While national home prices are making new highs according to the S&P/Case–Shiller U.S. National Home Price Index, affordability is another thing all together. It is becoming more and more difficult for homebuyers to afford homes with low inventory, rising prices, rising interest rates, and increased competition.
Millennial homebuyers now makeup the largest share of home buyers at 36% according to the National Association of Realtors and it’s getting harder and harder for young people to afford buying which is driving more and more millennials to live at home.
As the co-founder of Prevu, a New York City-based real estate startup, I believe strongly that it is important for homes to remain affordable not only for consumers but for the health of the real estate industry.
There is actually a way to make homes more affordable that many people don’t even know is possible or legal – commission rebates.
Most traditional real estate brokers won’t tell you that you can get cash back when buying a property, therefore lowering the actual cost of the purchase. This is money that is much needed in such an important moment in life. Especially in high-priced metropolitan markets such as New York City, San Francisco, and Seattle, affordability is becoming extremely difficult for buyers.
The traditional industry’s half-truth
There is a half-truth propagated by traditional real estate brokers that it is “free” for buyers to be represented as the buyer’s broker commission is paid for by the seller. This statement is very misleading and the word “free” is intended to distract you from how much money traditional buyer’s brokers receive.
Traditional real estate brokers are failing to transparently educate homebuyers on how the economics of commissions work during a transaction and most homebuyers don’t realize how much their buyer’s broker receives for the transaction until they are sitting at the closing table.
So how does this all work?
Commissions are typically paid by sellers and average between 5-6% nationally. In many regions of the country, this commission is split evenly between the listing agent (seller’s agent) and the buyer’s agent. A buyer’s agent could receive half of the commission or up to 3% while the rest goes to the seller’s broker.
To put context around this, the average price of an apartment in Manhattan is roughly $2 million. In this case, a buyer’s agent could receive up to $60,000 representing you as the buyer. That’s real money. A large percentage of this amount, in some cases up to two-thirds, can then be paid back to the buyer as a commission rebate.
This sounds great, but are commission rebates legal?
The answer is yes in 40 US states and the Department of Justice has even encouraged them. The states that don’t yet allow rebates are Alaska, Oregon, Iowa, Kansas, Oklahoma, Missouri, Mississippi, Louisiana, Alabama, and Tennessee.
On the state level, the Attorney General of the State of New York weighed in on the matter in a letter to the real estate industry in 2015 - touting the consumer benefits of rebates.
“Rebating by real estate brokers can greatly reduce the costs of buying and selling property and even facilitate new and innovative business models,” said Attorney General Schneiderman. “I urge the real estate community to embrace this opportunity to be more competitive, and improve the choices available to New York homeowners. I also encourage buyers and sellers alike to take advantage of your right to bargain with your broker for a lower commission.”
How can I find a broker who provides commission rebates?
Generally speaking, traditional agents don’t advertise these services because it would cannibalize their existing businesses. The best route is to search the internet for traditional or tech-enabled brokers who offer buyer commission rebate services.
You can ask a traditional agent for a rebate, but your odds of success aren’t great. It’s not all about the money though, when selecting an agent it is important to make sure they are experienced and good at what they do. Typically looking at how many deals they have done or talking to previous customers is a good place to start.
What if I decide not to use a buyer’s agent at all?
Can I just ask the listing agent to reduce the price by the buyer’s commission? The answer is usually no.
Listing agreements are privately negotiated agreements with sellers that typically entitle the listing agent or seller’s agent to the whole 5-6% commission if a buyer’s agent is not involved. So translation, even if the buyer and the seller want a lower commission they are at the mercy of the listing agent agreeing to this. The listing agent has every incentive not to agree to a rebate
In the end, some homebuyers may miss out on a commission rebate by using a traditional broker, however it’s important that homebuyers are aware that buyer commission rebates exist so they can make a smart decision. Getting the expert advice you need during a purchase plus money back from your broker is even better than “free” and gives you an advantage in an uber competitive real estate market.
