The rental market in New York City is different from many areas of the country for one reason: Brokerage fees are customarily paid by the tenant, instead of the landlord or building owner.
Example of Rental Fees
Broker fees are often 15 percent of a year’s rent, or sometimes one month’s rent. For example, if an apartment is renting for $3,000 a month, the broker fee would be 15 percent of $36,000 ($3,000 x 12 months), or, a broker’s fee of $5,400. The tenant pays the $5,400 fee to the brokerage and in turn, the brokerage pays the agent their share of the commission, or what is known as a “split.” If an agent’s split is 60 percent, the agent would make $3,240.
If there are two agents — one representing the landlord and one representing the tenant — that commission is probably divided 50-50 between the two brokerages and then split again to each agent. In our example, that’s $2,700 to the landlord’s brokerage and $2,700 to the tenant’s brokerage. If each agent has a 60:40 split, each agent gets $1,620. If you are in doubt, it’s always best to clarify how the money will be divided.
While the split or commission is paid out after the money comes into the brokerage firm, just as with a sales listing, often the split that the agent sees is higher on a rental deal than on a sales deal, because the amount of money coming in is lower. A new agent might, for example, have an arrangement with his brokerage firm where he makes a 50-50 split on sales commissions, but a 60-40 split on rental commissions. Again, these splits are negotiable with brokerages depending on an agent’s level of work and experience.
Variations to Rental Commissions
One-Month Free: The law of supply and demand forecasts that when the market is hot, landlords will raise rent. Conversely, when the market is slow, it’s predictable that landlords will reduce rent. Many landlords, however, offer incentives for signed leases other than lower rent prices. One of these is “One Month Free,” so that the tenant pays for 12 months and then receives the 13th month free.
If the tenant is paying a price of $3,000 a month (let’s call that “gross rent”), that is a total of $36,000 over the term of the lease, which would pencil out to $2,769 a month for each of the 13 months. Some landlords will advertise that lower, enticing figure as “net-effective rent.” As an agent, make sure to clarify with your customer whether you are charging your brokerage fee on the gross rent or the net-effective rent, because you don’t want to be in a situation where the client expects to pay you 15 percent of ($2,769 x 12) and you expect to receive 15 percent of ($3,000 x 12). Remember, commissions are always negotiable.
Owner Pays (OP): Another way that a landlord may try to move an apartment in a slower market is to offer an “OP”– which is slang for “Owner Pays.” This means the landlord or property manager will pay the broker a commission upon finding a tenant who signs a lease. The OP might be half a month’s rent, or it might be one month — there is no one standard. Ask experienced rental agents at your firm who might share their OP experience with different large landlords or property management companies. Just remember that unlike tenant-paid commissions, where a check is written at lease signing, an OP can take a month or even two to be paid from the landlord or property manager to the brokerage. In the case of a $3,000/month apartment, the commission could be $3,000 or even half that – $1,500. The brokerage then pays the agent their split.
No-Fee Listings: If you are representing a potential tenant, you should explain to your client what you expect to happen in a “no-fee” situation. For example, many large landlords will advertise apartments as “no-fee” and that means the tenant does not have to pay them anything. However, if you as the agent bring in a tenant, management companies will expect you to collect your commission straight from the tenant. The tenant is then susceptible to saying, “But the ad said no-fee! Why are you charging me money?” Or, even worse, the tenant will try to go straight to the landlord to save money, while not compensating you for your time.
The best way to protect against not being paid for showing a no-fee listing is to be upfront from the start. Tell your client that you will show them everything available that fits their criteria, no matter if it’s a fee or no-fee listing.
To defend your rental commission, establish early what services you plan to provide (i.e., screening of apartments, access to the apartments, expertise with the lease process, inside information on neighborhoods, etc.) and to get the tenant to agree to compensate you for those services when a lease is signed. Also, you might wish to emphasize that the broker’s fee is not annual, so that while it might seem expensive to pay $5,400 to snag a $3,000/month apartment, remind them that if the tenant stays for say, five years, the brokerage fee amounts to only about $900 per year for the help in finding them an amazing home. Or, perhaps you might establish an agreement with the potential tenant that is they rent a no-fee listing, you would receive a flat-fee payment of $2,000 or a certain portion of the annual rent, but not as high as 15 percent. Everything is negotiable, but the main thing you need to do is sell your value and services to your clients!
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