Tenants in Big Cities Could Save Thousands

Dave:
A lot has been made recently about the cost of rent right now and for good reason because rental affordability is a very serious issue. There’s more rent burdened people, which is defined as people who spend more than 30% of their income on a rent than there have been in recent years. And often we talk about some commonly acknowledged sources like the cost of building or under supply of housing. But today we’re going to look at an example of Boston and New York City and how certain legislation and frankly, some antiquated policy are also contributing to rising rental costs.
Hey guys, it’s Dave. Welcome to On the Market Today, I’m here with economist Kenny Lee. Kenny and I are talking about two bills that are currently on the table in New York in Boston that would reverse a antiquated law that requires tenants to pay some fees to landlords when they’re moving. And I’m bringing Kenny on because I think this highlights how complex a situation affordability is, right? It’s easy to point and say landlords are being greedy, or there’s not enough construction or public policy. There’s too much regulation on zoning, but there are all these other things that are contributing to this complex problem. And today with Kenny, we’re going to dig into one that may not exist in your particular market. This is mostly in New York and Boston, but I think just showcases how we could start cleaning things up to make rent more affordable and to make the entire housing industry work maybe a little bit more efficiently.
So in this episode, we’re going to talk about why New York and Boston are the only two holdouts on this one particular issue that we’re going to talk about, this difference between fee and no fee markets and how these two bills could affect market dynamics and pricing for rent in these big major metro areas. And if you’re thinking, I don’t invest in New York and Boston, this doesn’t apply to me, I hear you. But I think when you hear what Kenny has to say, it will help understand what I was saying earlier, just the complexity of housing affordability and some ways that cities are looking at improving affordability. So let’s bring on Kenny and get into it. Kenny, welcome to the show. Thanks for being here.

Kenny:
Thanks for having me. I’m excited to be here.

Dave:
Yeah. So let’s start easy here because not all of our audience might know what a rental broker’s fee is in the first place. So can you just fill us in?

Kenny:
Yeah. In a New York City or Boston rental market, the broker fee is a commission that a prospective tenant is asked to pay to secure the apartment even when they didn’t hire the broker themselves. This is something very unique to New York City and Boston. When the landlords work with rental agents, oftentimes there’s no promise of pay. That’s why when there is a successful tenant, oftentimes brokers will ask the tenants to cover the cost of their work.

Dave:
All right, Kenny, so I have a lot of questions here because I don’t fully understand this. Is the rental broker employed by the landlord or the renter?

Kenny:
So in this situation, this is something very unique to New York City and Boston. Usually in many other industries, the hiring party pays for the service. If you hire an accountant and you got the service from this accountant, you pay for the fee for this accounting service. In New York City, the broker is actually working for the landlord, but there’s no pay. The landlords just don’t pay them. For that reason, even though tenants didn’t explicitly hire the brokers, they’re often asked to cover this cost, which can be thousands of dollars because it’s tied to the asking rent on the lease.

Dave:
Okay, so just so I understand, landlord, they go out, they find multiple brokers. The broker’s job is to go out, find a renter, bring them in, hopefully sign a lease, but for some reason, there’s no legally binding situation where the landlord just then gets to decide if they want to pay the broker.

Kenny:
I think in an ideal world, the broker should enter an explicit agreement with the landlord so that we can avoid all these ambiguities. The landlords know that it is very time consuming to market the listing, find the proper tenant, and go through the vetting process. Do an open house, host a tour. It’s a lot of work. So this broker fee reform isn’t really going to change a lot for the landlord. The business will be essentially the same. This is just going to sort out who covers the cost of service that’s being provided for landlords.

Dave:
Alright, we have to take a quick break, but we got more from Kenny Lee on the other side. Welcome back to On the Market. I’m here with economist Kenny Lee. I do want to talk more about that because the current situation seems a little bit absurd to be honest. But I am curious, why does this just exist in New York City and Boston? They’re far from the only competitive Underbuilt metro areas in the United States. So why does it just exist in those two cities?

Kenny:
I would say New York City is such an extreme example of housing shortage. The rental vacancy rate in New York City is now at 1.4%. According to New York City data, that’s the lowest since the 1960s, usually about five to 10% of rental vacancy rate is considered healthy. But such extreme situation in New York City led to a very competitive environment for renters. In fact, in 2023, our data shows rents in New York City rose seven times faster than wage growth. Even tech workers who make six figure incomes are having a hard time finding an affordable rental in New York City. On top of that, you throw in upfront costs for rentals, which can cause anywhere more than $10,000 just to sign the lease, and that’s a heavy burden. On average, new Yorkers spend more than $10,000 just to sign the lease. That’s roughly 4% of median household income.

Dave:
That’s crazy. Wow. I did not realize it was that expensive. I guess the part, Kenny, that I’m still just failing to understand, so I apologize, is a super competitive market where there is low vacancy to me says that landlords shouldn’t need to hire a broker. I’m a landlord. I have been a landlord in Denver where it was super competitive. I would host a open house and people would show up and I’d be able to lease it relatively easily. Why would I ever pay someone to do that? I just don’t understand why this service is needed if there’s so much competition for these apartments.

Kenny:
I think there is the benefit. That’s what the data shows about 50% of rental listings that show up on StreetEasy likely do charge tenants for broker fee because they’re working with the brokers. Rental brokers come in with a lot of expertise. They can give you more information on the comms of rental listings in the area. They can also advise you on where the market is headed. Of course, they spend a lot of time showing the apartment itself, hosting tours that takes physical time. You have to be in your property, you have to go through paperworks yourself. There are different rules in New York City related to tenant protection. You have to navigate this on your own. If you don’t work with a broker, of course, every landlord has their own best way. If the broker fee reform becomes a law, both landlords and brokers will have the opportunity to have the proper conversation on what the right fee is and what the best way for the two parties to work together.

