How Do Real Estate Agents in NYC Make Their Money?
More often than not, when it comes to renting or buying an apartment in NYC, you’re going to have to go through an agent or broker.
Because of the relationships they’ve developed with landlords, experienced agents will have access to apartments that you’d never be able to access on your own.
But, with over 27,000 agents in NYC, the competition is fierce.
So how exactly do NYC agents make their money?
Most Agents Aren’t Getting Rich But Some Are
While shows like Million Dollar Listing portray NYC agents living the high life, the vast majority of agents struggle to be successful in their businesses.
Many agents do make a great living but a good number of agents are barely scraping by, particularly newer agents.
In fact, roughly 70% of new agents will leave the industry by the end of their first year.
Most NYC real estate agents are independent contractors.
- Agents receive no benefits
- Agents must pay for taxes out of their commissions
- Income can be inconsistent
Agents also have to pay additional fees, such as for:
- Commission splits (see below)
- All marketing, such as advertising listings online
- Agency resource and desk fees
- REBNY or any similar real estate board membership dues
How Do Commissions on Rentals Work?
Most often referred to as simply “the Fee”, this is a payment made to the agent by the client for the work the agent puts into the process of getting a signed lease for the client.
In NYC, agents must work for a brokerage, with whom they split these commissions.
When you first meet with an agent, you’re going to be asked to sign a legally binding form stating that you agree to pay this fee should you decide to rent any apartment the agent shows you.
The standard fee used to be 10-15% of the total annual rent, although this is often negotiable, with agents frequently accepting a fee equal to the amount of one month’s rent.
But the agent does not get paid the full amount of this commission. She or he splits the fee with the brokerage.
In New York City, this fee was traditionally on the onus of the renter or applicant to pay up if they wanted the apartment.
New agents will usually start with a 50/50 split. But it can be even less at some brokerages.
So in our example above, the agent would make a commission of $2,446.42 after splitting the fee with her sponsoring brokerage.
While this might seem like a nice payday for the agent, keep in mind that agents are independent contractors. As such, they’ll have to pay taxes (filing 1099’s) on their commission, thus further decreasing their take-home commission.
Also, if an agent is working on a team, the commission gets further split up between the team and the agent or among agents. Referral fees to other agents are also taken out of the total gross commission.
What Are Exclusive Listings and Co-brokes?
The holy grail for agents in NYC is securing their own “exclusives” with landlords; a deal the agent has worked out with the landlord whereby that agent, and that agent alone, has the “exclusive” rights to rent a particular unit.
When an agent has an exclusive, they can open the rental up to agents from other brokerages to market as well. This can include all brokers and agents throughout the city.
If another agent representing the renter completes the deal with the listing agent, the two agents will share the commission as a “co-broke”.
In this case, the commission will usually be a 50/50 split between the two agents, with each agent’s brokerage will take their cut off the top of their agent’s commission.
This split may get split even further depending on whatever arrangement each agent has with other brokers or team members.
An agent hopes they have a number of other listings that they are closing during that 4-week period, but that is not always the case.
This co-broke commission structure may all be but defunct now that New York State passed a new law in 2020 that prohibits collecting fees from the prospective tenant/applicant if the agent is, in fact, representing the landlord.
The above-discussed scenario was typically one where the commission was purely collected from the renter, even though only one agent was actually working for them.
This new law states that if the broker or agent is advertising and screening tenants for the landlord--working for the landlord, they cannot demand payment from the tenant.
Other Commission and Brokerage Structures
Brokerage structures are as diverse and complex as the real estate industry itself.
While we've discussed the traditional model of commission splits with real estate firms, it's really just the tip of the iceberg.
Typically, you'll find a 50/50 commission split between brokerage and agent. However, there are plenty of brokerages that offer less (especially for rookie agents), and more.
There are even brokerages that offer you 100% commission.
You usually only have to pay a desk or administrative fee, but these firms usually offer you little else other than their name and an email address (some don't even offer you an email).
These types of brokerages are best for real estate professionals who like autonomy and can work independently without technical or marketing support.
Then you have the more traditional types of firms that usually start at a 50/50 commission split, but you can potentially work your way up to a better split depending on your GCI.
A GCI is the Gross Commission Income and this is the gross commission one would bring in from a deal before you've split with your brokerage.
For example, if after a listing agent split with a buyer's agent on a 6% commission on a million-dollar condo, his GCI for that deal is $30,000.
Most of New York's top firms offer you higher splits based on the range of GCI you've brought in during a calendar year.
Lastly, there are firms that offer agents salaries with little to no commission.
This obviously follows a more traditional path of employer and employee and may be better for the agent who is looking for a steady income, but okay with no huge bonuses in commission.
Many of the city's top firms also offer salaried positions for agents who are staffed at new developments' sales or leasing offices.
Who Pays the Agent's Commission?
The New York City real estate system has been built upon the notion of a landlord's and seller's market.
Historically, landlords have held the upper hand as apartments were always in high demand and competition between renters has been fierce.
When it comes to disgruntled renters finding out that they are footing the bill for an agent whose services they did not technically utilize, it's due to this system that landlord is king.
Agents and brokers have essentially been providing their services for free to these landlords.
However, since the city started programs to incentivize developers to build housing in New York, the inventory keeps reaching new heights.
While people are moving to New York, there is a fair amount of the population also leaving the city for other opportunities are more affordable living.
As a matter of fact, recent times have seen the number of people leaving slightly outpacing those who are relocating to the city.
New Yorkers--both renters and landlords will find that this power struggle is evening out.
