All NYC real estate buyers should know about buyer agent commission rebates, understand how they work and how to get one. Through this guide, we’ll make sure that you understand everything there is to know about buyer rebates as well.
Table of Contents:
What are buyer agent commission rebates in NYC?
What are the biggest benefits of buyer rebates?
How do agents feel about buyer rebates?
How do I negotiate buyer rebates?
How do I find buyer rebates in my area?
What are some possible issues with buyer rebates?
Where are rebates banned and why?
Why are buyer agent rebates so rare in NYC?
Are real estate commission rebates taxable?
Next steps to get a buyer agent commission rebate
Do you know how a buyer’s agent gets paid? What about how much? It’s shocking how few buyers know the answers to those two simple questions. As a buyer, your broker is paid by the listing broker. The amount paid to the listing broker is determined by an agreement between the seller and the listing broker and differs from property to property.
Typically, a buyer's agent gets half of the 5-6% commission that the seller pays in order to sell a home. Buyer's agents can compete for business by refunding a portion of their commission to the buyer. These refunds are generally referred to as “commission rebates” or “buyer rebates”.
A commission rebate is simply when your agent gives back to you, the buyer, some of the commission earned on your transaction. It is the only way for you to have a say in how much your broker gets paid. If this sounds like a strange concept, give yourself a pat on the back! By making it this far, you’re significantly better informed than most buyers.
Is your broker steering you towards properties offering higher real estate commissions? Is that property you inquired about actually going into contract or is the commission low? These are questions you have to ask yourself if you’re not getting a buyer rebate.
Cash! And a lot of it! After hearing the cost to work with a buyer broker is “free”, most buyers stop asking questions. The truth is the average commission rate is above 5%, so agents on a typical transaction will each take home over 2.5% of the purchase price!
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!
Obviously, any amount of cash is better than no cash but what are some other benefits? When your agent is working for a fixed commission – dollar or percent – you can be sure you’re seeing all relevant listings. If your dream listing is offering a 2% commission, will an agent who is used to making 2.5% show it? Probably not. There are even firms that do not allow their agents to show properties offering a commission below a certain amount.
The current structure of real estate commissions was developed for the benefit of agents – not buyers or sellers. Buyer rebates are a big step in the right direction towards putting customers first. They allow buyers to control compensation, increase transparency and lower their closing costs.
There are two camps of agents – those used to making at least 2.5%, and those who have acknowledged 2.5% is absurd in 2018. The latter has embraced technology and efficiency to pass savings on to their clients in the form of buyer rebates. But to address the 2.5% camp, it’s important to put them in two buckets.
Listing Agents: Any smart listing agent will realize that a potential rebate on the other side of the transaction is very good for them. What the buyer’s agent does with his or her 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 million bid becomes $980,000. The listing agent is able to get a deal done more easily and the buyer gets cash back - everyone wins!
Other Buyer Agents: Understandably, full priced buyer agents are threatened by commission rebates. Nobody likes making less money. In order to justify their higher commissions, other buyer agents typically try to associate price and value. They’ll argue an agent who is offering a commission rebate is compromising on service. Why would they rebate a portion of their commission if they didn’t have to? If a buyer doesn’t understand the industry, that can make sense. But what if that was flipped around? Would a buyer get better service if they paid 4%? As Warren Buffet once said “price is what you pay, value is what you get.” Agents offering rebates work smarter, more efficiently, embrace technology and pass on those savings via buyer rebates.
Any agent or firm can offer buyer rebates - they are always on the table. That being said, it’s unlikely an agent used to get paid 2.5% will be happy about getting paid a fraction of that. Such an agent may also feel insulted if you imply they’re not worth the full commission. It doesn’t necessarily get you off on the right foot.
For buyers looking to avoid that confrontation, the easier approach is to contact firms that offer rebates to all their buyers. You’ll know exactly how much you’d be getting back with no negotiation. Their business models are built on lower commissions so they’ll be happy to have you as a client.
No matter where you’re looking, you should be able to find at least one firm that is openly providing a commission rebate to the buyer. As higher property prices have coincided with dramatically improved information transparency, smart real estate brokers are acknowledging reality and bringing the price of their services in line with the value delivered. A quick online search should present a few options.
Of course you can also ask 2.5% real estate agents for a rebate but, even if you’re successful in getting one, for a variety of reasons, it’s likely to be smaller than rebate-centric firms.
As long as you’re not offending a “full priced” real estate agent, there’s only one potential issue to consider around a buyer rebate. If you’re paying cash, you can skip ahead but for anyone financing, buyer rebates can affect the loan-to-value (LTV) of your mortgage.
Say you’re buying a home or property for $1 million with a bank mandated 20% down payment. You’ll contribute $200,000 and borrow $800,000 - seems simple. However, as discussed below, buyer rebates are generally treated as a reduction of the purchase price. If you’re getting a 2% rebate on this property, 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 the initial underwriting.
Figuring out where rebates aren’t legal is easy - you can find a map of states on the Department of Justice website. Understanding why different states have different rules is a bit thornier. We can’t find any clear legal argument for why a buyer shouldn’t be able to control their agent’s compensation. What we can point to is the National Association of Realtors, which is the second largest lobbying group in the country. If you are in a state where commission rebates are still illegal, call your representatives and ask why.
Being a New York City focused company, Yoreevo has given this question why rebates aren’t more common in NYC a lot of thought. The simplest and most obvious answer in New York State and elsewhere is agents and brokers like making more money. However, a less cynical view shows incumbents acting rationally. If a large firm dropped its commissions in an attempt to drive volume, their competitors would be right behind them, which would result in everyone making less money.
What about a very successful agent? Couldn’t he or she break off and start a business centered around buyer rebates? Of course. But if they’re already very successful, that’s asking a lot.
Realistically, buyer rebates need to be championed by a new entrant - a company that builds its business intelligently, and on the expectation of offering buyer rebates to all of its customers (not just those who drive a really hard bargain). Perhaps more importantly, this company would not have been built atop the notion of inflated commissions.
The short answer is no. The IRS has issued a private letter ruling which treats commission rebates as a reduction of the purchase price. If we take our hypothetical $1 million apartment, the IRS would deduct the $20,000 rebate from the purchase price and say you paid $980,000.
While a private letter ruling is not a universal rule, you should check with an accountant to analyze your individual situation. We are not aware of any taxed commission rebates.
Congrats! You’re now an expert on commission rebates! If someone you know is thinking about buying in New York, make sure they know about commission rebates. Only when they’re aware of their existence can they determine if one is right for them.
We’re a little biased here but we think all buyers should receive a commission rebate. A broker receiving a $30,000 commission for helping the average NYC buyer seems crazy! If you’ve made it this far, you probably agree so reach out to Yoreevo and let’s get you on your way to a commission rebate of your own!Note: This post should not be used as tax advice. Please contact a qualified accountant if you have any questions about your particular situation.