Real estate commission discounts and rebates are again dominating television and radio commercials. It’s an annual event, like migrating geese flying north in perfect geometric formation. New discount brokerages crowd the airwaves with slick ad campaigns touting their ability to save buyers and sellers thousands of dollars! on real estate commissions. Most of those advertisers are functioning real estate brokerages that actually employ agents working together in a large office, but some may be “virtual brokerages” with only a small headquarters staff that contract with agents who work from their home office. We’ll also see ads from brokerages that are little more than advertising companies with a real estate license. Their ad campaigns generate leads, which they sell to agents working at other firms who agree to provide their services in accordance with the advertiser’s published terms. The common thread is they are all advertising real estate services at a discount.
Commission rebates are also again being advertised with increased regularity, though not as often or with the level of fanfare as discounts. They offer something, usually cash, back to the client at closing, often in the form of a credit toward closing costs. Are rebates and discounts great ideas for buyers and sellers? Let’s look at pro’s and con’s of each.
But first… it’s important to know that most terms of a real estate agreement entered into by buyers, sellers and their agents are not mandated by law and are open to negotiation. That includes real estate commissions. Real estate commissions are always negotiable. Some brokerages don’t discount their commissions or offer rebates because their customers will pay whatever the brokerage charges. Other brokerages reduce the scope of services and discount their commissions accordingly. Still others operate their businesses with lower overhead costs, enabling the brokerage to offer full service with discount commissions. Brokerages are not required to negotiate their commissions, but clients are also not required to work with brokerages that refuse to negotiate.
Rebates can be attractive, but have the risk of creating a granfalloon* in which client (buyer or seller) and their agent do not benefit equally from the transaction. Rebates can also take many forms, and for that reason buyers and sellers should exercise extreme caution when contracting with a broker who offers one. Some rebates are simply cash in the buyer’s or seller’s pocket, a check made out to the client by the brokerage at the conclusion of the sale (in states where cash rebates are legal). Other rebates may be credits to closing costs. For example, a broker may rebate $500 by instructing the escrow officer to reduce their commission by $500 and apply that amount to their client’s closing costs. If the rebate is a larger amount, the broker might even agree to rebate a portion of their commission to help with a buyer’s down payment. Seems simple, right? There are two issues to consider: 1) In most instances, the broker is simply rebating money that was the client’s in the first place; 2) How the rebate is reported in the settlement statement can have income tax and capital gains tax implications now and in the future. Some rebates work out just fine for broker and client, but because the form of rebates can vary so widely and be subject to drastically different regulations from state to state, I recommend that clients always consult with their tax professional before agreeing to a rebate deal.
Other than first rate service, commission discounts are the most popular enticement brokerages offer to potential clients. It can be difficult to determine how big the discount is unless you know a broker’s standard commission rate. As mentioned above, some brokerages usually charge full commission based on a perceived prevailing rate – a commission rate typically charged by brokers competing for clients in the area. In reality, there is no prevailing rate – brokerages are not permitted to discuss their rates with other brokerages or in any way collude to set formal or informal standard or prevailing commission rates. When a broker offers a discount, it is off the rate that broker normally charges, not an industry standard or prevailing rate. Clients should take into consideration exactly what services are provided when a discount is offered so they can evaluate agents on an apples-to-apples basis. Once a broker is selected, the discount should be clearly understood and confirmed in writing, either in a listing agreement (sellers) or representation agreement (buyers).
Do real estate commission discounts and rebates always produce the best possible financial outcome from a sale – bottom line? Not always. Quality of service and standard of customer care can vary from agent to agent, brokerage to brokerage, and even between offices within the same franchise brand. A skilled and experienced agent charging full commission always has the potential to deliver an outcome as good or better than that produced by a discount agent. For example, let’s say an experienced, full commission agent implements a strategy that results in the sale of a home listed at $1,000,000 for 5% over asking price, a price bump of $50,000. A basic marketing program conducted by a discount broker would have sold the same home at list price, but with a 2% commission discount worth $20,000. Which agent put more dollars in the seller’s pocket? In this example, full commission produces $27,000 more for the seller than the discount commission. Discounts and rebates should never be the only criteria used to select a real estate agent.
If buying or selling real estate this summer, make sure to fully understand any commission discounts or rebates offered by brokers. Get the offer in writing and have it incorporated into the broker’s listing or representation agreement. If considering a rebate offer, have it reviewed by a tax professional before signing. Finally, weigh the value of discounts or rebates in relation to the quality and scope of services offered by agents you may hire. Look for the balance of commission cost and capability that has the highest potential to achieve your goals for your sale or purchase.
* A granfalloon is a group of people brought together based on a shared identity or purpose, though the premise of the association is false or does not exist. The concept originated in the novel Cat’s Cradle by Kurt Vonnegut.
Have questions about real estate commissions, rebates, discounts or other real estate issues? Drop me a line!