Landlords have also tried to get signed leases by offering “OP”, short for “Owner Pays”. Here, the landlord, not the renter, pays the broker’s commission (usually one month’s rent)
This is an excellent deal for the renter. But buildings offering OP’s tend to be less in demand. There are often reasons why the owner is offering OP.
For example, the apartment may have been on the market for a while.
Sometimes buildings offering OP’s may be less than desirable and therefore harder to rent; hence the landlord’s willingness to offer the OP concession or as a "No Fee" rental.
For the agent, an OP deal has it’s pros and cons as well.
On the plus side, these deals make things a bit easier from a sales perspective, as the agent doesn’t have to negotiate a fee with the client.
However, fees paid by the owner/landlord are lower than what the agent would normally receive. They're never more that one month’s rent, sometimes less.
Furthermore, it can take several months before the agent receives his fee when there’s an OP.
With the passing of the bill in 2020, all apartments on the market will be no fee, whether the landlord is paying the fee or they are advertising directly.
The “One-Month Free” Scenario
There are times when the landlord provides certain incentives to rent a unit faster. Such incentives can lessen a broker’s fee.
During the high rental season (spring/summer), landlords will typically be far stricter in their demands, often even raising the rent.
At this time of the year, the best apartments your broker shows you will almost certainly require a 10-15% broker fee.
But when the market slows down, landlords will loosen their restrictions, offering certain concessions to get leases signed.
Sometimes, rather than lower rents, they may offer “One Month Free”, whereby tenants sign a 13-month lease and get the 13th month free.
When the landlord offers a free month, If the renter is paying $3,000 per month, the gross rent (the total amount paid for the term of the lease) would work out to $2,769 per month for the total 13-month rental period.
This is also known as the “net effective rent”. Generally, an agent will then collect a fee whether on the net-effective rent or on one month's rent alone.
Many landlords are flexible with this concept and will also allow the free month to go towards the broker's fee instead.
What Does the Renter's Agent Do?
Even if now agents advertising for the landlord must collect their payment from the landlord, this does not mean that renters' agents have also been eliminated.
A prospective tenant once benefitted from OP listings, just as landlords once did from commissions being collected from the renter.
However, now the prospective tenant using a renter's agent's services should pay them for the work. This can be an agreed-to amount prior to working with them.
The maximum commission paid should be one month's worth of rent.
How Do Commissions on Sales Transactions Work?
In a usual NYC real estate sale, the commission is split up in four ways among the following stakeholders:
- The listing agent
- The listing broker (the agent works for the broker)
- The buyer’s agent
- The buyer’s agent’s broker
Example: If an agent sells a unit for $200,000 the listing agent and the buyer’s agent with each receive half of the standard 6% commission. This would come out to $6,000 each.
As in the case with rentals, the agents then have to split their share of the commission with their brokerage. So with a 50/50 split, each agent will take home $3000.
Given the current astronomical NYC sales prices, these commissions for an NYC salesperson can be extremely high, especially with very high-end luxury properties valued at millions.
A 50/50 split doesn't sound too bad. Especially, if you have a million-dollar listing, right? With a co-broke, the standard share might be $15,000.
However, that's not factoring in any overhead costs like advertising and marketing costs or any splits you may have with team members or cooperating agents and referral fees.
Also, some agents agree to a smaller commission of 4% or 5%. In the end, the agent may end up with very little for a few months of work.
So, the moment you can maximize as an agent is on direct deals.
The Commission Rebate
This is also known as a Buyer’s Broker Commission Rebate. This makes it possible for buyers to benefit financially when they buy a unit in NYC.
With a Buyer's Broker Commission Rebate, the buyer's broker gives some of her commission back to the buyer as a rebate. This is a way to pass on additional savings to the buyer.
In NYC, firms such as Prevu, Yoreevo, Hauseit, and NestApple provide these rebates, which can range from .5 to 2% of the purchase price.
To make this more cost-effective for firms, they have to minimize the number of services provided to the buyer.
Most agencies that provide commission rebates don't provide full in-house concierge agency services like a traditional brokerage as this takes time and resources with extremely slim profit margins, although smaller firms like NestApple do.
NYC Bill Limiting Agent Commissions
A bill, better known as Intro 1423, was introduced in a couple of years back to the NYC Council to limit broker’s fees and the sometimes exorbitant security deposit requirements of landlords in the city.
Manhattan Council members Keith Powers and Carlina Rivera introduced the bill, which would limit all broker’s commissions on rentals to the cost of one month’s rent.
This measure passed much to the chagrin of many industry professionals.
Many real estate professionals have argued that these measures will only hurt NYC renters.
The theory is that people who might otherwise have been able to qualify by paying more upfront can no longer qualify for an apartment using this method.
Furthermore, they also argued that the new laws would only raise rent prices as landlords would add the price of the commissions onto the monthly rent price.
Nonetheless, this will even the playing field for renters of all income levels across the NYC rental landscape, and does away with the predatory behavior of some agents and landlords.
Most people balk at the thought of paying a broker's fee. But consider the amount of work the agent is putting in on your behalf:
- Time put into researching the best apartment to meet clients’ needs
- Time showing apartments
- Time preparing your documents and submitting to the landlord
- Time negotiating with the landlord on clients’ behalf
- Time preparing and submitting lease
- Time managing the clients and their expectations
Looking for apartments on your own may not be an issue if you have the know-how, organization, and time to do so.
But given the difficulty of finding an apartment in NYC, paying a commission to your agent is, in the end, well worth the benefit of finding a home you’ll have for the foreseeable future.