One of the first steps in buying NYC real estate is picking an agent. Experienced? Check. Trustworthy? Check. Personable? Check. Do they give a rebate? Ummm, what?
Most buyers don’t really know how their agent gets paid and certainly not how much. Enter buyer agent commission rebates. 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!
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?
Where can 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
As a home buyer, your broker is paid by the seller’s broker. The amount is determined by an agreement between the seller and their broker. In most of the real estate market, the total commission is 5% or 6% of the sale price. That is then split 50/50 with the buyer’s agent so each side receives 2.5% or 3%.
Real estate agents can compete for business by refunding a portion of this commission to the buyer. These refunds are generally referred to as “commission rebates,” “buyer rebates” or “broker rebates” and are the only way for you to have a say in how much your agent is paid.
The mechanics are very simple. The buyer can either receive a check for the rebate or have it applied as a credit to the transaction.
Cash and a lot of it! After hearing their broker is “free,” most buyers stop asking questions. The truth is commissions average over 2.5% of the purchase price and in NYC, 2.5% is a lot of money.
Yoreevo’s average buyer rebate is 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.
Another huge buyer rebate benefit is transparency. When your agent is working for a fixed commission you can be sure you’re seeing all relevant listings. Without them, you won’t know if your broker is steering you towards properties offering higher commissions.
If your dream listing is offering a 2% commission, will an agent who is used to making 2.5% show it? Probably not. Some real estate brokerages don’t even allow their agents to show properties offering a commission below a certain level.
When your broker is working for a fixed fee (1% for Yoreevo), they will be indifferent to the actual commission being offered.
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 potential rebate on the other side of the transaction is very good 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!
Buyer Agents: Understandably, traditional brokers are threatened by commission rebates. Nobody likes making less money.
In order to justify their higher commissions, other buyer agents often 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? But what if that was flipped around? Would a buyer get better service if they paid 4%? As Warren Buffet says, “price is what you pay, value is what you get.”
Agents offering rebates embrace technology to work more efficiently and pass on those savings while traditional brokers do their best to maintain the real estate industry’s status quo.
Any agent or firm can offer buyer rebates. That being said, it’s unlikely an agent used to get paid 2.5% will be happy about getting paid a fraction of that. They may also feel insulted if you imply they’re not worth the full commission. Even if the agent would like to give you a rebate, they are often handcuffed by their brokerage which usually sets commission rates.
The easiest approach is to work with a real estate brokerage that offer rebates to all their buyers. That way, you’ll know exactly how much you’ll get back without any negotiation or awkward conversations. Their business models are built on lower commissions so they’ll be happy to have you as a client and get you a rebate.
Please note the total commission that is paid to a buyer’s agent is not negotiated. All members of the Real Estate Board of New York receive the same commission on a given listing.
No matter where you’re looking, you should be able to find a brokerage that is openly providing commission rebates. A quick online search should present a few options. Especially if you’re a first time buyer, you’ll want to make sure they are still offering full service.
Of course you can also ask traditional broker for a rebate but even if you’re successful, it’s likely to be small for a number of reasons.
As long as you’re not offending a traditional real estate broker, buyer rebates present only one potential issue with the loan-to-value (LTV) of your mortgage.
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 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 underwriting.
Is a buyer agent commission rebate legal? Figuring out where they are legal is easy - the Department of Justice has a map on its website. Understanding why they are illegal in some states is a bit more complicated.
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 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 is the real estate community likes making so much money. However, a less cynical view shows incumbents acting rationally.
If a large firm dropped its commissions in an attempt to drive more deals, their competitors would be right behind them, which would result in everyone making less money. What about a very successful agent? Couldn’t they break off and start a business centered around buyer rebates? Of course but they’re doing just fine as it stands.
Realistically, buyer rebates need a new entrant which is why we started Yoreevo! We're built from the ground up to operate profitably at lower commission rates.
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 $1,000,000 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, we are not aware of any taxed commission rebates. To analyze your individual situation, make sure to check with an accountant.
Congrats! You’re now an expert on commission rebates and just knowing about them is the biggest step.
We’re a little biased but think all buyers should receive a commission rebate. It’s an incredibly easy way to save money and offset some or all of your closing costs.
Average commissions in NYC are $30,000 and in Manhattan that's more like $60,000! If you've made it this far, we're pretty sure you'd agree that's an insane amount of money so contact us 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.