How Rebates On Real Estate Commission Work

Anthony Guerriero, 8/15/22 10:34 AM


Homes for sale in NYC have a bad reputation of costing a fortune for an incredibly small amount of space. Fortunately, buyers can cut down on that expense significantly with something called a buyer rebate.

What Is a Buyer Rebate?

A buyer rebate is a portion of the commission the buyer’s agent receives that the agent gives back to the buyer.

So, with a buyer rebate, a buyer’s agent can secure the same property for a buyer at the same price as another agent who didn’t offer buyer rebates could, but it would cost the buyer less to close on the home than if the buyer went with that other agent.

New York first legalized buyer rebates in 2014 as a way to lower buyers’ transaction costs and increase competition among real estate agents in NYC.

Another way to think of a buyer rebate is as a refund a buyer’s agent pays the buyer at closing.

Are Buyer Rebates Taxable?

Buyer rebates are typically not considered taxable income. However, buyers should speak with a tax accountant to be sure that applies to their situation and, if not, to ensure they meet their tax obligation on that rebate.

What’s the Difference Between a Buyer Rebate and Negotiating the Commission?

A buyer rebate may sound similar to negotiating a commission with an agent, but there are some slight yet significant differences. For one, and perhaps most importantly, the buyer’s broker is the one who may give a buyer rebate, while the seller pays the negotiated commission.

How Does a Buyer Rebate Work?

For example, if the seller pays their broker a six-percent commission on the sale and the buyer has their own broker, the seller’s broker keeps half of that commission, or three percent, and pays the other three percent to the buyer’s broker.

Who Negotiates Buyer Rebates and Seller Commissions?

As their names suggest, a buyer rebate is negotiated by the buyer and not the seller, while a seller commission is negotiated by the seller and not the buyer. What a buyer can negotiate about regarding a commission is whether or not the buyer’s agent will pay a buyer rebate and, if so, how much of one.

That said, a longer term for a buyer rebate is a buyer commission rebate, which means, that when a buyer negotiates a buyer commission with their agent or broker, they are indeed technically negotiating the commission.

What if a Buyer’s Agent Works Under a Different Broker?

Every real estate agent who isn’t themselves a broker must work under another real estate broker, commonly known as a managing broker. That means, if a buyer is working with a real estate agent rather than a real estate broker, that share of the commission the buyer’s agent may receive is further split (generally in half) with that agent’s managing broker.

For example, if a home sells for $150,000 and the real estate agents for the buyer and seller are splitting a six-percent commission, meaning they each get 50 percent of it, or a three-percent commission, each agent receives $4,500.

But, if those two agents each work under a managing broker, those agents must each split their $4,500 in half with their respective brokers. That means each agent and broker gets a 1.5-percent commission on that sale, or $2,250.

If the buyer’s agent then goes ahead and offers a one-percent buyer rebate, the buyer gets a refund of $1,500 and the buyer’s agent gets only $750, or a 0.5-percent commission.

This math can obviously affect how much of a buyer rebate an agent or broker may be willing or able to give a buyer. As a point of reference, real estate agents in NYC rarely agree to commissions below five percent.

How Much Can a Buyer Really Save With a Buyer Rebate?

According to the U.S. Department of Justice, on a home priced at the median price of $184,334, a buyer rebate of one percent would save the buyer $1,843.

Why Would a Buyer’s Agent Offer a Buyer Rebate?

The most obvious and, no doubt, common reason for a buyer’s agent to offer a buyer rebate is to compete with other real estate agents for that buyer’s business.

An agent may also agree to a buyer rebate if the agent really wants to sell a particular property and the added enticement could help convince the buyer to make an offer.

Buyer’s agents may also feel incentivized to pass some of their own savings from using more efficient technologies to operate their business and streamline their processes onto their customers. Sharing operational cost savings with buyers as transactional cost savings improves the home-buying experience for everyone.

How Can a Buyer Best Apply a Buyer Rebate?

The four ways buyers most commonly apply a buyer rebate are:

  • To lower closing costs
  • To make home improvements like new countertops or flooring
  • To purchase new home appliances like refrigerators or washer-dryers
  • As a cash payout at closing

Commissions Aren’t Everything

Homebuyers in New York City need to remember that commissions aren’t everything in choosing the right agent or broker to work with. The quality of the agent you work with is paramount, especially in the highly competitive market for real estate in New York City. It can be well worth paying the full commission just to work with an agent who can get you the right home at the right price in your time frame than get a buyer rebate from one who can’t.

Buyers who consider what agent will work the hardest for them and put their interests first, who consider the experience, expertise, and customer feedback an agent has will walk away from the deal feeling like they got the better end of it.