Two of the most competitive real estate markets in the country made it so renters don’t have to pay a fee for brokers hired by landlords.
Renters in New York City and Massachusetts shell out a lot of money when leasing a new apartment.
In addition to paying first and last month’s rent and a security deposit, many renters in Boston and New York also historically paid a broker’s fee. A broker’s fee, usually equivalent to one month’s rent, goes toward the agent who helped lease the unit.
Both Massachusetts and New York City — two of the top three most expensive rental markets in the country — previously allowed landlords to pass the broker’s fee on to the tenant, even if the landlord was the one who hired that broker. But recently passed laws in Massachusetts and NYC prohibit landlords from charging tenants broker fees if the landlord hired the broker. Tenants are only responsible for broker fees if they hired a broker to represent them.
Northeastern University experts say that while this is helpful in reducing the upfront costs of moving, it’s not the answer to reducing the costs of housing in these expensive cities. It could actually have the opposite effect and cause monthly rents to rise as landlords find other ways to make tenants pay that cost.
“I would say that we’re moving in the right direction, but more still needs to be done,” says Patrice Williams, an assistant research professor of participatory action research and Provost Impact Fellow at Northeastern University. “This fee won’t be here, (but renters) are still going to be paying more per month.”
New York City has yet to see substantial rent increases since the FARE Act was enacted last month. In Boston, the new law goes into effect Aug. 1, so the effects remain to be seen.
But these two areas joined almost every other city in the country in banning this practice.
John Kwoka, Northeastern University Neal F. Finnegan distinguished professor of economics, says landlords usually pay for the brokers they hire in other areas. However, the tight real estate markets in Boston and New York City provided leverage for landlords to pass this fee on to tenants, making it difficult for renters to avoid paying it.
“At the end of the day, with a tight market, the price is going to be high,” Kwoka says. “There’s going to be a lot of money sloshing around and a lot of people who want a piece of it. And the brokers in this market have positioned themselves as sort of necessary for tenants, even though that seems like the least likely.”
While brokers can find listings for prospective renters, many tenants end up finding listings on their own using real estate sites. While working with brokers may pose some benefit in navigating a complex market, renters also say many are not helpful in their search and they’re forced to pay a fee to someone they didn’t hire in order to see an apartment and sign a lease.
A benefit of shifting this financial burden is it reduces upfront costs for tenants. In New York, broker fees added up to 12% to 15% of the annual rent. On top of paying first and last month’s rent and other fees, they contributed to tenants needing to put down thousands just to move in.
“You’re asking for essentially three months’ worth of rent upfront,” Williams says. “Especially if you have a family or lower income, that’s a lot of money that they can’t always easily come by in order to acquire new housing.”
Williams says a result of this is people stay in housing that didn’t meet their needs. Advocates say this ban might help people in this situation move more easily.
Massachusetts’ law also specifies that tenants can’t be charged an application fee, in order to prevent landlords from shifting costs to the tenants in this way.
While reducing broker fees might reduce upfront costs for tenants, both Williams and Kwoka say they think landlords may eventually raise monthly rents to make up for now having to pay for the broker.
“To an economist, that’s not surprising,” Kwoka said. “To a tenant, that’s really distressing because it simply means that someone else’s hand is in their pocket. … The price will enlarge somewhere else.”
Williams, who has done research speaking to Massachusetts residents about housing, says broker fees are “a major hurdle” to affording housing, but are not the only issue renters face.
Many tenants deal with being displaced from their neighborhood by luxury developments or being unable to find units large enough to accommodate their families. Others have dealt with their landlords pushing them out through rent hikes, sometimes in response for asking for simple things like an air conditioner to be repaired.
“Having additional policies to make sure housing is still affordable (is key),” Williams says.
Equally crucial is building more housing that meets the demands of the area.
“The problem begins and ends with the housing supply,” Kwoka says. “Unless and until we do more about housing in the Boston market, it’s a whack-a-mole thing to take on the brokers.”