The real estate industry has undergone massive change in the last two decades. The average sale price for properties has risen, the market is hot, and prices are at an all-time high.
This meteoric increase can be attributed to multiple reasons, including the worldwide pandemic, the rise in mortgage rates, and the imbalance of demand and supply.
However, there are ways in which buyers can make homebuying less expensive. A buyer rebate is one of them.
Buyer rebates can help save thousands of dollars at closing. How does it work? What do you need to get it? Is it legal? Let’s discuss all these concerns here.
1. Home Buyer Rebate – An Overview
1.1 What Is a Buyer Rebate?
A buyer rebate is a cash or credit refund given by agents to buyers at the end of a successful real estate transaction. Think of it as an incentive for the buyer. Such refunds are provided to make transactions more lucrative.
The buyer rebate is usually pre-negotiated and as it amounts to a percentage of the final agent commission, it is given out after the deal is successfully closed.
Your agent can offer you these rebates in cash payments or as coupons, gift certificates, or service discounts.
A Rebate can be a powerful tool for price competition between brokers. It can also help buyers bear the financial burden and motivate them to close.
1.2 Why Do Agents Give Rebates Instead of Reducing Commissions?
In a typical real estate transaction, the seller and the listing agent determine the total commission for a deal. This commission is further divided between the buyer and the listing agent basis the split mentioned on the listing (generally 50% for each agent).
Now, if the buyer’s agent decides to offer a discount to the client, he is technically not discounting the buyer. In fact, he is reducing his end of the split and increasing the listing agent’s share. Long story short, if your agent discounts his share, the remainder would not come to you but go directly into the listing agent’s pocket.
This benefits no one- not you or the listing agent. That’s why buyer’s agents prefer to give out rebates to homebuyers instead of discounts.
Source: 6
1.3 Where Does the Rebate Come From?
Your rebate comes out of your agent’s pocket.
Suppose a seller promises a 6% commission in a real estate transaction. Out of this 6%, 3% will go to the buyer’s agent, and 3% will go to the listing agent to handle all the paperwork, set a competitive price for the home and then bring in potential buyers to see it.
The rebate you get will come out from the 3% promised to your agent (the buyer’s agent).
Let us explain this concept with the help of an example.
Say you buy a home worth $350,000. Post-closing, both agents get 3% each ($7,500 each) out of the total commission of 6% of the final purchase price.
From this $7500, if your agent has agreed to pay you 50% in rebate, you get $3750 at the end of the deal.
| Type of Rebate | Broker’s Commission | Your Buyer Rebate |
| 0.5% of the closing price | $10,5000 | $1,750 |
| 10% of the broker’s commission | $10,500 | $1,050 |
Source: 6
1.4 Why Is Your Agent Keen On Giving You A Buyer Rebate?
Homebuyers today are leveraging technology to not only view listings but also to narrow their home search.
According to the 2021 NAR report, 97% of buyers begin their search for their dream homes on the internet.
With buyers now having access to property information at their fingertips, agents today have to do lesser legwork to close a deal. This reduces their overall operating costs and enables them to work with more clients and earn more money. Thus, making them open to offering rebates so that they can attract more clients and close more deals.
Here are a few more reasons for offering a commission rebate.
1.4.1 To Cut Off Competition
Over 3 million people are holding active real estate licenses in the US. The competition is fierce, and buyers aren’t exactly lining up to work with agents.
So, offering a rebate can be worthwhile to attract more clients and gain an edge over the competition.
1.4.2 Rebate Makes The Transaction More Efficient
Offering a rebate can make the real estate transaction much smoother for all the stakeholders. How? Well, agents who provide rebates usually attract informed and motivated buyers who save them the time and effort they would otherwise spend on screening properties and showing houses. It also mitigates the risk of losing a buyer to another agent.
For sellers and listing agents, rebates help close deals faster. Furthermore, it helps buyers save big on the closing cost.
1.4.3 High Brokerage
4 in 10 buyers believe that real estate commissions (an average of 6%) are too high. Offering a rebate can helps reassure them that they are being charged a fair price for the services.
