Wednesday, 26 July 2017

Why are NYC real estate fees so high? Thoughts from a Frenchman

Written by Posted On Saturday, 15 July 2017 12:24

When I place an order to buy Microsoft stocks, I am being charged $4.95; when I shop for a hotel, an insurance or a plane ticket, I can choose and compare between thousands of options and with Amazon Prime, I no longer pay for shipping. The internet has reduced inefficient middlemen in most industries; why haven’t real estate brokers in New York been affected?

As a Frenchman, I am particularly shocked by the high 6% real estate commissions paid in New York.

The average commission paid to brokers in the United Kingdom, Australia, France and Belgium ranges from 1 to 3 percent.

Prices in the NYC may rise and fall, trends may come and go, but one number remained unaffected: the “standard” six percent broker commission. With 6%, NYC has the highest real estate commission rate in the world and even within the United States. If you try to negotiate, brokers will tell you that “6% is standard” and “this is the way it is in New York”. Maybe if you are a friend or a family member, they will go down to 5%... lucky you!

The national U.S. average real estate commission charged by real brokers to sell a home stands at 5.36%. In the U.K., real estate brokers charge 3.25% and in France, it ranges from 2 to 4%. In the center of London, brokers charge 1.7%. In London or Paris it’s common for real estate agents to charge a lower fee for more expensive apartments, brokers, generally, do not accept that in New York. To make matters worse, in London or Paris the average commission is lower than what it is in the rest of the country. How do you explain this? Real estate in London and Paris is considered a safe and liquid “asset class”, in other words, it is easy to sell. For instance, it is easier to sell a studio by the Eiffel tower than a farm in Normandy; this is the reason why the agent trying to sell the farm needs to charge more.

 

The same rationale should apply to NYC real estate but it does not. It turns out that real estate in NYC is actually higher than in the rest of the country when the market is more liquid and transparent. In New York most real estate opportunities are available in public domains such as Zillow and Streeteasy, properties move fast, inventory is always high and demand is constantly growing.

Technology has changed the way business is donein ways that were unimaginable a decade ago. Experts say that residential real estate practices should adapt and evolve now that buyers and sellers have unlimited access to property listings and other information that was once hard to get.

Twenty years ago, brokers were receiving apartments listings over fax, had access to information not available to the general public and were considered to have an insight into the business. Brokers are still useful and play a major role in real estate transactions however it is realistic to say their role has changed and should, therefore, be reflected in the commissions they receive.

The high fees are not coming from a lack of competition either: with 26,000 brokers in New York most of them do not close a deal per year and most new agents do not renew their license after 2 years. In New York, my personal theory is that the industry is actually LESS competitive than it looks. In Manhattan, a few successful brokers handle most high-end transactions. This selected group set high 6% fees, which lure ever more people into the profession. To put matters in perspective, an average agent in Britain closes 40-50 deals a year, compared with just seven a broker does in the U.S.

So New Yorkers still pay 6%?

  1. Although collusion about real estate commissions is illegal among agents, we have heard many real estate brokerage firms not allowing their brokers to work for less than 5%.

  2. 80% of the transactions involve 2 intermediaries: a seller’s agent and a buyer’s agent and each of those 2 share the commission with their firm (50/50 or 60/40). After taxes, there is not a lot left. A buyer can legally list his house directly (it is called FSBO – For Sale By Owner) and attract a buyer coming with no broker and can transact directly saving the 6%. In New York, most sellers think they have no choice but to pay the 6% commission just to get access to represented buyers: this is just not true.

  3. In France, if you give an exclusive mandate to a broker to sell a property the commission charged is lower (1-3%)because the likelihood of the agent earning the commission is higher (since there is no other agent). Also, you are not allowed to transact with a buyer represented by another agent. In essence, there is no commission to be “split”. In the US both the buyer and seller are represented by agents in most transactions, brokers must collaborate to close transactions at the same time as they compete for listings. Buyers' agents have an incentive to only show their clients homes whose sellers offer them a standard 3% commission.

  4. It’s common in Europe for percentage commission rates to be based on the sale price itself with a matrix. If the property sells for a higher amount, then the commission rate steps up. Conversely, if the property sells for a price on the lower end, then the real estate commission rate would go down. We think it is fair but propose that to a broker in NYC! As a consequence there is no real incentive for the broker to sell your price at the highest price possible, they just want to close a deal. A broker will prefer an apartment which sells quickly at $2 million than working for months (marketing, staging) and getting it done at $2.15 million.

  5. We think a seller should pay a flat fee to sell an apartment and a buyer should also pay a flat fee to a buyer’s agent. The amount of work for a $2 million 2-bedroom apartment is the same as a $4 million 4-bedroom apartment after all. Why does a broker need to get a percentage? What not a flat-fee? Just think about it…when I buy my stocks, Schwab charges me 4.95$ regardless of how many stocks I buy.

  6. If you try to negotiate, brokers will probably try to make you feel guilty and tell you that they will work less for a 3% than for a 6% and they can only get you top prices for your property if you pay 6%. The good news is that there are 26,000 other brokers you can try.

 

Our bold prediction for 2017-2018 is that real estate commission will get reduced by half and this is the reason why we created NestApple. New York’s Attorney General Eric Schneiderman issued an open letter to encouraging brokers to offer NYC broker commission rebates to make the market more fluid. “Such rebating is also pro-competitive and good for consumers…I encourage all real estate brokers and salespersons in New York to consider enhancing the choices available to real estate buyers by offering lower commissions (by means of rebates) to some or all of your clients.” We would love to hear your thoughts and discuss real estate with you so feel free to contact us @ This email address is being protected from spambots. You need JavaScript enabled to view it.

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