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 1st 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.
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