Source: 7
1.4.4 As A Trade-Off For Pricier Services
Agents spend a lot of money on marketing and advertising to acquire new clients. According to a recent report, 1 in 8 real estate agents spends more than $20,000 in marketing in a year, with the top 3% spending more than $80,000 on their marketing efforts.
Offering a rebate helps agents retain existing clients and attract and acquire new ones at a lower operating cost.
Source: 8
1.4.5 They Are Most Likely To Close A Sale With A Rebate
Sometimes buyers can back out of a deal last minute when they cannot arrange money for the closing costs, usually 3-6% of the final purchase price.
Agents agreeing to provide rebates in such situations can motivate buyers to move ahead with the deal. They will be much more likely to go through with the deal if they know that post-purchase expenses will be taken care of without further investment.
1.5 What Is The Average Rebate The Buyer Agent Gives?
To understand this, you will first have to know how the realtor commission works. Suppose your agent gets a 3% commission from the deal and promises to offer you a 50% rebate. In that case, you will get 1.5% of the final purchase price in a refund. For a typical $500,000 home, you get $7500 in rebate!
However, this is not the only way your agent can offer you a rebate. They can even offer a refund as a percentage of the final deal price.
For example, they could offer you a rebate of 0.5% of the final sale price.
Let’s understand this better with the help of an example. To set the calculation for the average rebate, we will take the average home value to be $269,039, the median price of a home in the US.
| Closing Price | Agent Commission | Rebate Type | Your Buyer Rebate |
| $269,039 | $8,071 | 50% of the commission | $4,035 |
| 0.5% of closing cost | $1,345 | ||
| $350,000 | $10,500 | 50% of the commission | $5,250 |
| 0.5% of closing cost | $1750 | ||
| $500,000 | $15,000 | 50% of the commission | $5,250 |
| 0.5% of closing cost | $2,500 |
Note: You should ask your agent upfront if the rebate is offered as a percentage of their commission or of the closing price. You should then calculate the rebate to know exactly how much you will receive.
1.6 Is Rebate Legal?
Buyer rebate is legal in 42 out of the 50 states in America.
The Department of Justice promotes such rebates as it benefits the buyer by decreasing the overall closing cost and promoting healthy competition in the industry. In addition, using rebates to attract clients is also considered fair on the federal level.
There are currently eight states in the United States where buyer rebates are illegal. They are:
- Alabama
- Alaska
- Lowa
- Kansas
- Louisiana
- Mississippi
- Missouri
- Oklahoma
- Oregon
- Tennessee
Source: 9
1.7 Where Can You Use Buyer Rebates?
A buyer rebate is like receiving cashback on a transaction—you can do whatever you want. You are not obligated to use it for anything specific. Most people choose to spend it on the following things:
Closing Costs:
Closing Costs are expenses over and above a property’s purchase price. They are line item expenses like appraisal fees, title insurance, home insurance, home inspectors fee etc. Put together, closing costs add up to thousands of dollars. You can use your rebate to cover part of these costs, but you do need to talk it over with your agent and title company first.
Furniture:
Many people use buyer rebates to cover the cost of new furniture.
Moving:
Buyers can use their rebates to cover their moving cost, which can cost them as much as $5000 (if you move cross country).
Savings:
It is always good to have money stashed away for a rainy day. Anyone who can afford it should put some cash back into a savings account.
1.8 Is The Buyer Rebate Right For You?
Buyer rebates mean thousands of dollars in savings—who wouldn’t like that? Most brokers and real estate agencies offer rebates to the buyer on the purchase of a house.
You decide on a percentage of the rebate, and they refund you after successfully closing the deal. While it is undoubtedly the smarter thing to do, whether you should get a buyer rebate or not is ultimately your call.
However, it shouldn’t be the criteria for shortlisting your agent. If an agent is giving out a rebate that is too good to be true, be wary of their intentions and check their reputation in the market.
If you are a first-time home buyer, you need to be extra careful of who you choose to represent you.
