If you are in the market to buy a home, understanding your options when choosing a real estate agent and the financial implications are critical. One of the biggest financial advantages a home buyer can take advantage of is negotiation a commission rebate from your real estate agent. Sadly, many buyers are woefully uninformed and do not realize that they even have options at all, and this is generally based on a couple common misconceptions.
Myth: Buyers pay their own agents commission, right?
Truth: Sellers pay the buyer’s agent commission not the buyers.
The first major misconception for home buyers is that working with a buyer’s agent costs money. This is incorrect. In fact, a buyer’s agent receives their commission from the seller – NOT the buyer. Although many buyers’ agents do charge a ‘transaction fee’ or something similar to cover some of their costs – any buyer should understand that all fees and commissions in real estate, by law, are negotiable.
Aside from fees buyers’ agents may charge, the commission received by a buyers’ agent is set in the listing contract by the seller and the listing agent. In Colorado, 2.8% is the most common commission rate offered to buyers’ agents, but generally can vary anywhere from 2.5 to 3% depending on the value of the home.
A common example (although outdated) is below:
6% commission is set in the listing agreement, of this amount 3.2% goes to the selling agent and 2.8% goes to the buyer’s agent for securing a buyer.
Key takeaway: What every buyer should understand is that commission is paid by the seller and this amount is set by the seller and listing agent prior to listing the home for sale.
Myth: Commission rebates are not allowed in real estate transactions, right?
Truth: In Colorado, you can negotiate a commission rebate from your buyer’s agent.
Real estate commission rebates are one of the most commonly misunderstood concepts in the industry – by both agents and buyers alike. In fact, even the legality of real estate rebates can vary from state to state. A rebate, by definition occurs when the buyer’s agent provides a portion of the commission back to the buyer upon closing a deal. The buyer would be credited or ‘rebated’ at closing. While not allowed in every state, Colorado does allow real state rebates. See below:
“Colorado’s real estate brokers licensing act prohibits a real estate broker from paying a commission or valuable consideration to an unlicensed person who performs any brokerage functions. However, the Act, including the rules adopted by the Colorado Real Estate Commission, does not prohibit the payment of a rebate to the buyer and/or seller”
In more simplistic terms, real estate rebates are legal. While an agent cannot pay any unlicensed person a commission, they can provide a rebate to the buyer which is applied at closing. Essentially an agent is agreeing to receive less of their commission, and instead providing it as a rebate to cover costs for their buyer.
Generally, the rebate is provided to cover what is called prepays and closing costs. Examples include: taxes, cost of appraisal, cost of inspection, loan origination fees, etc. But it can also be used in other ways such as buying down points on your mortgage, prepaying HOA dues and more.
What is a typical real estate commission rebate?
All commissions and rebates are negotiable by law. You as a buyer can negotiate any rebate you like with your buyer’s agent, provided it fits within the legal constraints mentioned above. Thus, real estate rebates can vary widely.
The truth is though that real estate rebates are not all that common in real estate transactions because the majority of buyers are unaware that they even exist.
Here at EZ Agents, we pride ourselves in offering what we understand to be the biggest commission rebate in Colorado. Our unique business model focuses on providing value to our buyers where they need it most (negotiations, legal contracts, etc.) rather than showing homes, and we appropriately split our commission 50/50 with our buyers for their efforts. We encourage you to contact us to explore this model and whether it is a good fit for you.