Why real estate commissions are higher in New York City compared to London
Real estate in both New York City and London is considered to be one of the safest and most resilient alternative asset classes in the world.
New York City and London are comparable in so many ways, so why is it the case that the average real estate commission in New York City is two to three times than the typical estate agent fee in London?
There is no other city pair in the world which arguably has as much in common as New York City and London. Each city lies at the heart of its respective country’s economic engine, and they both serve as globally acclaimed centers of entertainment, culture and tourism. Given their similarities, it comes as no surprise that there are currently over 30 flights per day which connect New York City with London.
Real estate in both New York City and London is considered to be one of the safest and most resilient alternative asset classes in the world. As a result, real estate prices in each city are comparable. Despite these similarities, the cost of selling real estate in New York City is two to three times higher than what it costs in London.
What are the average real estate commission rates in NYC and London?
The average real estate commission in New York City equates to approximately 6% of the sale price, whereas in London the typical ‘estate agent’ fee is 2% or less of the sale price.
Aside from the approximately 4% difference in the average commission rates for both cities, it’s also much more common in London to find alternative commission structures outside of the typical percentage based commission. These variants include a sliding percentage commission scale based on the sale price, a fixed or percentage commission based on the asking price, as well as a flat fee regardless of the sale or asking price. Listing agreement contracts are also usually much shorter in London compared to those negotiated in New York City.
In addition, London real estate commission rates are often quoted exclusive of the UK’s value-added tax (VAT). In order to accurately compare the average commission in NYC and London, you must add this 20% tax onto the quoted commission rate in London.
Why should real estate commission rates in NYC and London be comparable?
In the financial markets, the cost of buying and selling something is generally aligned with the risk of that particular asset class. The risk of an asset is defined by the probability of default, the assumed recovery value in the event of a default, and the overall liquidity (ease of buying and selling) of the asset.
US Treasuries, for example, are a very low-risk investment not only because the asset class has a low risk of default but also because there is a very large and robust market, which makes it very easy to buy and sell them. A highly leveraged speculative bond, on the other hand, carries a greater recovery-weighted probability of default. Most importantly, however, this type of asset is significantly less ‘liquid’ because the market is much smaller than that for US Treasuries. It’s, therefore, harder for a seller of this type of asset to procure a buyer. As a result, the transaction costs (commonly called the ‘spread’) of buying/selling US Treasuries are significantly lower than those for highly leveraged bonds.
Given the fact that NYC and London real estate offers a comparable level of risk, reward and ease of buying/selling, we would expect the transaction costs (real estate commissions) to be comparable. However, the reality is that the average NYC real estate commission is two to three times higher than the typical London estate agent fee.
Why is the average NYC real estate commission rate so high?
In a typical New York City real estate deal, there are usually two agents: a listing agent, who represents the seller, and a buyer’s broker, who represents the purchaser. The typical 6% real estate commission in NYC is usually split equally between both agents, meaning that each agent earns approximately 3%. Under the traditional ‘exclusive right to sell listing agreement’ in NYC, a seller does not pay less commission if the buyer is procured by the listing agent and no buyer’s agent is involved in a deal.
Under the traditional ‘sole agent’ model in London, there is only one agent involved in a deal. The typical real estate commission for a sole agent in London ranges from 1-3% of the sale price. Therefore, a large part of the discrepancy in real estate commission rates between the two cities is a result of there usually being two agents involved in an NYC deal compared to just one for a London property sale.
Why is having a buyer’s broker a good idea when buying an apartment in New York City?
If you are buying a property in NYC, it makes sense for you to work with a buyer’s broker because sellers contractually agree to pay the same total commission regardless of whether one or two agents are involved in a deal. Most importantly, a seasoned NYC buyer’s agent can automatically save you thousands of dollars on your purchase by offering you an NYC buyer agent commission rebate.
In addition, an experienced NYC buyer’s broker adds value by serving as a credible intermediary during negotiations. This puts you in a much stronger negotiation position than you would be otherwise by working directly with a listing agent under a risky dual agency arrangement.
An experienced NYC buyer’s agent can also help you answer questions about the building and unit while also facilitating the review and submission of a board package in the event you are buying a co-op apartment in New York City.
Because of the intense competition amongst buyers in NYC, working with an experienced buyer’s agent can often make the difference between winning and losing a deal. For example, a seasoned buyer broker will be able to advise you as to whether or not it makes sense to waive your NYC mortgage contingency in order to make your offer more competitive against all-cash or non-contingent buyers.
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
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