Market Opens Up To Creative Compensation For Brokers

By Glenn Roberts, Jr.

Inman News
November 29, 2004

New York City apartment rental listings have long been the domain of
real estate brokers. Renters in many other housing markets across the country can expect to search for a place themselves without the need for
professional help.

But access to apartment listings has traditionally been controlled by brokers in New York, and renters can pay up to 15 percent of their first year’s rent to the broker who landed them in their new digs.

Within the past few years a new breed of apartment listing, the “no-fee listing,” emerged in New York City as an alternative to the traditional 15 percent fee paid by consumers. These listings provided a much-needed post-Sept. 11 jolt to the city’s rental market. With no-fee listings, a broker is typically paid a fee by the landlord rather than the renter, so “no-fee” is a misnomer.

No-fee listings are a staple in the market now, and even top Manhattan brokerages use them. Brokerages will in some cases use a combination fee program in which they accept part of the fee from a landlord and the other part from consumers.

The growth of no-fee listings has not gone unnoticed – New York Department of State investigators have been watching this market closely.

Eamon Moynihan, a Department of State spokesman, said, “We are taking a look at the no-fee industry. No-fee listing in Manhattan is an issue we are concerned about. We’ve been circling this because we have a lot of questions about whether or not the public interest is being served here.”

In August, the Department of State announced a 126-count complaint against ML1, a company that does business as Gotham City Apartments and sells lists of apartments in New York City to consumers. The department reported that dozens of consumers told investigators they paid $250 for lists of available apartments “but were never able to actually locate an apartment and then were denied a refund as stipulated under New York state law.”

“They clearly have been a major problem,” Moynihan said of Gotham City Apartments, which has advertised the availability of no-fee listings.

Real estate professionals say no-fee listings tend to flood the market when apartment inventory expands and dry up when inventory is tight.

“A few years ago there was no such thing as low or no-fee,” said Peter Kelleher, executive vice president for Douglas Elliman, a major real estate brokerage in the New York market that has more than 2,000 agents and 50 offices. The volume of no-fee and low-fee listings is all about supply and demand, he said, “The landlords were more creative when the market was really saturated earlier last year.” Kelleher said Douglas Elliman works with no-fee and low-fee listings, along with standard apartment listings.

Howard T. Palmer, manager of New York Apartments Unlimited Inc., said about 60 percent of his company’s listings are no-fee listings. With these listings, companies will negotiate a fee with a landlord – typically it’s the equivalent of two months of rent, one month of rent or half of the monthly rental cost. Consumers are definitely searching for no-fee listings these days, he said, “Of course a client is going to want to come to us and not pay a fee.”

Daren Hornig, CEO of Dwelling Quest, a New York real estate company, said that if there are two similar listings – one is a fee listing and the other is a no-fee listing – “the one with the no-fee will get called 98 times out of 100.” He added, “The only reason they call the other one two times is they thought they were getting a no-fee apartment.”

Hornig said no-fee listings do tend to be cyclical. “Landlords basically use it as their throttle to dictate supply and demand,” he said.

The fee market is driven, in part, by the relatively closed real estate market in New York City, he said. “Most of the rentals are going in New York City from a closed list that not every rental firm gets access to.”

He cautioned consumers that there is some “bait-and-switching going on in the market” with supposed no-fee listings that end up charging fees to consumers, and he encouraged consumers to seek out legitimate listing sites.

Esther Muller, a real estate consultant in New York, also warned consumers to check out the legitimacy of the source of the listings. “I think some of the companies are using (no-fee listings) as a way to bring in the consumer and client. Some of these companies and vendors are not licensed and are taking advantage of the consumer.”

Craigslist, a collection of Web sites in various U.S. and international markets that offer community-based bulletin board of classified listings and other postings, has been a force in the popularity of no-fee listings in the New York City market. Craig Newmark, who founded Craigslist in 1995, said the category of no-fee apartment listings for the New York version of Craigslist gets about 40,000 posts and 950,000 page views per week.

That is dramatic growth from a couple of years ago – the Wall Street Journal Online reported in May 2002 that no-fee listings posted at New York’s Craigslist were at 2,300 in March, up from 180 in September 2001.

“My biggest single project is dealing with a few unethical brokers there and trying to raise the ethical level. I’m hearing we’ve gotten good results, but there’s more to do.” Newmark said no-fee listings are a fixture in other markets, too, where brokers have a large presence in apartment listings.

Sites such as Craiglist, in addition to offering real estate companies a big audience for listings, also can serve as a direct link between consumers
and apartment owners. And owners sometimes rent directly to renters,
though brokers say consumers run the risk of paying too much and getting too little if they go it alone.

Craigslist has a range of categories to cover the many forms of apartment-rental listings: no-broker listings, all no-fee listings, broker-fee listings, broker-no-fee listings, by-owner listings, and registration-fee listings.

Erin O’Brien, a Manhattan resident, said she has had some bad experiences with no-fee listings, and she found her current apartment – a typical fee
listing – by working with a broker. “There are a bunch (of listings) that promise to show you no-fee apartments if you pay them a fee, but I found
out that a lot of them are hoaxes, or, as I found out in one instance, ads for apartments that don’t actually exist,” she said. In some cases the listings were taken from other sites, she added.

When she first moved to Manhattan in January 2003, she said she found a range of no-fee apartments on Craigslist that were listed by owners. But when she began her latest search in July 2004 “I felt like there were more people who just wanted my money. I had to find a place in a short time frame, which is why I ultimately gave up on no-fee listings,” she said.

“No-fee is hit-or-miss, and since I needed to find a new apartment quickly I went with a broker. That meant about $1,000 extra up-front, but I got an amazing deal on a nice apartment,” she said.

Wes Chow, another renter, said the last two apartments he has rented were no-fee and he found them through Craigslist. “I do have some moral problems with paying a broker’s fee mostly because it’s a relative crapshoot which broker gets the deal. In general, I’ve found brokers to not eliminate the time spent looking for an apartment (I found them quicker on Craigslist). And so, what am I paying a fee for?”

But as far as cost goes, it’s probably a toss-up for consumers choosing between no-fee and per-fee apartments, he said. “I can’t say I have any bias for or against no-fee rentals. If the market is efficient and competitive, then there’s going to be little variance in rental prices.”