If you or someone you know lives in New York, you likely saw headlines about the Department of State’s (DOS) Guidance Memo that “banned broker fees,” according to major headlines and confused consumers. Whether you’re just getting caught-up or looking for more guidance, this article should help you further understand the legislation and its potential impacts.
As of today, past renters, prospective tenants, landlords, and brokerages are all in a state of limbo until March 13th, the date the Real Estate Board of New York (REBNY) and New York State Association of REALTORS (NYSAR) will return to court to further dispute the DOS’ updated guidance on the Housing Stability and Tenant Protection Act of 2019. Until then, the Honorable Michael Mackey has granted a temporary restraining order which removes the prohibition against landlords’ agents collecting commissions from tenants.
Before diving deeper, you should know there are two types of agency relationships we’re focusing on in regard to this Guidance; landlords’ agents and tenants’ agents. A landlord’s agent is one who is engaged by a landlord to represent the landlord’s interest, whereas a tenant’s agent is engaged by a tenant to represent the tenant’s interest. It’s important to distinguish between the two because the Guidance explicitly calls out the landlords’ agent, prohibiting them from being compensated by the prospective tenant for bringing about the meeting of the minds.
When you meet an agent, they should tell you who they’re working with upfront, and the relationships should be clear from the start. In fact, New York State law requires real estate licensees who are acting as agents of buyers and sellers to advise the parties with whom they work of the nature of their agency relationship, as well as the rights and obligations it creates (see NYS Disclosure Form).
Who Can Charge Fees?
For tenants’ agents, nothing has changed. In fact, any headlines, tweets, or posts that stated, “New York Bans Broker Fees,” should really have had an asterisk. Plainly speaking, New York State did not ban brokerages from performing a service and collecting payment.
As it stands, if a prospective tenant hires a real estate agent to help them find an apartment and act as their tenant’s agent, the tenant must pay the agent unless the landlord is offering to do so in the form of an incentive. In New York City, these incentives are commonly referred to as OP’s (Owner Pays). This applies to all apartments, regardless of whether they’re exclusive or open listings.
For the landlords’ agents, whom this Guidance affects, the upcoming court ruling will result in one of the following:
If the court upholds memo #5 of the Guidance, a landlord’s agent cannot be compensated by a prospective tenant for bringing about a meeting of the minds. That is, if a landlord hires a real estate agent to list their property and act as the landlord’s agent, the agent must seek payment from the landlord (not the tenant) for the services performed.
If the court reverses memo #5 of the Guidance, a landlord’s agent will retain the right to charge a prospective tenant a fee regardless of their agency relationship.
The Domino Effect
Knock one domino over, and you’ll knock down all the ones that stand in its path—the same concept applies when assessing the impact of this Guidance on rent prices, agent employment rates, and the adoption rate of technology.
In the short-term, landlords will need to restructure their agreements with agents to compensate them for their services and comply with the regulation. On the upside, this cuts down on the upfront costs for renters, but landlords will undoubtedly look to creatively offset their new expense, either by adopting new and affordable technologies to replace the activities being performed by agents or by increasing rents (this excludes rent-stabilized properties with annual increases set and limited by the Rent Guidelines Board).
If the latter, renters will most definitely see an increase in rents across New York. Instead of paying a one-time fee, renters will now pay for the service in perpetuity over the term of their lease, which not only has a compounding effect but also hinders the tenant when attempting to qualify for an apartment in the first place. If landlords instead opt to adopt new technology, we can expect to see a decrease in the number of licensed agents in New York as adoption spreads among landlords.
As a Co-Founder of Byson Real Estate Co., a brokerage based out of New York, I’ve been privy to a range of feedback and questions from landlords, tenants, and agents in the wake of the recent news, regulatory changes, and still forthcoming updates.
We should support regulation, which promotes transparency in the marketplace. We want to demystify the industry and can get there by relying more heavily on the sharing of information through technology while emphasizing the disclosure of agency relationships and fees throughout a transaction.
Legislators, stakeholders, and advocacy groups need a forum to discuss the impacts of legislation before their effective date. These meetings will help each stakeholder understand the implications, rationale, and motives of their respective counterparts.
Whether you’re a renter, landlord, or agent, it’s important to consider both the short-term and long-term impacts. On the surface, memo #5 may appear to be isolated to broker fees; however, it can potentially affect unemployment rates, investor motivation, and the adoption of technology.
There will always be a need for real estate agents in the market on both the tenant and landlord side. The New York market is complex, and a vast majority of clients will still require and seek help from agents in navigating the rental process. For landlords’ agents, the process of seeking alternative resources will not happen overnight—it takes time to set up systems and recruit personnel to handle these activities in-house, and even then, the landlord may be better off outsourcing the work anyway.
The market will regulate itself and dictate the price per apartment. We see this disparity today for fee and no-fee apartments; those with fees associated naturally have lower gross rents comparative to no-fee options.
There will be more updates to come as we await the March 13th court date, but as of today, I see this as an opportunity for the industry to come together and add new transparency to a complicated marketplace. If you enjoyed this article, please clap and recommend so others can stay up-to-date on the market.