NYC broker fees were in the news lately as the state banned them, then unbanned them as the issue goes to court. To help you better understand what it is all about, we gathered everything you need to know about New York City broker fees.
What is a real estate broker?
Real estate brokers are the humans who broker real estate deals. Duh.
Specifically they are the individuals licensed by the state to oversee transactions. They aren’t quite lawyers, but they do need to understand the law. If you want to take the Real Estate Broker Exam in New York City, you can head here and sign up.
Real estate brokers are experts who can oversee every aspect of any home search. Not only do they know the rules, the regulations, the laws, all the paperwork you need to fill out to buy, sell or rent a home, but good real estate brokers are experts about the neighborhoods they work in.
When you meet with them, they can help steer you to the home that will best work for you. Whether you are a recent college graduate who want to live next to bars and clubs, young parents that want good nearby schools, or retirees that need an easy access to subway stations. Brokers know these things and can help you find a home.
Buy-side vs. sell-side
When a home is sold there are almost always two brokers making the transaction happen. There is a sell-side broker, representing the seller. Then there is the buy-side broker, representing the buyer.
The sell-side broker makes sure the home is in the best shape it can be, so their client can get the best possible deal. They take photos to make every corner of a home look as nice as possible, from the kitchen countertops, to the bedrooms, to the backyards. They market the house, by putting it on websites like Localize.city, by hosting open houses, by negotiating for you however they can.
The buy-side broker is a trove of information, who helps educate the consumer. You consult with them and they help you find homes. Not only do they take you to open houses across the city (or your preferred neighborhood), but they help you understand how mortgages work, which mortgage is best for you, and all the other complex paperwork involved with buying a home.
The idea is that each broker (or team of brokers) have their clients’ best interests at heart in the entire process, and help make the complicated act of buying a home in New York City feel as easy as possible.
Who pays the broker fee for a home sale?
Who pays the broker fee in New York City when you buy or sell a home? Well the home buyer already is spending a bunch of money to get their apartment or house. So the broker fees, for both the buy-side broker and the sell-side broker come out of the total sale of the home.
Traditionally 6% of the sale price is taken out for the brokers. Both the buy-side and the sell-side broker get 3% of that total. It might not feel like a lot, but considering the cost of homes in New York City it adds up. On Localize.city there are over 6,500 homes in NYC listed over $1 million. 3% of that is $30,000.
The median individual income in New York City is around $50,000, so just two sales a year would generate a broker that total. Of course there are taxes, and the brokerage you work for takes a cut, and you have to spend money and time marketing the home, so it’s not like brokers are all wealthy, but there certainly is money to be made if you are a broker and good at your job. If you’re really good at your job you can make a lot of money, considering Localize.city has around a thousand homes listed over $6.5 million.
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Don’t want to use a broker when buying a home?
Occasionally you might be tempted to forego the use of a broker at all. You think to yourself, “I’m a smart person with access to the internet and a sense of how much money I can spend, I can do it myself.”
“Oh! I’ll also handle all the paperwork and legal needs like taxes and insurances. Because I totally have time for that.”
Broker fees are expensive but can be worth it for sheer time saved and expertise given, provided you find the right agent to best represent your interests.
What about selling? Selling without an agent is possible too. It’s called “For Sale By Owner,” abbreviated FSBO, and Derrick Chou describes his whole process here, including some interesting takeaways. The key takeaway for you? Caveat emptor. Selling a home takes a lot of time, and timing, which is something brokers have nothing but.
What is the law in NYC about broker fees?
Now this is where the fun discussion happens, the stuff that’s all over the news at the start of 2020.
Many apartments in NYC have broker fees for rentals. Often times this fee is 10-15% of the annual rent for an apartment. The median rental listing on Localize.city is $3,150. 15% of that comes out to $5,670. So in addition to the first month’s rent and a month-long security deposit, a renter would pay that total. That means when moving in somewhere you have to pay close to $12,000 up front, not counting moving costs, new furniture, or all the champagne for your housewarming party (but if you have good friends they’ll bring the bubbly to that party for you).
Sometimes people speak to a broker early on, learning on their expertise in the market to help them find you a home. They’ll lead you around similar to a buy-side broker in a sales transaction. Regardless of the change in New York State law, tenants will pay those brokers their fees. But if you find an apartment on your own, without using the broker to find it for you and show you around, you might not have to pay it anymore. The new interpretation of the law says the landlord is responsible for that fee, not the tenant, since technically the broker was acting more like a sell-side broker than a buy-side broker.
While a $5,670 fee to pay to have the opportunity to rent, and not own, a home might feel like a lot, to the broker who has to market the unit and pay a cut to their brokerage, it certainly pales in comparison to what brokers engineering sales receive. So these brokers now are at risk of making even less. Landlords now have to cover those fees, but will they still be 15% when it’s no longer coming from someone desperate to move? Will rents just be raised to cover the fee? Early evidence shows that rents will go up if this law is implemented.
What does this mean for you?
Well it’s important to think about whether you want to buy or rent in NYC and whether you can afford an apartment that has a broker fee. It’s important to know what’s going on, before you spend money on anything!