
And inventory in the city is also extremely constrained. Manhattan, home to 1.6 million people, had just 6,300 active rental listings in April, according to Corcoran Group data. In recent years, the citywide vacancy rate has fallen to as low as 1.4%.
The New York Real Estate Board, a trade group that, along with several brokerage firms, sued the city to block the law, argued in its lawsuit that the changes will drive up rents and worsen the inventory shortage. Some brokers contacted by Yahoo Finance shared those fears.
'The sentiment is that that fee is already baked into your rent,' said Michael Jeneralczuk, team leader at Living New York, a real estate firm that represents landlords. 'I think long term, the implications will be much higher rent growth.'
Exactly how much monthly rent could rise is up for debate. No-fee apartments in New York have generally rented at somewhat of a premium to their fee-based counterparts as landlords work some of their costs into their tenants' rent, according to an analysis by StreetEasy Senior Economist Kenny Lee.
But how big that no-fee premium is depends on broader market conditions. When New York lost population during the pandemic, landlords broadly advertised listings as no-fee and ate the costs associated with working with brokers to attract tenants. When rental demand roared back in 2022, they passed those fees back onto tenants in the form of rent that was 6.4% higher than comparable fee-based rentals.
Lee analyzed properties that switched to no-fee ahead of the FARE Act's implementation and found that rents rose, but not wildly out of step with the broader market. In April, rentals that dropped their broker fees were listed for 5.3% higher than they were a year earlier, compared with 4.6% rent growth in units that kept the fees.
'Market conditions will still prevail over landlord expenses,' Lee said. 'Property managers pay a lot of attention to demand and supply.'
Ahead of the FARE Act's implementation, many properties had already switched over to no-fee. Some landlords and brokers holding out in the hours before the law went into effect were testing two-tiered pricing models, like listing a two-bedroom East Village rental at $4,200 with a broker fee, or $5,000 without one. On Wednesday morning, many were re-listed as no-fee, with rents a few hundred dollars higher.
Jeneralczuk has concerns about inventory levels going forward. He's seen fee-avoidant landlords opt to pull listings from the market with the intent of only showing them to tenants who hire their own broker instead of paying for a broker to advertise them broadly.
Though there's another argument that the FARE Act could end up improving inventory by making it easier for New Yorkers to move. High up-front moving costs effectively lock some New York renters into their homes, StreetEasy's Lee said, and lowering them should ease that friction.
Time will tell. Lease turnover typically peaks in New York in July and August, as families move before the next school year and the city's many students and recent graduates relocate or settle in, giving the market a busy adjustment period.
'The goal is, sometime in the next couple of months, everything normalizes,' Jeneralczuk said. 'This will be the new normal, and we'll be able to go from there.'
Claire Boston is a Senior Reporter for Yahoo Finance covering housing, mortgages, and home insurance.
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