Dave:
Okay. Yeah, I mean, I guess I’m a little skeptical that if landlords were actually forced to pay for this service, if they would continue to use it. So can you tell us about what the potential reforms are? Because this feels like a very old school antiquated arrangement.

Kenny:
This is actually how it works in the rest of the country. A lot of landlords, if they choose to hire the broker, they pay for the service themselves. So what we are trying to do in New York City is to implement a common sense policy to sort out this mess, for the lack of a better word. If the barrier to moving is so high, it messes up the whole thing. It freezes up the whole market because a lot of people just can’t afford to move. Three in four renters said high upfront costs affected their ability to move and delayed their decision to move. In New York and Boston, these are the only cities where tenants are often asked to cover the cost of broker.

Dave:
And so what is the proposal here in New York City? What’s going to change?

Kenny:
The key component of this proposal is really to help make sure that the hiring party pays for the service. If landlord choose to work with the agent, they should cover the fee. There are also plenty of tenants who choose to hire brokers to help them with the search. As you know, New York City comes with so many different types of apartments. There are townhouses, condos, co-ops at vastly different price points. There are rentals that go for 2000 a month, the rentals that go for 200,000 a month, and it really depends on their individual needs. This proposal will make sure that the hiring party will cover the cost. There’s also this aspect of single agent dual agency. We want to make sure that there is independent representation. We want to make sure that the broker representing landlord does not represent the tenant. At the same time sorting this out, making sure that each party enters on explicit written contract. We can avoid all this mess. I think renters as well as landlords deserve some transparency on the fee structure and who covers this fee. And this bill is precisely trying to do that.

Dave:
Yeah, that just seems like common sense, right? The people who hire the agent are going to pay no dual agency. I think people who are involved in the real estate business will certainly resonate with that. Alright, so Kenny, can you tell us just specifically what exact proposals are out there right now?

Kenny:
Yeah, there are several bills going through the system right now. At the state level, there are two bills under consideration. There’s another one in New York City Assembly. The core aspects are similar. The key difference is that the city does not address the aspect of single Asian dual agency, but at its crux, all bills are trying to target the biggest pain point of New York City renters right now.

Dave:
Kenny, I’m curious if this passes. What do you think this does for the rental market? What are the economic implications here?

Kenny:
Right. I think the biggest change would be probably for renters. I truly think mobility is an essential component of a healthy housing market. A lot of people move because of life changes. Even if we make landlords cover the cost of brokers moving is just an expensive operation. You have to hire a mover. You have to spend time to look for the next apartment. This proposal is not about encouraging people to move. It is about allowing people who want to move to have the opportunity to do so. That essentially means we’ll give more opportunities for New Yorkers to find their next home. It will open up spaces for newcomers to this great city that will overall help continue and sustain the city’s economic growth. That’s also basically a successful housing market. It means successful business for the industry as well as the city’s long-term growth. Now, taking a step back, to be completely honest, I don’t expect a seismic change for landlords.
The rental market in New York City has been persistently competitive for renters. There is so much pent up demand that the competition is always here. The proposal will only create an opportunity for landlord and broker to finally come to an explicit contract. They now have the opportunity to negotiate the terms of their relationship. And this is an opportunity for brokers too. So long they worked for the landlord without the promise of pay. This is the opportunity for them to reiterate the value of their work and also to make sure to get the clarity from landlord that their work deserves some money. The industry is always changing. We’ll have to see. Yeah,

Dave:
I mean, it doesn’t sound crazy to me because as someone who regularly pays to fill tenants, that’s just part of the business. I don’t pay a rental broker, but I pay my property manager to find tenants for me, and that’s usually eight to 12% or one month’s rent, or there’s different fee structures. But this is just the business. If you’re not going to self-manage your own property, people pay for it. Kenny, thank you so much for taking the time to explain this issue with us. I’m curious, make sure to update the audience in case this stuff passes. And of course we’ll put contact information for Kenny in the show notes below. Thanks, Kenny. Thank you so much. Alright, time for one final break, but stick around for some analysis on how these bills fit into the bigger picture of the housing market.
Welcome back investors. Let’s jump back in. Alright, another thanks to Kenny. Just a couple of quick thoughts about this before we get out of here. First and foremost, it sounds like these bills should and will pass if you couldn’t tell from my questions to Kenny. This just seems like a crazy system. As someone who’s a landlord, I have always been expecting that when I hire someone to find a tenant for me that I’m going to pay them. And you should too. I think as business people, we should pay the people that we employ to do to provide value to us. So I think that this seems like very reasonable legislation. But I think my main takeaway from this whole thing is just how many different fees and how much complexity goes into how much renters are paying and the decisions that they make. Because I think given the situation in New York as a landlord, I wouldn’t be charging more or less rent based on the renter situation.
But I thought it was pretty fascinating to know that less people are moving because of these upfront costs. And I think just generally when there’s more competition, when there’s more movement in an economy, it generally does better. And these types of antiquated policies, whether it’s a broker fee in your market or not, there’s probably some policies and things going on in the housing market or rental market that you probably don’t even know about that are impacting your tenants or impacting you. So we try and highlight these things from time to time to shed some light on the complexity of the situation and encourage you to look at what’s going on more closely in your own market. That’s what we’ve got for you all today. Thank you so much for listening for BiggerPockets. I’m Dave Meyer On the Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.