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Governments try to save renters money by banning brokers' fees

NY real estate agents say if landlords have to pay brokers' fees, they will pass these costs to tenants

New York

WILL banning brokers' fees actually save renters money?

The question is being asked around the world as governments try to reduce costs for renters. Over the past decade, Germany, Britain, Scotland and Spain have ruled that landlords, not renters, should pay brokers' fees.

In a surprise ruling this month, New York also adopted fee reforms. A judge temporarily blocked the changes after real estate groups sued the New York Department of State.

Investigating reforms abroad offers insight into what might happen in New York. The preliminary findings? A ban looks like it would be a good deal for apartment hunters.

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Real estate agents in New York have argued that if landlords are forced to pay brokers' fees, they will pass those costs on to tenants.

There's evidence that may have already happened. Prices for about 5 per cent of rentals on the listings website increased in the week up until the ban was halted.

"Someone has to take the photos, write the listing description and arrange the open house," said Jamie McShane, senior vice-president of communications at the Real Estate Board of New York, an industry lobbying group. "Those costs are going to get rolled into the monthly rent."

For renters who want to stay put, it makes more sense to pay a one-time brokers' fee than have a rent bump add up over the years, he said.

But when researchers in Germany analysed online rental listings in two cities after the law there took effect, it was as if nothing had happened. Prices of units that once charged renters a fee grew at the same rate as no-fee units.

Economists found that consumers forget to add extra charges like sales taxes, property taxes and shipping charges into the total cost of a purchase.

The German experiment suggests that most renters don't consider brokers' fees when they compare apartments, and that removing those fees will not affect how much they are willing to pay.

"People don't always act that rationally," said Eva Berger, a researcher at the Johannes Gutenberg University Mainz and an author of the study.

There is more reason for New York tenants to be optimistic: Forty-four per cent of New York units are rent regulated, meaning owners can't jack up prices overnight.

After New York governor Andrew Cuomo signed a set of laws capping rental application fees at US$20 last June, some brokers continued to charge applicants hundreds of dollars in "processing" fees.

The same thing happened with application costs in Scotland, where 11 per cent of landlords surveyed by a real estate industry group reported charging new fees as a result of reforms there in 2012.

Such surcharges are banned in Germany. A few brokers have skirted the law, according to Dr Berger, but those violations have been rare and tenants can reclaim illegal fees up to three years after paying them.

As of this month, there's a lot less wiggle room for New York landlords or brokers to pile on new fees. When the state clarified that landlords should pay brokers' fees, it also underscored other charges that are now illegal, such as a security deposit greater than one month's rent and move-in fees.

After fee reforms took effect in Germany, some property owners stopped using real estate agents.

Once they were on the hook for the brokers' fees, these landlords could not or wouldn't pay for the agents' services they had previously enjoyed free.

Most landlords continued to work with brokers, but at a discount. The average commission that agents received dropped by about half, according to the news website Zeit Online.

Landlords also started to pay only for the specific services that they needed, such as photographing an apartment, according to Dr Berger.

Technological advances have also made it easier for landlords to find tenants, with listing websites like StreetEasy and Craigslist.

New artificial intelligence tools, with names like ResidentScore 3.0, claim to help landlords pick the applicant most likely to pay rent on time.

Reduced demand for agents' services would put many New Yorkers out of work, argues Sarah Saltzberg, a co-founder of Bohemia Realty Group. She guessed that more than half her agents would be pushed out of the industry if New York's ruling stands.

"A lot of them are living pay cheque to pay cheque," she said.

The British Ministry of Housing estimated that fee reforms would cost the real estate industry almost twice as much as landlords.

It did not forecast how many agents' jobs would be lost, but it stated that agents who imposed "unfair, excessive or duplicative charges" would be the most likely to lose business.

While broker fees are an annoyance for New Yorkers, reforms could have the most impact on families living near and below the poverty line.

New York has the highest rate of homelessness in the nation and a shortage of affordable housing for extremely poor households.

Lopping even a few hundred dollars off move-in costs could shorten the amount of time a family stays in a shelter by months.

Along with bringing down apartment prices for low-income renters, said Giselle Routhier, policy director at the Coalition for the Homeless, the changes could save the city and state money currently spent on grants and help the homeless afford broker fees. "They could reinvest that money into more rental assistance," she said.

Lower move-in costs also make it easier for unhappy tenants - rich and poor - to leave an apartment, increasing pressure on landlords to respond quickly when the elevator stops working or the heat goes out.

Landlords have emerged as the real winners in New York's housing market, benefiting from brokers' labour on the renter's dime.

In almost every other city across the country, landlords pay for brokers' services.

Naysayers may argue that New York's rental market isn't the same as Germany's or Scotland's. But in the absence of a crystal ball, some data is better than none. And that data suggests that if a court upholds New York's fee reforms, renters will finally catch a break. NYTIMES

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