The process of trying to rent an apartment in New York City is its own special circle of hell. Verge science editor Katie Drummond was thrilled when she found an apartment on Craigslist that fit her price range and was just across from a beautiful park in Fort Greene, Brooklyn. When she showed up to meet the broker, however, “He told me that the apartment we wanted had been rented but they had an ‘amazing’ studio available nearby.”
This “amazing studio” ended up being a basement apartment with two tiny windows. “I should have known better, but the guy was really high pressure,” says Drummond. He told her there were a number of other offers, but if she put in an application and paid $500 cash, he would bump her to the front of the line.
Shortly after she moved in, it became clear the entire building was infested with roaches. “We had it exterminated twice,” Drummond remembered. “We ended up having to pay to break the lease early AND find new tenants before they'd let us move out.”
"An honest broker can't win."
Horror stories like this abound. Craigslist is overflowing with ads for apartments that don’t exist, in fact a study found more than a third were scams. Bait-and-switch brokers sucker clients in with promises of spaces that have already been rented, then try to upsell them on a different location. When clients do find a place they like, brokers ratchet up the pressure, as five or six other agents are often showing the same apartment to their own clients. And then come the fees, which can run between 10 and 20 percent of the annual rent.
A steady stream of ambitious tech entrepreneurs have tried to solve this problem. "The dream that you can remake the apartment rental market here is a siren song that has crushed many an able-bodied startup," says Lockhart Steele, founder of the real estate site Curbed. "The market is too big, too fast, too messy, and old-school. The person who finally solves this problem, I will bow down and salute them."
The newest and most ambitious entry in the field is Urban Compass, which debuted to the public today. The company was founded by Ori Allon, a tech superstar who sold his first company to Google and his second to Twitter, and Robert Reffkin, who spent the last five years working as chief of staff to the president of Goldman Sachs.
"We asked people what was wrong with renting an apartment in New York, and heard the same things over and over," says Reffkin. "Too much fraud, too expensive, and requires way too much time and energy."
Urban Compass promises consumers its own verified listings, meaning no spam or duplicates. Instead of using independent brokers who work on commission, Urban Compass is hiring full-time agents with salaries and health benefits. Users can search and schedule appointments online or through a mobile app. And finally, the company promises to charge substantially less than the average brokers' fees.
How can a company succeed by paying its employees more and charging its customers less? "Technology," says Allon, bluntly. "We’re not just building a brokerage. This will be a platform for real time local knowledge. Real estate is just the first application."
"... A siren song that has crushed many an able-bodied startup."
With vacancy rates hovering under two percent, limited land for expansion, and a growing population, there is always money to be made in NYC apartment rentals. The problem, for consumers and brokers, has long been the toxic climate of cutthroat competition.
"It's a great way to make quick money, but to succeed, you need to really kill yourself out there," says Doug Person, a former real estate lawyer who now runs the online home sales site RealDirect.com. Agents are competing, not just against other firms, but often their own coworkers. "An honest broker can’t win. To stay ahead of the competition and succeed, you have to bend and break the rules. That’s why there is so much burnout in the industry." More than half the rental brokers who get their licenses don’t renew two years later.
By bringing on salaried brokers who have equity in the startup, Urban Compass hopes to create a different culture of sales. Users will be able to book appointments online, and will be notified on their mobile device if the desired apartment is rented before they arrive. It’s a model borrowed from the doctor scheduling service ZocDoc, whose CEO, Cyrus Massoumi, is an investor in Urban Compass. Perhaps most importantly, Urban Compass will tie agents' bonuses to user reviews, instead of sales figures, to promote better customer service.
Incumbent brokers like Anthony Lolli, the founder of Rapid Realty, aren’t buying it. "Look, we’ve got a sales force which is gonna go out and hustle these listings. You got to hear no 50 times before you get a yes. Nobody is gonna do that on a salary."
Lolli is the epitome of a New York City broker: his website features an animation of him with a pair of brass balls like those made famous by the salesmen in Glengary Glen Ross. He recently made headlines for handing out bonuses to sales agents who got his company logo tattooed on their bodies. "You think a broker on salary is gonna sweet talk a landlord into taking a second look at a shaky credit report?" Lolli asks. "My guys will do that for a client, because they know what it takes to close a deal."
The one bright spot for apartment hunters over the past decade has been the emergence of online aggregators like Zillow, Trulia, and StreetEasy, which scrape property listings from around the web and organize them in one place. "StreetEasy, especially, has been killing it," says Curbed’s Steele. "It’s a real godsend if you’re looking to find clean, reliable property listings." For a small fee, StreetEasy will even show apartment seekers how much an apartment and comparable properties have rented for in the past. "Comps are an invaluable tool for consumers who want to get the best price." says Steele. "The problem is, once you find a place you like, these search sites just pass you off to a random broker, with no guarantee of honest service."
