UPDATED, Feb. 7, 2020, 3:15 p.m.: Sarah Saltzberg got an email alerting her to state regulators’ new interpretation of the rent laws at just after 9 p.m. on Tuesday.
“This blindsided us,” she said. “The sky is blue. Now all of a sudden the sky is red. Change your entire business model.”
Saltzberg — one of 25,000 licensed brokers in New York City — leads Bohemia Realty Group, a 100-plus-agent firm that focuses on rentals in Upper Manhattan.
After state regulators unexpectedly issued guidance that ended tenant-pay rental commissions, chaos ensued across the industry as agents and brokers struggled to understand what the rule meant — and what it didn’t.
“I don’t know what to process. I called the DOS today just to try to get some unfiltered information,” said one brokerage chief who spoke on the condition of anonymity. “It’s a mess. People are lining up looking for refunds. Everyone thinks there’s no such thing as a tenant-paid broker commission.” (The DOS clarified Thursday that the guidance was not retroactive.)
On Tuesday, the Department of State issued guidance ending a long-held standard in New York City, whereby tenants paid commission on rental apartments in cases where agents were hired to represent the owner. The guidance, based on the DOS’ interpretation of the rent law passed last June, was meant to eliminate barriers for tenants seeking housing. But industry leaders called it a “body blow” to both landlords and rental agents.
The Real Estate Board of New York demanded Thursday that state regulators rescind the guidance. A day earlier, the trade organization had announced it was exploring legal action.
“It’s not that I think it’s morally objectionable as much as I think it’s impractical,” Frederick Peters, CEO of Warburg Realty, said of the new guidance. “I’m tired of agents being seen as overcompensated enemies of the general population.”
Proceed “with caution”
Amid the confusion, some of the city’s biggest firms were split on their advice to agents.
Douglas Elliman, the city’s largest residential firm with some 2,600 agents, challenged the idea that the guidance is law.
“This Guidance is not the law, but rather a position taken by the DOS as it relates to licensed real estate agents and brokers,” Kenneth Haber, the firm’s general counsel, wrote to agents in an email obtained by The Real Deal. “We do not believe that this Guidance is consistent with the law.”
A representative for Elliman did not immediately respond to a request for comment.
A similar sentiment was shared at the Corcoran Group. In an email to staff, COO Gary Malin advised brokers to “remember that this interpretation merely represents the opinion of the DOS.”
“Until further notice, we recommend continuing to conduct your business in accordance with the law and all applicable regulations, not advisory opinions promulgated in haste,” he wrote, according to an email cited first by the New York Times.
Triplemint appeared to follow suit. “We have been advised to operate with business as usual,” co-founder Philip Lang wrote in an email to agents Thursday.
When reached later for comment, Lang said Triplemint is adhering to the guidance and said that the email was meant to reference a memo he sent earlier that day, which said “we can’t collect a fee directly from a tenant. For now, please speak with your landlord about raising the rent.”
Corcoran, too, later told its agents to adhere to the guidance. A source at the firm said executives held a conference call Friday morning for 1,600 agents and instructed them to follow the state rule. But amid all of the week’s confusion, one Corcoran agent who spoke on the condition of anonymity said they followed the company line and collected a broker fee after the guidance was issued.
Compass also encouraged agents to “have conversations with your landlords immediately and try to revise your agreements” to protect their commissions. The SoftBank-backed firm advised compliance with the guidance, as did Warburg Realty.
Saltzberg said Bohemia is continuing to do rentals “with caution,” ensuring tenants sign a state disclosure form acknowledging agent representation. The firm is also drafting its own custom form as “double insurance.”
REBNY advised its members to adhere to the guidance “until further clarity is provided.”
Shell shock
Coming without warning this week, the DOS guidance caught many agents and firms by surprise.
“The phones have been ringing non-stop,” said Stefani Berkin, president of R New York. “Agents don’t really know what to do.”
She said the firm’s lawyers have been standing by for questions about individual deals. Mike Walker, R New York’s residential sales manager, quickly put together a seminar on Thursday afternoon to answer agents’ questions.
“There’s a lot of anger, stress and frustration,” Walker said. A key challenge, he noted, is that the media coverage glossed over important nuances of the guidance, specifically that agents representing tenants can still charge commission. Owners who hire agents to represent the property, however, are now on the hook for the commission payment, not the tenant.
Firms that work extensively with owners played defense. “We’re rolling with the punches,” said Louis Adler, co-founder of Real New York, a firm that works with around 100 owners. “It would have been great if there had been notice.”
Adler and his partner were on the phone late Wednesday night trying to assuage clients. “The conversation we’re having quite often today is, the rents are going to have to go up.”
Karla Saladino of Mirador Real Estate said her firm’s landlord clients confirmed they would pay broker fees and asked them to increase asking rents on current listings from between $500 to $1,300.
Compass agent Jed Wilder said his team, which exclusively manages a rental portfolio of over 1,000 apartments, said listings were being redesignated as no-fee units with 8 to 10 percent higher asking rents.
Jordan Sachs, co-founder of Bold New York, said most of his firm’s commission from rentals were already paid by owners, but he acknowledged that wasn’t the case for many.
“Do you know how many people are going to be out of a job?” he said.
The New York Residential Agent Continuum, a group that represents New York City brokers, said it’s anticipating income loss.
“We anticipate that tenants or landlords or both will decide not to use the services of an agent,” said Cathy Taub, a Sotheby’s International Realty broker and co-founder of NYRAC.
Multiple landlords have said they plan to either raise rents for market-rate units or may start to handle listing and showing apartments themselves without the help of real estate agents, particularly if their portfolios consist of many rent-regulated units.
REBNY has urged its members to voice their opposition, too, by signing a petition, writing and calling the state and posting on social media.
“I think it’s a misunderstanding of the agent’s role in the transaction,” said Sean McKenzie, an agent at Compass. “It’s more than opening doors.”
Write to E.B. Solomont at eb@therealdeal.com and Erin Hudson at ekh@therealdeal.com
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Update: This story has been updated to include details of a conference call Corcoran held with its agents Friday morning.