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City Council Bills Threaten to Harm NYC Renters and Real Estate Professionals

Originally posted on May 30, 2019 8:23 am
Updated on May 30, 2019 12:47 pm

 
The New York City Council is currently considering a package of bills that, if passed into law, would make it illegal for real estate professionals to collect a rental commission greater than one month’s rent and for owners to collect a security deposit greater than one month’s rent.
While the sponsors of these bills believe they will help make New York more affordable, we believe such restrictions would drive rents higher (for both current and prospective tenants), reduce housing options (particularly for underserved communities), and likely put thousands of hard-working real estate professionals out of work.


Sections: The Case Against Capping Commissions | The Case Against Capping Security Deposits


The Case Against Capping Commissions

 
Though there are many reasons to object to a government-imposed cap on commissions, the most glaring is the anti-competitive precedent that such a bill would set. Why is there no cap on the amount an attorney, doctor, or stock broker can earn? Real estate professionals operate in the same competitive marketplace as these other professions, however, under the proposed bill, only real estate professionals would be forced into a government imposed price fixing regime. This makes little to no sense, particularly given that the average real estate professional earns less than $50,000 per year and, as an independent contractor, doesn’t receive employment benefits such as health insurance or sick pay. The proposed fee cap would unfairly hamstring the incomes of rental agents in a manner that has never been applied to any other profession in the city’s history.

In addition to directly harming real estate professionals, the proposed restrictions would create frictions and misaligned incentives that would make it extremely difficult for renters to find affordable apartments.

Today, agents are generally eager to show clients both their own exclusive listings and the exclusive listings of other agents (often a better fit for the client). Agents are incentivized to do so because, even if their client rents another agent’s listing, the agent is still able to earn a reasonable commission even after it is split amongst the two agents and their brokerages.

However, if commissions were artificially capped at one month’s rent, agents would be incentivized not to show other agents’ listings. For instance, if two agents worked together on a deal, the one month commission would be split between the agents, and these agents would then have to split their share with their brokerage (50% splits are the industry norm). Thus, on a $3,000/month commission, each agent would end up taking home only $750 (before taxes) for a deal that could have taken weeks or months to put together. Given that agents often go multiple months without closing any deals, this model would make it extremely challenging for rental agents to reliably support themselves and their families.

Without agents incentivized to show their clients all available apartments, prospective renters would be forced to work with scores of different agents in order to see the same number of apartments they could currently see through a single trusted professional.

A fragmented rental market would make the already daunting process of finding a NYC apartment substantially more time consuming and circuitous. This would be particularly harmful to the communities of tenants who need the advice and guidance of real estate professionals the most, e.g., tenants who are new to NYC and tenants who lack the technological expertise to effectively conduct an apartment search across several brokers and websites, such as the elderly and members of underprivileged communities. This would also be unduly burdensome to renters who simply do not have the time to dedicate dozens of hours to coordinating a proper apartment search.

Tenants who work with brokers often save thousands of dollars over the course of their lease, even after factoring in commissions, due to the cost-saving expertise brought to bear by their real estate professional. Indeed, the expert guidance of a licensed fiduciary regularly adds tremendous value to transactions in most industries; apartment rentals are no exception. Evidence of this value can be found, among other places, in the reviews section of RentHop, which contains thousands of testimonials from tenants extremely appreciative of the value added by the agents they engaged. Brokers who provide excellent service for their clients should be able to receive market-value compensation for their work, as opposed to having an artificial cap placed on their earnings.

Unfortunately, should the proposed fee restrictions pass, it’s safe to assume that many NYC rental agents would be forced out of the industry. Without real estate agents, management companies will need to significantly increase their staff to handle the marketing and showing of available apartments. The costs of employing new staff will be passed on to both current and future tenants in the form of rent increases. In effect, current tenants who may have lived in their apartments for decades will be underwriting these new costs. This is both extremely inefficient and unfair; why should tenants who have not moved in years be required to underwrite the costs of placing new tenants in their building?

Moreover, unlike real estate agents, the employees hired by management companies will not be required to provide fiduciary advice to renters and will only be motivated to push their employer’s inventory. This would create yet further expensive fragmentation in the rental market.

At the bottom, the costs of marketing and showing apartments will still be paid by tenants in the form of increased rent, while the expertise, knowledge, and fiduciary advice of real estate professionals will be lost — nothing could be further from an inefficient or desirable result.

 

The Case Against Capping Security Deposits

 
Similarly, while capping security deposits to one month’s rent may sound appealing on its face, such a regulation would leave renters who are unable to qualify for apartments on the basis of their income or credit scores alone out in the lurch.

In order to qualify for an apartment in NYC, most apartment owners require a prospective tenant maintain good credit (generally a credit score above 700) and earn at least 40x the gross monthly rent on an annual basis. If either of these criteria isn’t met, owners will generally require that a qualified guarantor co-sign the lease (usually someone earning 60-80x gross monthly rent) and/or the tenant provide more than one month’s security deposit at lease signing.

However, under the proposed bill, it would become illegal for a landlord to accept more than one month of security deposit from a prospective tenant. Thus, if an underqualified renter is unable to provide a guarantor, there would be no way for that renter to lease the apartment. Eliminating the ability for landlords to accept additional security deposits will close one of the only avenues that New York’s most vulnerable renters use to gain access to viable housing options.

And, while it may be politically convenient to cast blame on landlord qualification requirements, the practical reality is that apartment owners — many of them individuals — take on tremendous risk when renting their apartments to tenants with bad credit and/or no reliable source of income. Given New York’s tenant-friendly housing court system, the process for evicting a delinquent tenant can take six months or more — much longer than the buffer that a one-month security deposit provides. Without the safety of several months security, an individual apartment owner would face potentially ruinous financial consequences when renting to a tenant with less than stellar financials. We cannot expect apartment owners to bear that risk.

Ultimately, both landlords and renters benefit from the ability to negotiate security deposits of greater than one month, and taking away this lever would leave underqualified renters with even fewer viable housing options than they have today.

***

Rising rent and reduced housing options are issues that impact millions of New Yorkers. For this reason, it is critical that the City Council fully consider the far-sweeping implications that these proposed bills would have on New York City’s rental market. As detailed above, there is ample evidence that, in addition to eliminating thousands of real estate professional jobs, the proposed restrictions would make New York apartment rentals even less affordable and accessible than they are today. For this reason, we urge the City Council to vote against proposed bills, Intro No. 1423 and Intro No. 1424.

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