A buyer commission rebate is when your buyer’s agent gives you a portion of their commission at closing. This can be a significant financial savings for any potential home buyer and is used by savvy buyers to save thousands in closing costs and fees. In Denver, Colorado which has been a consistently growing and hot real estate market for years a rebate can be particularly useful. Denver’s average home price is now around 610k, up 1.8% over last year.
How does it work?
Since you as a buyer are not a licensed agent, it is important to understand that you cannot be paid a commission. This is actually a good thing as it avoids potential tax implications (more on that later). So, instead of receiving a commission check, you receive the cash in the form of a rebate from your agent at closing. In short, the rebated amount shows up on your settlement statement as a credit. There are any number of ways you can use the rebate to your advantage, let’s explore a few.
How to use your rebate? Lender or no lender?
If you are a cash buyer the rebate is pretty simple. It shows up on your settlement statement as a credit and you simply have to bring that much less cash to closing.
If, like most buyers, you are using a lender then the concept is still essentially the same. Your rebate will show up on your settlement statement as a credit. The only difference being that you and your lender will have to work together on how to best apply the rebate – as lenders do have certain rules about accepting money from others that could effect their lending terms. More simply put, the lender just applies your rebate at closing to pay various closing costs and fees. These are fees that you as the buyer would otherwise be responsible for. So again, the concept is the same as a cash buyer. At closing you will simply show up with less cash to close (the normal cash to close minus the rebate amount).
What are closing costs and prepays?
In any real estate transaction there are various fees and costs that come up in the process and are due at closing. Some example of these fees would be title fees, loan origination fees, HOA fees, funds for escrow, etc. Although we at EZ Agents do not have any transaction fees or anything like that, often agents will also tack on a transaction fee at closing which you could be responsible for – this is always a good question to ask an agent when considering them.
These closing costs can range wildly depending on the home, the lender, the title company, and the County, but the key is that you as the buyer are responsible for paying them as part of your transaction. With a buyer commission rebate, buyers are able to take a portion of their agents commission and use it to pay their fees – saving them thousands all at no cost.
Are buyer commission rebates legal in Denver?
Yes! Buyer commission rebates are legal in 40 out of 50 states. In fact, in a letter written in 2009 by the Department of Justice, it specifically states that Colorado “does not prohibit the payment of a rebate to the buyer…” and goes on to say “It is the Colorado Real Estate Commission’s position that the brokers involved in the transaction may rebate a portion of their commission to the principal(s).”
Why would an agent offer a portion of their commission as a rebate?
There are lots of reasons agents choose to offer a rebate to their buyers… Let’s explore a couple…
To get clients!
In Colorado there are currently over 44,000 licensed agents and they all want to get your business. While that number is alarmingly large the reality is most of the transactions are handled by high producing top agents and most licensed agents do very few if any transactions a year. That being said, they are all fighting for business. Offering a buyer commission rebate can be a great way to stand out amongst your competitors. In fact the Justice department has previously argued in favor of buyer commission rebates as a way to increase competition amongst agents and provide home buyers more options.
Not all buyers are created equal!
With the explosion of the internet things have drastically changed in real estate. Nowadays buyers have more access to listings and information about homes than ever before. Yet, commissions have not changed at all to account for this. At EZ Agents we firmly believe that not all buyers are created equal and that buyers should have another option when it comes to commissions. A lot of buyers prefer to do a lot of the upfront work in finding a home on their own in the comfort of their own home. As agents, this saves us a significant amount of time and we feel that should be reflected in our commission. Our buyers save us time and we rebate them for their efforts – a win/win.
Reduction in services?
One key to understand when considering an agent that offers a buyer commission rebate is whether or not you will receive discounted service. There is no standard buyer commission rebate just as there is no standard commission (it is in fact against the law). So, if you are considering working with an agent that rebates their commission it is important to get a clear understanding of what they do and do not offer as well as how big of a rebate they will give you. Some agents advertise a rebate to get clients as discussed above, but often the rebate will be a small fixed amount depending on the price of the home.
Another thing to be wary of is agents misrepresenting the rebate itself. Commissions are negotiable by law. In Denver, most commonly the commission offered to a buyers agent is 2.8% but it can vary depending on the seller.
At EZ Agents we offer a 50% commission rebate to our buyers. The reason we are able to do this, is because we don’t personally show homes. We outsource in person showings to other agents for a small fee and then personally handle all other aspects of your transaction. Focusing our efforts on where buyers actually need help – contracts and negotiations and leaving the finding of the home to them. As a result, our buyers get to work directly with one of the top producing agents in Denver, while also receiving a huge financial savings.
Are buyer commission rebates taxable?
As mentioned earlier, since the money comes in the form of a rebate and not a commission check it is not considered taxable income by the IRS. You can read more about that here.*
- This is not financial advice. All buyers should contact a tax professional for any questions relating to taxes.
Is a buyer commission rebate right for me?
There are many factors to consider when choosing an agent. In our experience, the buyer commission rebate model is not the best fit for everyone, however, when it is a good fit it works out great for all parties involved. A couple questions we always like to ask our buyers before getting started are:
Are you already spending hours of your own time looking at homes online on sites like Zillow, Realtor.com or Redfin?
Are you comfortable touring homes in person with a showing assistant?
Do you want to work directly with a top, local agent for all of the rest? Including handling your negotiations, dates and deadlines and all contracts from offer to close?
If you answered yes to the above – we might just be a good fit. Feel free to contact us with any questions or to get started today!