Rentals: "Fee" or "NO Fee" ... Which Way Should You Go?
Below is an email that I wrote this AM to a potential renter who was only interested in "No Fee" apartments. He said that he could afford a fee but that didn't make economic sense to pay one when there are enough "No Fee" apartments available. And he wrote, why would anyone in their right mind pay a fee when they don't have to?". Here's how I responded:
Hi xxxx, this is only to make you think about your own best interests. There are two reasons that one would only be interested in a "No Fee" apartment. One would be that one simply doesn't want to pay a fee. And the other would be that someone doesn't have the additional funds needed to pay a fee in addition to the 1st month's rent and a month in security. Both are equally valid, and it's very understandable that at 1st glance it looks like a no-brainer. So let's look a little bit under the surface: If a potential renter doesn't have the funds then that is a condition that can't be changed at that moment (it can be in the future as the fee can be accumulated but that implies that a move at that moment isn't necessary). The 2nd reason is that it is simply a choice, why give away money to a real estate agent........ If it's the latter, then I encourage you to think about a few things.
1. 15% of the yearly rent is a tough #, but truthfully there are plenty of one month fee apartments out there.
2. What is the value of a no fee apartment? Since there are so many one month fee apartments available, It's really one month's rent.
3. There are no true, "NO Fee" apartments. There really aren't. Real Estate agents don't, can't, won't, work for free. We have children to feed too. So there is a fee on every apartment that rents that a real estate agent finds for you, and someone is paying it. If not the renter, then it's the landlord.
4. Why would a landlord pay a fee? Why would he give away a month's rent? LL's are in this business for one reason, to make money. And they are smart. In fact they are among the smartest businessmen you will find. Whether they own a 2 family in Park Slope or an office tower on Park Ave. They do NOT give away money. Not to a tenant, not to a real estate agent.... Ever......
5. The only reason that an LL is paying a fee to an agent is........... The apt is overpriced. (Ok, there actually are two..... If the building is a new development and there are many vacant units, the LL will pay the fee to get renters in to fill the apartment as quickly as possible and get it producing cash flow). But most of the time the unit cannot be rented at the rent being asked without the LL paying an incentive to the agent, otherwise it would have been already before the LL decided "ok, I'll pay the fee".
6. So, let's take a a look at the math. We'll use a $2400 apt because the #'s work easily. What is the value of the fee being paid on that apartment? Answer: It is a month's rent divided by 12 months (as most leases are 1 year). So $2400/12 = $200 per month. You can be sure that you are losing $200 per month if the fee is paid by the LL. The apartment is really worth $2200. And you likely can find a similar value at that rent if you pay the fee.
7. So if you move after 1 year, you will break even. You pay an extra $2400 in rent, but you also saved a $2400 fee.... Your even, everybody's all good.
8. The problem comes if you don't move....if you like it there and you stay, or if you don't like it there but stay because the pain of moving is worse than the pain of paying the extra $200 monthly (it's actually a little more because after your initial lease expired, the LL raised your rent.... And he based the rent increase on a % of the old rent, so you're likely paying a slightly bigger increase too. Most renters stay around 3 or more years in NYC, again the pain of moving again keeps someone in an apartment. Yes even if the rent is high as the cost of moving (movers, another fee, painting, etc.) and the hassle of moving keep people in apartments. So if you stay two years, how does the math break down? You've paid an extra $200 monthly x 24 months now = $4800 but you still have the $2400 benefit from the fee being paid by the LL. But $2400 - $4800 = -$2400. You are at a loss of $2400. You've lived in the apartment for 24 months, 24 months of paying an inflated rent, $200 worth of inflate. Had you paid a fee and rented the apartment for $2200 you would be $100 per month ahead of the game.
9. If you stay 3 years? Well 36 months x $200 monthly =$7200 - $2400 = $4800. $4800 divided by the 36 months you've lived there equals $133. Had you rented the apartment at its value, $2200, you would have save an amount equal to $133 per month, for 36 months. 4 years? $200 x 48 =$9600 - $2400 = $7200 = $150...... You have given away $150 per month to the LL because he offer you the candy of paying the fee for you............ Like I said, LL's are pretty smart guys.
10. The point is the longer that you stay in an apartment that you rented where the landlord pays the fee, the more you lose as the benefit you've received shrinks in relation to the overpriced rent you are paying.
So should anyone ever rent a "No Fee" apartment? Yes, of course. If you have to move and don't have the fee, 1st month's rent and security deposit, then you are basically forced to find a "No Fee" apartment. And if you only plan to stay in the apartment for a short period.... 1 year ideally, or 2 years max, then the benefit of not having to come up with the fee makes sense. Otherwise, you are better off staying until you can afford a fee....
Note: Originally Posted 8/9/2015 on previous website.
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