There's always a lot of chatter on real estate blogs, Q&As and forums regarding commission rebates to clients.Â And while there are clearly many in the industry that are not in favor of giving or being asked to give part of their commission to the buyer, there are many quallified, skilled and highly experienced Realtors who DO give rebates, so if you're buying a home, talk with a variety of Realtors before hiring a Realtor to help you with your home purchase!Why Would A Realtor Give Commission Money Away?
That's a great question, and you'll often hear other industry members saying that a "discount" or "commission rebate" Realtor is unskilled, unqualified, lacks knowledge, clients and contacts within the industry.Â In reality, while some discount Realtors are new to the industry and use discounts to start their practice, there are many who have been around for years who have had extensive experience in the field.Â Redfin.com, well known for their discount services, completes exhaustive interviews with their Realtors to ensure that they hire some of the sharpest, brightest talent in the local area.Â Redfin reaches out only to those Realtors who rank in the top 10 percent in transactions in a specific geographic region, and after a series of three interviews, they hire only a handful of Realtors to be either Redfin Realtors or Redfin affiliate Realtors.Â I know, I've been through the process myself, and their service model is impressive.
Other realty firms are similarlyÂ moving towardÂ the "commission rebate" model.Â My broker at Area Pro Realty, at first, was reluctant to allow me toÂ make commission rebates to buyers, but soon realized that the service model was not only extremely "do-able" for the agent, but profitable for all parties--Realtor, Realty firm andÂ Buyers (and Sellers)!Â Â In the past two years since I began working as a "commission rebate" agent,Â my buyers haveÂ received rebatesÂ that goÂ right back into the home (and the local economy) by way of improvements, moving costs, repairs, and decorating.Â I like to think of my offering rebates as my own way of "stimulating" the economy, and I've "converted" a few of the agents here to the commission rebate model too!
But to answer the question, I offer rebates because, frankly, my own cost base at Area Pro allows me to provide rebates to clients.Â In other, larger firms, such cost rebates may not be possible because the brokerage takes a significantly larger share of the Realtor's gross commission than would my own employer. I also don't pay for a large office building, which is a cost savings--savings that can be passed along to a buyer or seller.Â Â So commission rebates are often not an indication of the lack of skill of a Realtor, but the lack of overhead costs that the Realtor must pay.How much is the typical rebate?
The amount of the rebate depends on the firm and the Realtor.Â In the caseÂ Redfin and Zip, for example, the rebate is usually equal to 1/2 of the commission offered to the buyer.Â For me, the typical rebate is 1-1.5%, and can go as high as 2% for purchases over $2 million.Do Buyers Have to Pay Income Taxes on Rebates?
If the rebate is handled incorrectly
, yes, the buyer may find that the rebate is 100 percent taxable.Â
Handled properly, however,Â a commission rebate is not a taxable event at the time of purchase, but is considered a reduction in the purchase price or "boot" of the home cost.Â When the home is sold, the seller must use the reduced cost to determine capital gains.Â For more information about commission rebates and how this can affect your taxes, please consult with your tax professional.How to Handle a Rebate Legally and Correctly?
To ensure that any commission rebate you receive is handled properly and legally and does not trigger inadvertant tax consequences, it MUST MUST MUST
appear on the HUD-1 closing statement.Â In addition, sellers and buyers must memorialize the rebate on addendums to the purchase contract, and the information should be disclosed to the buyer's mortgage company since rebate can affect the appraised value of the home as well as the buyer's ability to get a loan.Â
Realtors and Buyers who are considering a home purchase with a commission rebate should always consult with the mortgage company representative BEFORE making an offer on a home.
A commission rebate can come in the form of:
1) Reduction of the home price at time of purchase;
2) reduction in loan fees and closing costs and
3) a check to the Buyer for the commission rebate.
Typically, the commission rebate cannot be used a part of the downpayment for the home.Â There are also some home purchases where the Realtor is disallowed from offering a commission rebate to the buyer, and these are typically home sales where a bank is involved (REOs and Short Sales).Â In these cases, the Realtor may pay for loan fees and inspection costs, but NOT provide money directly to the buyer.
Ensuring that your rebate is legal and correct is both the responsibility of the Buyer and the Realtor, and, believe me, the Department of Real Estate is ever watchful of rebates that are handled incorrectly, "under the table" or made in cash.Â So make sure your commission rebate is ALWAYSÂ completed inside the escrowÂ transaction and appears on the HUD-1 closing statement.Â Does this make the "full service" Realtor obsolete?
There will always be those clients who need a lot of hand holding, don't know how to use the internet, don't do emails, don't use electronic signatures, or, in general, feelÂ more comfortable with a full service Realtor. And there a LOT of buyers and sellers who feel this way, so there will always be a place for both the discount/commission rebate Realtor and the full-service agent.Â Â Â
The most important task for any Buyer is to find an agent--full service or commission rebate--who works well with you, who you can trust, and who will provide the service package that you need in your home sale or home search.
Area Pro Realty-People's Choice
Tel (408) 426-1616