Let’s do away with real estate broker fees

FOR DECADES, the laws of supply and demand have weighed heavily toward landlords and the 3,000-plus real estate agents scattered across brokerage offices in Allston, Brighton, and Brookline. Historical market conditions have cemented a business model of brokers collecting a payment of one month’s rent from renters and it’s taken a global pandemic to blast a hole in the foundation of that model. Seemingly overnight, negotiating power has now been given to the renter, paving the way for innovation in the apartment leasing industry.

In a normal year, Boston renters conservatively shell out somewhere between $100 million and $200 million in broker fees. This rental season, that wasn’t the case. The overwhelming demand for apartments driven by an annual influx of 100,000-plus students every September 1 did not occur.

This drastic decline in the student population coincided with two other pandemic induced factors: record-high unemployment and new remote-work policies. This new reality has led renters to shift their focus outside of Boston where housing is more affordable, a shift that has increased the number of vacant apartments.

In a normal year, 64 percent of all apartments in Boston and Cambridge turn over on September 1. This year, September 1 came and went and tens of thousands of apartments still sit vacant. To put it in another perspective, our apartment database at Places For Less, a Boston-based apartment renting platform, currently has a 77 percent vacancy rate with an average 28 days vacant.

When concern over the pandemic ignited in February, most landlords cautiously kept an eye on the situation but prices stayed status quo with pre-pandemic rates. Now? Full panic for overleveraged landlords with high vacancy rates who rely on lucrative rental income to pay off mortgages.  If you were on the apartment hunt in the last month you would have found significant price reductions and unheard of incentives being offered for both luxury and class C properties alike.

The common trait? Something previously unheard of: Broker fees being paid by the landlord. A landlord-paid broker fee is not a novel concept. New York passed a law in February banning broker fees paid by renters. The law is being challenged in the courts by the real estate industry with a final decision expected next month. If New York’s law holds, Boston will be the only city in the country to subject renters to broker fees.

A common complaint by renters in today’s market is that they do 99 percent of the leg-work in finding an apartment. With the rise of online search sites and an ever-increasing arsenal of digitized content, including virtual reality tours and video walk-throughs, renters can now pre-vet and narrow their search completely online, reducing the role a broker has traditionally provided.

With additional technology adoption such as online document signing, digital deposits/transfers, and Zoom and FaceTime, the role of the real estate agent in the rental transaction has been streamlined, yet the fee of one month’s rent has remained unchanged and unchallenged for decades, pinned as a standard by the real estate industry.

Our city must take a bold step and think differently about its approach to how people rent apartments. With many ‘house-rich and cash-poor’ landlords and likewise struggling tenants, we need to foster competition and create more innovation to enable both sides to benefit from the adoption of a new model where fees reflect the value of the service and not an arbitrary fee equivalent to one month’s rent.

Landlords have proven innovative during COVID-19, offering oversized TVs, UberEats gift cards, waived fees, and more to entice prospective renters. That same approach needs to be applied to the broker fee. It’s a lot to ask a landlord with 10 apartments, let alone hundreds or thousands, to eat the cost of a broker fee for their apartment inventory each year. Some renters fear this will be passed on in the form of increased rent, although in the near term this is unlikely given the current market conditions and a continued decline in prices.

Several startups, including Places for Less, are bringing innovative models to the space to better serve renters, property managers, and landlords while driving down the cost of renting.

• Places For Less is charging a lower, flat-rate fee to landlords, regardless of rent price or number of bedrooms to help fill their units and provide an affordable streamlined service to renters.
• Avail, Obligo , and Xspaced are developing easy-to-use software platforms that provide landlords a do-it-yourself model for various aspects of the leasing process
• An incentive-based model like Doorkee where current tenants augment the leasing process by facilitating tours and providing transparent details to new prospective renters

The movement to end the fee is already in the works. In February, Boston Mayor Marty Walsh announced the formation of a working group to look into the issues surrounding broker fees. Various city councilors and state representatives have expressed their support for doing away with the fee, but we need to let them know how important fostering innovation is to change the renting dynamic in the city, saving renters and landlords alike hundreds of millions of dollars each year.

It’s up to us to ask our city’s leaders, landlords, real estate professionals, entrepreneurs, and neighbors to identify a new path forward for the apartment-leasing industry. Boston, it’s time to cut the cord with broker fees.

John Puma is the chief operations officer at Places For Less, an apartment rental platform.