Because if you work with an agent who does not have your best interest at heart, you can end up overpaying for your home, picking the wrong location, or missing significant defects. Having a good agent helps avoid these situations.
You need an excellent agent to hold your hand through the buying process. So, it might be better to forego the rebate and hire the best available agent.
1.9 How Much Buyer Rebate Can I Get?
First, find out what kind of rebate you are getting. Is it a commission rebate on the selling price or a commission rebate on the buyer’s agent commission?
If it is a commission on the selling price ( generally 0.5 – 1% of the final selling price), then the rebate that you will get will be equal to the commission on selling * final selling price.
For example, the final selling price of the property is $500,000, so you will get a rebate of $2500 (0.5% of $500,000)
However, if it is the latter, here is what you need to do:
List the final sale price, say $500,000
List Commission Percentage ( as mentioned in the listing agreement), this amount is usually 6 percent, from which 3 percent will be given to the buyers agent
Commission earned by buyer’s agent = sales price* buyer’s agent commission= $15000
Now, if the buyer agent offered you a 50% rebate, you will get $7500 as a commission rebate
You can use this rebate calculator by The US Department of Justice to calculate your commission rebate.
Let’s understand this one last time:
Model 1: Commission on Final Selling Price:
| Final Selling Price of the Property | $500,000 |
| Commission Rebate Promised on Selling Price ( let’s say 0.5%) | $2500 |
| The rebate you will get | $2500 |
Model 2: Commission rebate on buyer’s agent commission
| Final Selling Price of the Property | $500,000 |
| Commission earned by your agent (let’s say 3% as per the listing agreement) | $15,000 |
| Commission promised to you as a rebate ( 50% of buyer’s agent commission ) | $7500 |
| The rebate you will get | $7500 |
1.10 Real Estate Commission Rebate vs First Time Home Buyer Tax Credit
First Time Home Buyer Tax Credit, (now discontinued) was a way to incentivize buyers to purchase a new home.
Through the First Time Home Buyer Act, you get a rebate of up to $15,000 on taxes when you purchase a home for the first time. Although first-time homebuyers can no longer enjoy this credit, other federal and state programs can help make the purchase possible.
1.11 Are Rebates and Cashbacks Similar?
Buyer rebates may or may not be similar to cashback.
Ideally, a buyer rebate is offered in one of two ways:
- As cashback which you receive after buying the house. This can be in the form of actual cash or cheque, and you can spend it as you may see fit.
- As closing credits. These are far less flexible. There are rules to how you can spend closing credit, and it is subject to the approval of your lender. They can be used for covering the following closing costs:
- Escrow
- Apraisal fees
- Loan origination fees
- Transfer fees
Note: You won’t be able to use your rebate to fund your down payment. That’s because cashback or closing credits are received only after the purchase of the house. Thus, they cannot be used to fund the down payment.
2. Problems With Buyer Rebates
2.1 The Seller Can Influence The Situation
Sometimes agents and sellers negotiate on a variable commission rate. So that if the listing agent also brings in a buyer and does not split the commission, the seller can reduce it altogether.
This way, the seller pays a smaller commission, and the agent doesn’t have to split the commission with a buyer agent.
Since the agent has already reduced his commission, he will not be willing to offer a rebate and reduce it further.
Source: 12
2.2 Buyer Rebates Depend on Lenders
Your lender also gets a say in whether you get a buyer rebate or not.
That’s because if you receive a rebate as closing credits, it reduces the overall closing costs of the purchase.
This affects the loan-to-value ratio of your house. The loan-to-value ratio or LTV ratio is the amount you have borrowed compared to the price of your property.
The lender has to maintain the LTV at 80% to avoid risks. That means if this ratio changes, your lender will need to make changes to your financing to keep your LTV at 80% or lower. Here is an example:
| Rebate Amt. | Loan | Value of Home | LTV Ratio |
| – | $240,000 | $300,000 | 80% |
| $6000 | $240,000 | $294,000 | 81.6% |
So to adjust this ratio, the lender will have to reduce the loan amount, which can, in turn, hurt your finances when buying the home. That’s why your lender needs to be aware of the rebate in advance.
