WHAT IS A BROKER REBATE?
It is simply a portion of the real estate AGENTS’s commission that is shared with you. To understand this, you need to understand how commissions work in general.
In New York (and in most parts of the country), the SELLER agrees to pay their AGENT (called the listing agent) a commission for selling the property. In Westchester County, the commission is usually 5% of the sales price. The LISTING AGENT, in turn, offers a portion of their commission (usually 50%) to the AGENT who brings a ready, willing and able BUYER to the deal (called a selling agent). (Don’t get me started on why the buyer’s agent is called a selling agent). So, for example, a house that sells for $100,000 would have a commission to the LISTING AGENT in the amount of $5,000 (5%), and the LISTING AGENT shares their commission with the BUYER’S AGENT so that each agent gets half, or $2,500 each.
In this traditional scenario, this is where the story ends. The seller gets PAID, the listing agent gets PAID, and the buyer’s agent gets PAID. The buyer – well, they just PAY.
But wait a minute! The buyers don’t pay their agent any commission – it’s paid by the Seller. The buyer gets a free ride, right?
Yes, and no. It’s true that the commissions come out of the seller’s share of sale proceeds, but where do the sale proceeds come from? Think about it. The buyer is paying the seller at the closing, so in essence, it’s really the buyer that is paying the commissions in the end.
So shouldn’t the buyer catch a break somewhere in this process?
That’s where the BROKER REBATE comes in.
HOW DOES IT WORK?
Simply said, we share the commission we are paid with you. At the closing, you will receive a check from our agency. In most cases, this is thousands of dollars back in your pocket. In some cases, the rebate will help pay for the dreaded NEW YORK MANSION TAX.
HOW MUCH IS THE REBATE?
Our rebates are between 1/2% to 1% of the sales price. We keep 1.5% of the sales price, and give you the rest.
$750,000 sales price, 2.5% commission to buyer’s agent, we receive 1.5% and you receive 1%, which is $7,500.
$900,000 sales price, 2% commission to the buyer’s agent, we receive 1.5% and you receive 1/2%, which is $4,500.
$1,500,000 sales price, 2.5% commission to buyer’s agent, we receive 1.5%, and you receive 1%, which is $15,000. In this example, this pays your Mansion Tax!
IS THE REBATE TAXABLE?
NO. The IRS has determined that a BROKER REBATE is not taxable income so you do not pay income taxes on the amount you receive from us. see IRS opinion letter here. No Form 1099 needs to be issued by our agency. But you could end up paying a small additional amount of capital gains down the road when you sell the property. The buyer would treat the refund as a reduction in the cost of the property. See the next section.
WHAT’S THE CATCH?
There’s always a catch, right? Well, again the answer is yes and no. There is no catch as to whether or not you will receive your rebate from us. And it is not taxable income per IRS rules. BUT, the rebate does lower the cost of the property (known as your “tax basis”). OK, this is where we say that we are not accountants and we recommend that you speak with an accountant if you have questions about this. But, basically, the tax basis on your home is usually the purchase price. When you get a rebate, you reduce the amount of the purchase price by the amount of the rebate, and that becomes your tax basis. Again, we suggest speaking with your accountant about this if your head is starting to spin a bit.
And, ALSO, it is important to tell your lender about the rebate. You see, your loan is typically based on a percentage of the sales price. A typical transaction in Westchester is structured as follows:
- 10% of the sales price given the the seller’s attorney when contracts are signed
- 80% financed by the lender
- the balance of the 10% paid by the buyer at the closing.
If the sales price is $100,000, your loan would be for $80,000.00, or 80% of the sales price.
But when you get a rebate, it lowers the basis of the sales price. So if your rebate is $2000, then, in the lender’s eyes, your sales price drops by $2000 and becomes $98,000, and 80% of this lower amount is $78,400.00, not $80,000.00.
How do you avoid having trouble with your lender? We recommend just telling them about the rebate from the beginning, and they’ll work it into their numbers right from the start. Easy peasy.
WHY DON’T ALL REAL ESTATE AGENTS OFFER BROKER REBATES?
Well, part of the reason is tradition/custom/history. You see, real estate agents, since the beginning of time, have been paid somewhere in the range of five percent of the sales price. Why on earth would they want to reduce this amount if they don’t have to?
Another part has to do with reputation. The big real estate agencies have an image to uphold, and no one wants to be the “discount” agency, possibly tarnishing their image as a “luxury” or “high end” brand.
And, of course, there is always the greed factor. OK, maybe not the Gordon Gecko / Bernie Madoff type of greed, but many of the big real estate agencies have invested tons of money setting up their swanky offices, hiring staff, marketing, staging, branding, etc etc. This all costs money, and those 5% commissions help keep these companies in the black.
WHY ARE WE WILLING TO ACCEPT LESS IN COMMISSIONS?
We are new. We are lean. We are a lean, mean fighting machine. We don’t have the huge budgets to maintain, or giant expense accounts to fund. We know that today’s buyers do a lot of the agents work already. I’m sure you know about Zillow, Trulia, Realtor.com and many, many other websites that not only offer lists of all of the properties for sale, but also tons and tons of information on the buying and closing process.
So we welcome you to use these tools. We are here to supplement them, not replace them. We are members of the MLS in Westchester County, so you’ll have access to all of the listings there. We are also in the community, we network with other agents, and we get the scoop on deals just like any other agent working for any of the other “big” agencies.
And you still receive the full service that you’d expect from any other agent. We’ll help you find the right home, we’ll schedule and attend the showings with you, we’ll help you negotiate with the seller, and we’ll help you get to the closing table.
WILL OTHER AGENTS WORK WITH US?
Some ask, “If you are a broker that gives away part of their commission to your clients, won’t that cause other brokers to avoid you or send business in another direction?” That is a legitimate question, and for this reason, we are discreet throughout the buying process. Although we think BROKER REBATES are the future of real estate (assuming commission rates never change), we understand that discretion is the better part of valor, and we keep our arrangement discrete so that anyone involved in the transaction would not even know that you are receiving a rebate (unless you tell them, of course).