Why are real estate agent commissions so high in NYC?

[J Randall]

Highest property prices in the nation, maybe the world.  Yet commission rates are untouched.  5-6% is still standard.  But how is that possible considering that'd be more than most people make in a year? $100,000 I hear is the average commission...sign me up...

[Steven Kopstein]

Hello from the trenches here... Commissions remain high here for 2 main reasons.  

1) The process is WAY more complicated here than anywhere I've ever worked in RE and I'm pretty sure more complicated than anywhere else in the US.  Ever seen a board package?  It's about 300 pages of intimate financial detail that must be combed over, reviewed for accuracy, typed, and cross-checked 5 times.  That's one of the services we broker's provide and it takes a huge amount of time and effort.  One slip up and the deal falls apart - and with the average sale price of over a million, people are not doing it themselves, nor should they be.  Also, you don't know if there's a problem with the "package" until you're 3-4 months down the road so it's really awful when that happens.  Never happened to me because I'm meticulous and careful.  

2) People here are all busy busy busy - so when they are selling (or buying) having someone help them sort it out is important - again - since it's such a complicated process (see #1).  Besides the board package, the building itself must be approved by the lender.  Sounds simple in theory, but in practice each building has its own quirks and no 2 are alike.  

You need the cooperation of the managing agent, who, like every other New Yorker, is really busy all the time and may or may not respond to lender's emails, phone calls or letters.  They frequently need to be harassed for basic information and assistance, yet the deal cannot happen without them... so you've got well -entrenched people/systems with no incentive whatsoever to get your deal through.  They're better off if the apartment doesn't sell, actually, as they have to change billing records, etc... just more work for them, with no benefit -other than absurd "application" and "processing" fees (often totaling more than $1,000) that the clerks pushing (or sitting on) the papers rarely see.

I've bought and sold in many other places, but trust us when we say, it's really different here.  One more example.  In most places, you don't need an attorney - there's usually just a closing or escrow agent and buyer/seller agents at the closing.  In NY - there are usually 6 - 8 attorneys or paid professionals involved AT THE CLOSING - Buyer's Attorney, Seller's Attorney, Lender for Buyer, Lender for Seller, Title Person, Attorney for the Coop/Condo Management.  This is not counting the real estate brokers - so add 2 more places at the table please.  

As brokers, we cannot and do not write contracts - only attorneys can.  So, there is usually a 10-15 day window between "accepted offer" and contract.  During this time, either party can walk away with NO PENALTY because there is no money exchanged.  So, more deals fall apart before contracts here.  Lots of work may have happened to get to this point - but no renumeration.  Not for the weak of heart.  

Low/fee FSBO type operations have all tried here and all failed miserably. I check all the time to see if I can pick up FSBO listings this way. A few weeks ago on a Sunday, there were 2, that's correct 2, open houses by owners for condos in Manhattan.  I am not making this up.

Just accessing apartments is more complicated as there are no lockboxes - every single showing must have a minimum of 4 people involved - buyer, seller, listing agent and buyer's agent  - we must all coordinate just to show an apartment.  Again - lots of work that most buyers don't want to deal with.  Sellers are pretty private (our apartments are a part of our very limited private personal space in a crowded city - so we protect our space) and they don't want a lot of people traipsing through.  They want a professional to handle it.

At the end of the day it's still a percentage of the sales price - so if a broker is getting a $100k commission check for example, the seller is getting $1.666 million.  The majority of commission checks are not that high - the higher end apartments skew the numbers.  I'm not sure what the average commission is across the city, but I'm sure it's way less.  There are plenty of $300k-$800k apartments selling outside of the prime areas that are still part of NYC.  So - most agents are seeing checks closer to the $10-$20k range - not bad but not $100k for every deal.  It's not like on TV.  Lots and lots of showings, some turn into sales, but most don't - longer waits for closings - broker takes a cut- anyone who has done this knows the drill.

For better or worse - NYC is odd.  As most NYers agree - it's one of (if not the) best places on earth (certainly in the US) because we have incredible diversity, openness, creativity, access, architecture, history, culture, opportunity, transportation etc..  We put up with small spaces, rude encounters (not all the time but it's bound to happen), higher prices for most things and lots of other negatives (noise and dirt come to mind) because it's an incredibly fun, exciting, interesting and stimulating place to be - and to live- if you can make it work.  It's not easy and not for everyone, but there's nothing like it - both in day-to-day living and in real estate.  

For me, it helps to have an escape hatch (a cabin in rural Vermont) - and the ability to hop on a non-stop flight to just about anywhere.  One needs to find balance through yoga, exercise or just quiet time, and the secret that NYers know is that we all take that time.  It's learning to say "no" to all the great things to do/see/eat here that takes some practice.  It's 1:40AM here - time to break that other myth - this is the city does, in fact, sleep.  But if I wanted a particular type of food or really anything (product/service/experience), I know I can go out right now and walk to the corner and get on a 24 hour train (about $115/month unlimited rides) to a special spot that is waiting to serve it up and will be full of interesting creatures large and small.  I'll find whatever I want.  The subway will be there to bring me home when I'm done.  That's kind of amazing.  

Good night.