On the contrary, if you choose not to disclose your rebate to your lender, they might back out of financing your home altogether. And if matters get worse, they might even file mortgage fraud charges against you. So, ensure that you disclose your rebate to them at all times.
3. The Process To Get A Rebate
3.1 Step 1: Find Platforms that offer Rebate
Using online platforms for getting buyer rebates is one of the easiest ways to save thousands of dollars at closing.
3.1.1 Top platforms that offer buyer rebates:
- List with clever: Clever offers a 0.5% cash back at closing on the home’s purchase price if the closing price is above $150,000. If the closing price is between $50,000 and $150,000, the buyer gets a rebate of $250.
- REX: REX offers a buyer rebate of up to 50% on the agent’s commission. However, there are a lot of terms and conditions that make getting qualified for a refund a tedious task.
- RedFin: RedFin offers buyer rebates in a few markets of its choosing. You only get a rebate if the agent makes at least $6500 in commission. The rebate could be issued as cash back or closing credit, there is no standard mode of rebate. On average, buyers receive $1500 as a rebate.
- Prevu: Prevu offers up to two-thirds of the agent’s commission as a rebate to eligible buyers. Only clients buying property worth $750,000 are eligible for the maximum buyer rebate of 2% of the closing price. However, if the seller uses a Prevu agent, the buyer is not suitable for a rebate.
- Upnest: The exact amount will depend on the agent you choose, but Upnest guarantees a buyer rebate of $150 to all buyers.
In case you are already working with a realtor here is how you can negotiate with them to give you a rebate.
3.1.2 How to get Buyer Rebates From Agents?
3.1.2.1 One-on-one Negotiation
During the negotiation stage, when both buyer and seller agents refuse to move and reach a stalemate. The agents are anxious to close on the deal, allowing buyers to negotiate with the agent one on one.
Start by asking your agent whether they usually give commission rebates or not. Your agent might refuse outright, but if you stay persistent, the odds of you getting a rebate might increase. That’s because if your agent thinks you will walk away from the deal if you don’t get a rebate, they will start talking with the listing agent to see what they can offer you.
For the agents, parting with a percentage of their commission is way better than losing it altogether.
Of course, they might call your bluff, and end up with nothing, so read the situation well before you try to negotiate.
Note: If there are many interested buyers and it is a seller’s market, this won’t work.
In a buyer’s market, negotiating one on one usually works because if the agent loses you, they will have to do a lot of work to find a new buyer.
Source: 13
3.1.2.2 When Can You Negotiate With an Agent for a Rebate
Some situations make it easier to negotiate a buyer rebate with the agent. If the following factors apply to you, you are more likely to get a rebate from your agent:
- High-Value Homes: The property in question is of high value, and the agent is pocketing a huge commission. They have spent roughly the same time and effort in this deal as they would in a low-value home. The agent will be more than happy to offer a rebate if it helps close the deal.
- Dual Agency: If you commit to buying a new house and selling your old one with the same agent, they will be more than happy to give you a rebate. That’s because you will be giving them more business, so they will want to retain you even if that means a pay cut.
- You Have an Offer Ready: Every agent hopes to work with buyers who have already done their due diligence and are ready to make a move on the property. As working with such buyers reduce an agent’s workload considerably, they are valuable to agents. So, agents would be willing to offer a rebate to such buyers to get their business.
- Buyer’s Market: If the market is saturated with sellers and there aren’t enough buyers, then the buyers have an advantage over the seller. In such a scenario, you as a buyer become more valuable, and agents will try to woo you with a rebate to help close the deal.
3.2 Step 2: Read And Sign The Buyer Broker Agreement
This is a very crucial step—you should never skip out on reading all the terms and conditions of the agreement.
Go over all the terms specifying the buyer rebate and ensure everything is as you discussed. Calculate the exact amount you’ll receive, so you know what to expect.
Sometimes there are additional clauses with a minimum net commission for the agent. In this case, the commission needs to meet a certain amount for you to get a rebate. Some agents also reduce the rebate based on the number of homes they showed you.
