eNeighborhoods, LLC A Dominion Enterprises Company
Empowering real estate's top professionals
REALTOR Benefits
877-363-4442
 

How Home Buyer Rebates Work

In today’s housing market, buyers are looking for bargains. One way for home buyers to stretch their dollars is the home buyer rebate. At the same time, rebates have become a hot-button legal issue for the traditional real estate industry and the U.S. Justice Department’s Antitrust Division.

Buyer rebates can make getting into a home more affordable, and more so-called non-traditional real estate companies – those offering alternatives to full-service, full-commission brokers – are offering to share their paydays with buyers. At the same time, many traditional brokers around the nation are trying to block rebates because they threaten fat margins with price competition in the form of commission discounts.

Since buyers pay the lion’s share of closing costs in addition to down payments, many are interested in receiving rebates to ease the cash crunch of moving into a new home. This can be a real advantage for buyers who have a solid income and credit history, but little cash up front.

In this case, the term “rebate” is little confusing because home buyers are not getting a portion of their cash outlay back. The buyer representative (agent, broker or both) is rebating a portion of his or her commission back to the buyer.

The rebate process seems confusing to some buyers because it runs counter to the common belief that home buyers don’t pay real estate commissions. In fact, commission costs are passed on to buyers as part of the home’s sales price. Buyer-agents typically are paid half the standard 5-6 percent of sales price commission. That money doesn’t come from thin air…chances are that the sellers have factored commission into their price. When traditional listing agents tell sellers not to stress over commissions, because they can recover the costs through a higher sales price, someone is paying the freight.

So how do home buyer rebates work, and what’s in it for you?

- In traditional real estate transactions, buyer representatives and seller representatives typically share commissions of 5 to 6 percent. Selling brokers usually offer half this commission to a broker who brings them a buyer. As an incentive to drum up business, some brokers now offer to rebate a portion of their buyer-representative commission to home buyers. For example, suppose you buy a $400,000 home on which the seller pays a six percent commission. The buyer and seller representatives split the $24,000 commission evenly. In this case, a one percent rebate means that the buyer representative receives $12,000 from which they pocket $8,000 and “rebate” $4,000 back to the buyer.

- Buyer rebates generally depend on the home’s sales price, total amount of commission and the commission split. Some rebates may be advertised as a percentage of the buyer-representatives commission. In the example above, the rebate is $4,000, or about 33 percent of the $12,000 buyer-side commission. Other companies offer fixed-amount buyer rebates, such as $1,000 in cash or a $1,000 gift certificate.

Homebuyer rebates: To ban or not to ban?

At the same time consumers are looking to rebates to help relieve the high cost of home buying, traditional real estate brokers are trying – and succeeding in some cases – to prevent their use. Broker lobbying groups around the nation, concerned about price competition and downward pressure on commissions, have successfully lobbied lawmakers in 10 states to make home buyer rebates illegal. Four more states limit home buyer rebates to credits at closing. Fortunately for Florida buyers enduring record-setting home prices, rebates remain legal in the Sunshine State.

Industry watchers recently have looked to the state of Kentucky to see where the rebate debate might lead. In March, the U.S. Department of Justice sued that state’s Real Estate Commission, alleging that its rebate ban violated antitrust laws. The DOJ investigation alleged that Kentucky’s rebate ban may cost consumers “several thousand dollars” extra for each real estate transaction. In July, rebate fans received a victory when the DOJ and the Kentucky Real Estate Commission reached an agreement permitting rebates in that state.

If you’re shopping for a rebate, get the facts:

Some points to keep in mind if you are a home buyer looking to take advantage of rebates:

- Shop around. Some rebate programs included other buyer services, such as contract preparation or review, or escrow services. Even in a sellers’ market, buyers have some leverage. After you have established the rebate amount, ask what else is in the package to help simplify your purchase and control transaction costs.

- Consider your tax picture. Getting a rebate in the form of funds applied to closing can be double-win because that money may go untaxed when applied to closing costs. If the rebate or a portion of the rebate is not available until after closing, it may need to be reported as taxable income. Of course, this isn’t an issue if you have plans for your rebate other than closing costs. Be sure to consult your tax advisor for this and other tax consequences of home buying.

- Rebates won’t be available on many homes, including sale-by-owner homes and some homes sold by discount brokers. That’s because in these cases, the traditional commission percentage and split – from which the rebate is derived – doesn’t apply. Some real estate companies don’t offer buyer-agent commissions, and owners selling their own homes probably are doing so to avoid commissions.

Finally, check to see if rebates are legal in your state. Money Magazine’s 2005 Real Estate Guide reported that rebates were banned in Alaska, New Jersey, Kansas, Oklahoma, Rhode Island, Louisiana, South Carolina, Mississippi, West Virginia and Missouri. Rebates were reported as restricted to credits at closing in Alabama, South Dakota, Oregon and Tennessee. If rebates aren’t available in your state, you might ask your buyer agent what incentives are available. After all, for being a smart buyer in today’s challenging real estate market, you deserve some type of reward.


Dominion Enterprises eNeighborhoods, LLC