July 5, 2019
One of the first steps in buying New York City real estate is picking an agent. Experienced? Check. Trustworthy? Check. Personable? Check. Do they give a rebate? Ummm, what?
If you've never heard of buyer agent commission rebates, you're not alone. They’re the big secret the real estate industry doesn’t want you to know about and can save you a ton of money. To be more specific, Yoreevo’s buyers receive an average commission rebate of over $15,000! Those renovations you wanted to do? New furniture for the place? A buyer rebate can go a long way towards paying for part or even all of that so let's make sure you get one!
Before explaining how commission rebates work, you need to understand how commissions are paid. There are a few steps so bear with us.
The first payment is from the seller to the listing agent. The seller agrees to pay a commission to the listing agent, most commonly 6% of the purchase price.
Next, the listing agent turns around and offers to split that commission 50/50 with any buyer's agent. This is the second payment and how your agent gets paid. In other words, most of the time a buyer's agent is paid 3% of the purchase price.
You will often hear buyer agents say their services are "free". While that is technically true - the buyer is not paying their agent directly - the buyer is the only one showing up to the closing table with cash and therefore effectively paying everyone. This misconception is great for real estate agents because buyers don't think twice about using one nor do they care about price. This is where commission rebates come into play.
A buyer agent commission rebate is simply when a real estate agent gives part of their commission to the buyer. In the example above, it adds a third payment - from your agent to you!
The rebate can be any amount - that's between you and your agent - but Yoreevo rebates two-thirds of the total commission.
These refunds are also called “commission rebates,” “buyer rebates,” “broker rebates” or "buyer's broker rebates" and the mechanics are very simple. The buyer can either receive a check at closing or have it applied as a credit to the transaction.
Of course commission rebates are legal in NYC! Not only are they legal, the New York Attorney General's office encourages their use as a way to promote competition. Without them, a buyer can't control their agent's compensation.
For example, say you buy an apartment for $1,000,000 and there is a 3% commission offered to your broker. The listing broker is going to write a check for $30,000 - that much is certain. Without a rebate, that's the end of the road - your broker is going home with $30,000. But if you think that's too much, you can get a rebate and reduce the amount your broker ultimately makes. A Yoreevo buyer would get a check for $20,000 in this situation.
As shown in the map below, most states allow commission rebates. The DOJ also provides some basics on commission rebates here. We can’t find any legal argument for why a buyer shouldn’t be able to control their agent’s compensation. If you are in a state where commission rebates are illegal, call your representatives and ask why. If they have a good answer, we'd love to hear it!
The short answer is no. The IRS issued a private letter ruling which treated a commission rebate as a reduction of the purchase price. If we take our hypothetical $1,000,000 apartment with a $20,000 rebate, in the IRS' eyes, the buyer paid $980,000.
A related question we get is will a buyer receive a 1099 for their commission rebate. Since the rebate is not considered income, the answer is no.
While a private letter ruling is not a universal rule, we are not aware of any commission rebates that have been taxed. That being said, always check with you accountant to go through your situation.
To answer this question, we need to break the traditional broker community into two buckets.
Listing Agents: Any smart listing agent will realize that a rebate is great for them. What the buyer’s agent does with their commission does not affect the listing agent whatsoever. Their commission will be exactly the same.
When a buyer is getting a commission rebate, it makes it easier to get a deal done. In the mind of a buyer getting a commission rebate, a $1,000,000 offer becomes $980,000. The listing agent is able to get a deal done more easily and the buyer gets cash back - everyone wins!
Traditional Buyer Agents: Understandably, traditional buyer agents are sometimes threatened by commission rebates. Nobody likes making less money.
In order to justify higher commissions, they will often associate price and value and argue an agent offering commission rebates is compromising on service. Why would they offer a rebate if they didn’t have to? The answer is because brokerages like Yoreevo operate more efficiently and pass those savings on to our buyers.
In NYC, there is a clear split between agents embracing technology to work more efficiently while traditional brokers do their best to maintain the status quo.
Any NYC real estate agent or brokerage can offer buyer rebates. That being said, it’s unlikely an agent used to getting paid 3% will be happy getting paid a fraction of that. They may also be insulted if you imply they’re not worth the full commission. Even if an agent would like to give you a rebate, they may be handcuffed by their brokerage which often sets minimum commission rates.
The easiest approach is to work with a real estate brokerage that offer rebates to all its buyers like Yoreevo! That way, you’ll know exactly how much you’ll get back without any negotiation or awkward conversations. Yoreevo's business model is built on lower commissions so we're happy to have you as a client and get you a rebate.
Regardless of who you work with, make sure you get the rebate in writing to protect yourself and make sure everyone is on the same page.
Please note the total commission that is paid to a buyer’s agent is not negotiated. In NYC, all members of the Real Estate Board of New York (REBNY) or MLS of Long Island (MLSLI) receive the same commission on a given listing.
The only issue you could potentially encounter with a buyer rebate is the loan-to-value (LTV) of your mortgage. If the rebate is not factored into underwriting, your LTV could be too high but as long as you tell your lender, everything will go smoothly.
For example, say you are buying a home for $1,000,000 and the bank requires 20% down. You’ll contribute $200,000 and borrow $800,000 - seems simple. However buyer rebates are generally treated as a reduction of the purchase price. If you’re getting a 2% rebate, the bank’s numbers will now say you’re getting an $800,000 loan on a $980,000 property and your LTV just increased to 81.6% ($800,000 / $980,000).
While that may seem trivial, banks don’t budge on those ratios and it could create some speed bumps for your transaction. The solution? Just tell your bank you’re getting a rebate! As long as they know, it’ll all be factored into underwriting.
More buyers are learning about commission rebates everyday but unfortunately many have no idea they exist! There are a couple reasons we can point to.
If your boss asked you to do 3x as much work for the same pay, you would probably tell them to get lost. It wouldn’t matter if you had received a 50% raise over the last ten years while actually doing less.
That’s exactly what you’re doing by asking a current real estate agent for a commission rebate. Even though your transaction would remain extremely profitable, it’s easy for them to get comfortable and convince themselves they deserve $700/hour.
It takes a new entrant like Yoreevo to build a business around buyer agent commission rebates (and have more reasonable expectations!).
Transaction Size and Frequency
The best thing traditional brokers have going for them is NYC apartment purchases are large and infrequent. It's hard for buyers to become experts on something they do every 5-7 years.
First time buyers are especially risk averse and assume they need to pay 3% for their broker. When Yoreevo speaks with repeat buyers, the conversations are much shorter. They know what a broker actually does and recognize a $30,000 commission is absurd. Hiring a traditional broker is like hiring a brain surgeon to do a few stitches. They’ll get the job done but it’s completely unnecessary.
If you were charging more to do less, you’d do your best to keep that quiet. Brokers often try to change the subject by spending money on flashy but unnecessary expenses. Fancy offices, all day car services - buyers end up paying for these. This has locked traditional brokers into high cost structures that require high commissions. They couldn't offer rebates even if they wanted to.
Thankfully, you don't have to use a traditional broker and are now an expert on commission rebates! If you've made it this far, we're pretty sure you'd agree everyone should get one so call us or send us a message and we'll get you on your way to a commission rebate!
Note: This post should not be used as tax advice. Please contact a qualified accountant if you have any questions about your particular situation.