Fee’s, No Fee’s, & Free Rent

Or

Lies, Damn Lies, & Statistics

  

  Thinking about renting an apartment in NYC? I’m here to set the record straight about this whole commission issue when it comes to renting an apartment. Why does a renter have to pay a fee? Why do they get it without a fee sometimes and what’s wrong with free rent?

   Well I’m going to start off with another cliche. “There ain't no such thing as a free lunch”. When I worked on the trading floor of the AMEX, a fellow member actually named his company after that statement, well the initials anyway. His company was called TANSTAFL LLC. And he named it that because he didn't want to forget that there is a price to be paid for everything, even if that’s not apparent on the surface.

Let’s start out with the three players in the transaction:

1         1)      Real Estate Agents are going to get paid a fee when they find you and apartment. Otherwise, their children would go hungry, their mortgage unpaid and they would have to find jobs where they only worked 8 hours a day.

2         2)      NYC Landlords are among the shrewdest investors on the planet. They do NOT give away money…… ever! As such they would rather cut off their left leg….above the knee than reduce the rent on an apartment.

3         3)      Renters want to spend as little as possible for their apartments, both in monthly rent and in upfront expense.

   Let’s face it upfront expense IS expensive. Take a $3,000 per month apartment, and a renter with excellent income and excellent credit. There is 1^st month’s rent, 1 month security deposit, and a commission (usually 15% of the yearly rent). That’s $3,000 + $3,000 +$5400….$11,400. A lot of moolah!

   So the landlords have had all the control over the last few years as the vacancy rate in the city has been running somewhere between 1 & 2%, but now demand has been softening a bit. Let say the last tenant was paying $3,000 monthly and they are moving out. The landlord, had the tenant stayed might have raised the rent 4% or so to, let’s say $3,100, knowing that the tenant would rather pay the extra $100 per month than go through the expense and hassle of moving. But if the tenant moves out, he must take a look at what the current market price would be for that apartment. Maybe it’s $2800 or $2900. He needs to find a way to fill that vacancy at$3,000. When the statistics are tallied, landlords don’t want average rents to be shown as falling, that would cause more renters to demand lower prices. So he will offer a “concession”. Essentially he concedes that the apartment is not worth the rent he is charging. In return for a renter taking an overpriced apartment he will give back some of the overpricing by offering an “OP” (owner pays), paying the fee, or by offering a free month of rent.

   All well and good right, landlord and tenant are even…. Well not really. You see the value of that concession is spread out throughout the term of the lease, usually 1 year. In this case a free month’s rent or an OP is worth $3,000/12 or $250. If you take a free month your prorated rent will be $2750 or your fee will be taken care of by the landlord, which if deducted from the rent gives you the same yearly expenditure. But most people stay longer than one year. So the next year when the increase comes (and it always does), your increase will come from the $3,000 level, not $2750. So a 3% increase will raise the rent to almost $3,100 not $2,860. You are screwed if you took that free rent and chose to stay longer than one year. And if you took the no fee option? Well if you stayed 2 years before moving, that $3,000 benefit becomes worth only $125 per month as it is now spread out over 24 month. If you stay longer, the benefit decreases even further.

   Now there are good reasons for looking for an apartment with a concession. Well…… there are two of them. For instance, many people simply do not have that big lump sum available to take an apartment. So in that case a No Fee apartment is not only desired, it’s imperative. And the second reason is if you know you are only going to be there for a short period of time, like one year. Then you will receive the maximum benefit form that concession. Your rent, in the case above will, on a yearly basis is $2750, not $3,000. In all other cases you are better off paying the fee and renting an apartment that isn’t overpriced, because your actual rent will be lower the entire time you reside in the apartment.

Hope that helps.