A lot has changed in the NYC real estate market over the last ten years but if there has been one constant, it has been brokers and the extremely large commissions they siphon out of most transactions. Despite information being dramatically more available, brokers are as prevalent as ever and their commissions have increased significantly. Anyone looking to buy an apartment in New York should know the facts and question if their broker is really earning their commission.
Despite the blustery pitches you may hear, buyer’s brokers really only provide four or five basic services. They’ll do a property search to make sure you’re seeing all the relevant listings. They’ll actually walk you to the apartments and gather your feedback. Once you’re ready to make a bid, a market analysis will be conducted to determine a reasonable price range. They’ll assist in negotiations and if it’s a co-op, help put the board package together.
To sum it up, their job is to show you what’s available, make sure you’re getting a fair deal and get it across the finish line. That’s as true today as it has been for decades. But how has the value of those services changed?
|1) Property Search||Very helpful as brokers had comprehensive access to listings while individuals had to look across numerous incomplete sources (think classified ads!).||Streeteasy provides almost the exact same inventory as proprietary broker systems (it’s often more comprehensive).|
|2) Walking You Around|
|3) Market Analysis||Information was available from city records but difficult and time consuming to obtain.||Streeteasy provides a transaction history for every unit and building with a click.|
|4) Negotiation||Still helpful but more important is the market analysis to establish of a reasonable range.|
|5) Board Package (For Co-ops)|
Before 2005, brokers provided a lot of value. They had the best view into market inventory and you needed them to find out which apartments fit your criteria. That changed in 2005 with the launch of Streeteasy. In the twelve years since, Streeteasy has gradually become the dominant search portal for NYC apartment buyers (and renters). Brokers realize this and give Streeteasy direct access to their listings to make sure they’re available to Streeteasy’s massive user base (sales have not been affected by the recent changes on the site). Streeteasy has arguably become more useful than the listing service accessible only by brokers. Anyone can now go online and discover all the properties that make sense for them. You can even set up alerts for specific searches, buildings or units and easily schedule as many open houses as you can handle.
Sometimes you’ll hear a broker say they have access to some secret, exclusive listing. Unless someone is breaking the rules, that’s very unlikely. The Real Estate Board of New York requires all members to post new listings within 24 hours of signing a listing agreement so all other members know it exists. “Having a good relationship” with the listing broker doesn’t grant any special access.
Unless your sense of direction is terrible or you love small talk, I think we can all agree this not why you hire a broker. You’re buying an apartment – it’s your opinion that counts and you don’t need the broker to tell you what you like.
Just like listings, the data used by brokers to determine a reasonable price for an apartment has been put online by Streeteasy. All the city records that previously had to be combed through manually are available with a click. You can quickly see when and for how much an apartment last sold, the transaction history for the building and even the entire neighborhood.
While this will be addressed in detail in a future post, it’s worth briefly describing what a “market analysis” actually is. Say you’re looking at a one bedroom apartment and five other one bedrooms in the building have sold over the last few months for $1,500/sq ft. No big surprise here – the apartment in question will probably go for about $1,500/sq ft. There are other considerations but at the highest level, that’s all your broker is doing – looking at the price of actual transactions and applying them to the property being considered. If anyone says they’re doing more than this, ask for details. We won’t say they aren’t but if they had some secret sauce, they’d probably be buying that “incredible deal’ for themselves.
If brokers aren’t helping you find apartments, surely they must be helping you get a better deal on them, right? Not exactly. Again, we will go through this in detail in a future post but think about a real estate transaction at the highest level – the listing broker is telling the seller they’re going to get the highest possible price while the buying broker is telling the buyer they’re going to get the lowest possible price. Those both aren’t possible so what is actually going to happen? They will agree on a reasonable price, a price that is supported by the market analysis.
The one advantage you can get in negotiations is the commission rebate provided by Yoreevo. With 99%+ of brokered transactions going through traditional brokers you are virtually guaranteed a 1.5% to 2.0% advantage over other buyers.
A real estate broker will help you determine what that reasonable price range is and that can be a valuable service. The information is there for you to do it yourself (another future post) but many buyers would prefer to have a professional come up with the reasonable price range and that’s totally understandable.
Realogy is the largest brokerage company in the US – about 27% of the industry1 – and they happen to be a public company. As part of its public company filings, Realogy discloses their average commission rate. Below, you’ll see those commission rates since 2007 –
Source: Realogy SEC filings2, Yoreevo Analysis
As you can see, Realogy’s commissions have barely moved over the last decade. These are not NYC commissions, just Realogy’s, but given Realogy controls 27% of the national market and has a large NYC presence via Corcoran, Citi Habitats and Sotheby’s, we’ll bet the trends are similar here.
The math is pretty easy from here – if commissions percentages haven’t moved and real estate prices have gone up, commissions dollars have gone up. That’s exactly what we did here –Source: Miller Samuel, Yoreevo Analysis3
Keep in mind this is just for the buy side of the transaction. The total commission paid per transaction will be twice as much. This trend should not be a surprise – Manhattan apartments have gotten more expensive so broker commissions have gone along for the ride. Rather than commissions going down with increased information transparency over the last decade, they have gone up 50%.
Obviously we can’t come up with a good reason and that’s why we started Yoreevo. Brokers do not provide the value they once did and commission rates have not come down to reflect that. We hope we’re at the beginning of a change in the industry as buyers begin to realize how many sheer dollars they are paying for their NYC broker (even that “free” buyside broker).
If you think the services above are worth $60,000, we’re going to ask you which brokerage you work for. If you don’t, we hope you’ll consider Yoreevo when you’re looking to buy. We provide all the services above but rebate the buyer 1.5-2.0% of the purchase price – about $20,000 on the average NYC apartment and $40,000 on the average Manhattan apartment.
As we build out this blog, we’re going to dive into each piece of a real estate transaction so that you, the buyer, can learn as much industry detail as you like. If we can arm buyers with knowledge, we’re confident they’ll choose Yoreevo. As always, don’t wait for the next blog post. If you’re thinking about buying, please contact us today and we’re happy to answer all your questions.
1 2015 data per May 2016 Realogy Investor Presentation; market share is percentage of broker-assisted existing transaction volume
2 Combined average commission rate for NRT (Realogy’s company owned brokerages) and RFG (Realogy’s franchised brokerages)
3 We know this chart will get some questions so we want to be clear on what we did. Price x Commission Rate = Commission Dollars. We know average prices from Miller Samuel reports and then applied a static 3.0% commission. Something between 2.5% and 3.0% is the real number but regardless of the commission rate assumed, the percentage increase in commission dollars will be the same.