A no-fee apartment is almost exclusive to one city in the U.S. The process of renting an apartment in New York City is like no other. When you combine the competitiveness of landing an apartment with regulations from rent control and rent stabilization, renting in the Big Apple arguably wins the award for the most complex rental situation in America. And that's where the no-fee apartment phenomenon kicks in.
What is a no-fee apartment?
The no-fee term is used almost exclusively in New York, where both landlords and New York City apartment hunters tend to use a real estate agent or broker to facilitate the rental process. In New York, particularly in the high-demand areas of Manhattan and Brooklyn, the renter is the one who typically pays the broker fees, which can be quite hefty. In a no-fee apartment, the tenant does not pay the broker fee. This can amount to a huge savings for prospective renters. The term "no fee," however, is somewhat of a misnomer because there is a fee; it's just that the renter doesn't pay it -- the landlord does.
Some background information
A no-fee apartment is mainly found in New York City. But with Boston apartment rentals, it's also common for the tenant to pay the broker fee. The no-fee (meaning broker-fee) concept regarding renting an apartment is the way most rental situations happen in virtually every other city in America. The no-fee practice is so commonplace everywhere but New York that no other city has a need to name the practice in the first place. In most cities in the United States, people either rent a home all by themselves, without needing to use a real estate agent and pay an agent fee, or if they do use an agent, then the landlord pays the fee.
Because of the demand for rentals in New York City combined with the low supply, New York City renters began using a real estate agent or broker to land a coveted NYC address. Because brokers typically don't work for free, someone needs to pay them, and that someone, in New York City, has traditionally been the renter. With no-fee apartments, however, the renter no longer pays this fee. This sounds great for tenants, but here's the catch: The broker's fee does not just disappear. It shifts to the landlord. If you're a renter cheering for this development, you might want to hold off on the celebration.
Competition means middlemen
In most places around the country, a real estate agent is unnecessary much of the time when it comes to renting an apartment or house. It's easy enough for a prospective tenant to search listings online, contact the property manager or owner, view the unit, look over the lease, decide whether or not to apply, and then apply on their own (often online).
Regarding a NYC apartment, even if the renter doesn't hire an agent or broker, the landlord likely has and requires the renter to go through their broker. The system makes it almost impossible for renters to rent an apartment on their own since real estate brokers control the game in New York. Nowhere else in the country do these middlemen rule the rental roost as much as they do in New York.
Renters, new to the city, who are unfamiliar with how things work in a Manhattan apartment situation, are often confused as to why they can't simply contact the landlord or apartment manager themselves. And even if they do, they often still need to pay a broker fee. One reason is that landlords are still operating the way they did before the internet made listings available to everyone.
A new law for New York
New York State passed a law in February 2020 prohibiting brokers from charging their broker fee to renters. Brokers, under this law, who wish to be paid must charge the landlord instead of the tenant. At the time of this writing, the Real Estate Board of New York (REBNY), a trade group for landlords, has challenged this law.
The intent of the new law
The broker fee ban, in yet another case of a government good intention gone wrong, is supposed to protect renters by eliminating the broker's fee for renters, which can be quite hefty -- typically one month's rent, or in some cases, as much as 15% of the annual rent. This fee, when combined with first and last month's rent plus security deposit, can make it difficult for renters to afford anything in New York.
The unintended consequences of no fee
As with most government interventions intended to do good, there are unintended consequences. And with the broker fee ban, there are two.
The first is the possible elimination of thousands of broker jobs in New York. In a quote one could find funny, Larry Rideout, co-owner of Gibson Sotheby's International Realty, told The Real Deal, "In the end, someone will have to pay for the broker's services." Of course, there is another option: people could just eliminate the broker.
The second unintended consequence is that renters could actually pay more than what they were paying before. The problem with relying on an agent for a rental is that using one comes with a fee. If the landlord must pay the fee instead of the renter, the landlord will likely pass that cost onto the renter.
Why renters do not necessarily benefit from the broker-ban law
The average monthly rent in a New York City apartment, at the time of this writing, is $3,450. So the broker's fee, if the broker were charging 15% of the annual rent, would be $6,210 that the renter would typically pay. In a no-fee apartment, the renter doesn't pay that $6,210 agent/broker fee. But it's likely they will pay it one way or another. If renters don't pay this fee upfront to an agent or broker, they will likely pay it in the form of higher rent. The more costs a landlord has, the less they make, unless, you guessed it, they raise the rent.
Let's say a landlord raises the rent to cover that $6,210 fee they now need to pay an agent or broker. To pass that cost onto the renter, a landlord would divide $6,210 by 12, and raise the rent $517.50 per month. So an apartment that would have rented for $3,450 now rents for $3,967.50. If the tenant wants to stay another year, they will pay more than if they had just paid the fee upfront. Plus, there will likely be a rent increase on top of the already-increased rent.
When renters would benefit
New York has about 1 million rent-controlled or rent-stabilized apartments. In rent-regulated cases, landlords are capped on how much they can increase rent. So if expenses go up for landlords, like if they need to pay a broker fee, unless they own an unregulated apartment, they can't raise the rent to cover their costs, which would benefit renters. Rather than lose money, a landlord might decide not to use a broker at all.
The bottom line
It remains to be seen whether the broker-fee ban that would essentially make all New York apartments no-fee apartments will stick. If it doesn't, it will probably go back to business as usual in New York. But if it does, look for an increasing number of landlords, particularly small-time landlords, to start doing business the way landlords do business in most of the rest of the country: cutting out the middleman and listing their own rentals. That is one sure way to eliminate an exorbitant broker fee. If this law passes, landlords will likely either pass their extra cost onto their tenants in the form of increased rent, or they will fire their broker, creating job losses for thousands of real estate agents and brokers in New York City.