Buying and selling homes is expensive business. Whether you are on the buying or selling side, there are many fees to pay. Even sellers have to fork over thousands of dollars in order to transfer ownership of their home. One of the largest fees many sellers pay is the real estate agent’s commission. In many cases, the seller pays as much as 7% of the sales price of the home. On a $300,000 home, this equals $21,000 – that’s no small change! The buyer is never responsible for paying the real estate agent’s commission; this is always on the seller. If a buyer brings in a buying agent, usually the listing agent agrees to split the commission with him 50/50. In this case, the buyer’s agent would receive $10,500 for bringing the buyer. The buyer’s agent can share the wealth with a commission rebate, though.
What is a Commission Rebate?
When the buyer’s agent helps the buyer purchase the home with a credit at the closing, it is called a commission rebate. The buyer’s agent provides the buyer with the money necessary to pay down closing costs or even the down payment. The money comes right off the bottom line of the money the buyer would have to bring to the table. In the end, the agent receives less cash at the closing and the buyer has to bring less of his own money to purchase the home.
Is it Income?
Many people wonder if the commission rebate is income. If so, do you have to claim it on your taxes at the end of the year? The IRS has a special ruling regarding this situation. They ruled the credit is not income. Instead, it is a credit. Because of the credit, however, the buyer must decrease the amount of the purchase price of the home by as much as the amount of the credit for tax reporting purposes. The realtor is not obligated to provide the buyer with a 1099 and the buyer does not have to claim the income on his tax returns.
Why Would Agents Offer Rebates?
You might wonder why agents would want to give up a part of their commission. After all, they earned the money. However, most agents look at it as a marketing ploy. If they offer to provide their buyers with even 0.5% back in a credit, they lower the costs of the buyer significantly. Let’s say a home was selling for $300,000 and the seller’s agent has an agreed upon commission rate of 6%. This means the buyer’s agent would receive $9,000. If the buyer’s agent agreed to a 0.5% rebate to the buyer, he would pay him $1,500, leaving the agent with $7,500. That is still a large sum of money! Now, if the agent did not offer the buyer’s rebate, you might use a different agent. The difference between $7,500 and $0 is huge – which is why many buyers’ agents go ahead and offer the rebate.
How to Negotiate a Commission Rebate
So how do you go about getting a commission rebate? Chances are you will not see them advertised very heavily. You will probably have to do some of your own negotiating in order to secure one. Here are a few ways:
- Old school negotiation – You can always go about it the old school way and just start negotiating. Think of something you could offer the buyer’s agent in return for the commission. For example, if you do a lot of the home searching on your own, which is rather easy thanks to the internet, you can take that work off the agent’s shoulders. If you tell him you will only contact him when you find houses you want to get in and see, you take a portion of his work away. In exchange, he may be willing to give you a credit. There are other services you can negotiate or you can get competing offers and use them to get higher commission rebate bids from agents.
- Use a service that pits agents against one another – In today’s technological age, there are many ways to secure quotes from competing agents. Find a website that offers quotes from realtors in your area. The realtors on these sites often offer perks to use them because they know they are in direct competition with a wide range of other reputable realtors.
Should you Focus on the Rebate?
The fact of the matter is, you should not focus on the rebate. If you purchase a home you cannot afford because the down payment required is too high or the closing costs exceed your budget, you shouldn’t purchase that home. You don’t want to enter home ownership already drowning in your finances. Instead, find a home you can comfortably afford on your own. If you find a realtor who offers a commission rebate, consider it a bonus. But, remember, this often comes in exchange for less work. The realtor knows he will make less money on your home purchase, so it will not be his first priority to work on your file. This doesn’t mean you will receive poor service as a result of the rebate, but it could make the home purchase process a little harder for you.
Start by searching for a reputable real estate agent you can trust before you start negotiating for a commission rebate. If you happen to come across a lender willing to offer one though, by all means, take it. As long as you can handle the work it puts on you, go ahead and enjoy the savings. You do not have to claim the rebate on your taxes, so it will not increase your tax liability at the end of the year. The only thing it does is affect the purchase price of the home that you can claim on your tax returns. Consult with your tax accountant and figure out the best way for you to go if you are concerned about how you will be impacted by the process.