Urban Compass aims to marry this kind of search technology with its own in-house brokerage force. Allon’s first search engine, Orion, scoured the enormity of the world wide web, and is now part of Google’s core search algorithms. His second company, Julpan, kept tabs on the torrent of real-time messages coursing through social networks, and is now part of Twitter's search. By comparison, the apartment rental market in New York City five boroughs, with a little over two million total units and just a few hundred new listings per day, seems like a rather small and slowly shifting data set.
The company has also employed a small army of agents over the last six months, each equipped with a brand new iPhone, to pound the pavement, verifying apartments in person, snapping photos, and marking locations with geotags. It currently has 30 brokers, which it calls neighborhood specialists, and plans to hire 100 by the end of the year. "We are going to launch with an almost comprehensive database of apartments in Manhattan, from open listings to exclusives," says Allon.
"We’re not just building a brokerage. Real estate is just the first application."
Despite Allon’s ambitions, getting every apartment in the system may not be possible. New York, unlike almost every other state in the nation, doesn’t require all available properties to be be publicly listed through what is known as a multiple listing service, or MLS. "It’s anti-competitive and at some point it will get struck down, but right now, that’s the lay of the land, and it makes it a lot harder to disrupt incumbent players who have built up relationships with landlords over decades," says Steele.
So while there is a ton of pain in the market for consumers, the real power for change lies with the sellers, the landlords, who have very little incentive to change. "Why should 80-year-old Donna, who happens to own a couple dozen great properties, learn to work with some complex new technology?" asks Steele. "Her apartments have been renting just fine. She’ll keep right on working with the brokers she knows, and they will do business as usual."
In fact, the antiquated nature of the rental market, with some landlords still faxing new listings in to their favorite brokers, is something property owners may want to protect. "The idea of having more transparency is not something landlords are necessarily going to be interested in," says RealDirect’s Doug Person. "If they rented an apartment on the third floor last week for $2,700 a month, but the market has tightened, and now they want to rent same apartment on the fifth floor for $3,500, that is not something they want buyers to be aware of."
To break into the industry, Urban Compass raised an $8 million round of seed funding from deep-pocketed backers including Goldman Sachs and Thrive Capital, a tech investor intimately connected to the Kushner family, one of the bigger real estate developers in New York. It hired dozens of agents before even opening to the public, and nabbed Gordon Golub, a star broker and 20-year veteran of the game to manage them.
Golub says by embracing technology, the startup will be able to offer landlords a big incentive to abandon traditional brokers and share their listing with Urban Compass. "There is a lot of volatility in the rental market, prices change even week to week as supply and demand fluctuate." Right now most market reports aren’t updated more than once a month, and there is often a big discrepancy between the advertised price and the actual closing figure. "We’re going to be updating our database in real time with our sales. Landlords who list with us can get access to this information, meaning they can get a better price."
"If they could have a real-time ticker on leases that are being signed, that would be some very interesting valuable data," says RealDirect’s Doug Person. "But the question is, will they have a big enough sample size?"
Urban Compass is also trying to make things easy for Luddite landlords. "A lot of tech startups have failed to disrupt the rental market because they asked landlords to adapt to their platforms," says cofounder Robert Reffkin. Urban Compass will gather apartment listing from the same email blasts or message boards landlords have always used. "Our technology can understand that unstructured data and incorporate it into our listings. We’re not asking them to change a thing."
"More transparency is not something landlords are necessarily going to be interested in."
If New York City is a success, the company plans to expand to other densely populated locales like San Francisco and London. But the real key to Urban Compass may be that its business in real estate is just the first expression of its technology. "If people think of this as just a brokerage, then I have failed," says Allon. "My last two companies were these search engines, these pure tech plays with no immediate business model. This time, I wanted to build something that would last, that would impact people’s lives, and to do that, I needed to generate cash."
The dysfunctional nature of the apartment rental market in New York actually makes it the perfect petri dish for a startup. Unlike social networks or photo sharing apps, the apartment rental business is always open to the next hungry participant, and it's a great way to quickly make a lot of money. The high fees don’t result from a lack of competition, but from the toxic culture. "There is a reason the sales commissions stay so high," says RealDirect’s Doug Person. "You couldn’t get anyone to do such a thankless job otherwise."
Urban Compass believes it can afford to better compensate its agents and charge the consumer less, because it plans to extend its platform to more than just apartment rentals. "Think of this a very high-end method of user acquisition," Allon jokes. "If we give someone a great experience, find them the right apartment, and the whole experience is pleasant, than we have made a customer for life."
From there, Urban Compass plans to begin layering on additional offerings, like local event listings, classifieds, and discount offers for nearby businesses. They have a wealth of information on their clients — everything from name, age, and location to occupation and credit rating. Allon hopes his website will serve as a gathering place for new residents of specific neighborhoods to meet and exchange information. "It’s not a social network at all. It’s a local network, of people tied together by the place they live. And we’re the ones who helped put them there."
Photos by Michael Shane and Dante D'Orazio