Remember to carefully read all the fine print to make sure you will get the rebate you were promised. Also, the rebate depends directly or indirectly on the closing price of the house, so it has the most impact on your buyer rebate.
Weigh all your options to ensure you get the maximum rebate possible. Double-check everything and sign the buyer-broker agreement to lock in terms of your rebate.
3.3 Step 3: Close On A House
Your buyer rebate is locked in when you sign the buyer-broker agreement, but you don’t get it until you close on the house.
As you probably know, closing on the house is a long process with many steps like escrow, home inspection, and meeting financing requirements, to name a few. So, it will take a few weeks until everything is finalized, and the home is yours. It can take anything between 30 days to 75 days to close, depending on the financing you choose. A conventional loan takes 47 days to complete whereas a traditional refinance takes 35 days to complete.
Once you close on the house, you will receive your buyer rebate.
Source: 14
3.4 Step 4: Get a Buyer Rebate!
As we’ve mentioned, there are two ways of getting a buyer rebate. You either receive closing credits, which go towards the closing costs, or you get a cashback. In the latter, you are handed a cheque for the rebate amount at closing. Either way, you end up saving thousands of dollars.
4. Increase Your Chances Of Getting A Rebate By Doing This!
Agents spend the most time finding and showing properties. You could go the extra mile and do this yourself. Since you already know what you’re looking for and you only need help in placing an offer and closing the deal, agents will be more willing to offer you a buyer rebate.
5. Is The Buyer Agent Rebate Taxable?
A buyer rebate is not technically income, so it is not taxable. The IRS has issued a letter ruling that specifies the taxability of buyer rebates.
It states that a buyer rebate is akin to automobile rebates, and both are considered adjustments to the purchase prices. They are not considered income, and hence you don’t have to pay taxes on them.
6. How Do I Find Out Whether I Am Eligible For A Buyer Rebate?
There is no particular eligibility criteria for buyer rebates. Every buyer who makes a property purchase is eligible for a buyer rebate. Do note that buyer rebates aren’t mandatory. So while you are eligible for a refund, the seller is not obligated to offer you one. In this case, you either have to accept their terms or look for a different agent or property altogether.
Furthermore, if you reside in one of the eight states where a commission rebate is illegal, you cannot avail of a rebate on purchasing a property.
7. What Other Ways To Make Real Estate Transactions A Little Less Costly?
Buyer rebates are great, but if it is illegal in your state or your agent is not offering you one, hiring a fee-for-service broker will help you save money on real estate transactions.
With these brokers, you have to pay a flat fee either basis services or the number of hours. So, instead of handing over a percentage of the closing price as a commission, you only pay for your chosen services.
Such brokers offer a suite of services, including listing houses, negotiating contracts, closing contracts, pricing the home, etc. You can pick and choose the services you want and pay accordingly.
For Buyers who prefer to do as much as possible in their homebuying journey, like finding the listing on their own, negotiating with a buyer, etc., fee-for-service is an excellent choice.
8. Can A Real Estate Agent Rebate A Portion Of The Agent’s Commission To The Borrower?
Yes, according to HUD, real estate agents may rebate a portion of their commission. However, the rebate must be listed as a credit on page 1 of the HUD-1 in Lines 204-209, and the name of the party giving the credit must be identified.
Note that real estate agents or broker commission rebates to borrowers do not violate Section 8 of RESPA as long as no part of the commission rebate is tied to a business referral.
9. Can Realtors Give A Rebate To Sellers?
Rebates are technically cashback received against buying a property. Sellers are not buying anything, so it doesn’t make sense to offer a rebate to sellers.
If the seller is trying to save money, they can negotiate with the realtor for a lower commission, but it still wouldn’t be a rebate.
10. Should Rebate Be The Sole Choosing Factor For A Realtor?
Getting a buyer rebate is a very attractive perk for most buyers. However, it cannot and should not be the only factor you consider while choosing a realtor. Sometimes, realtors with bad reputations or public relations offer buyer rebates to attract clients. So, be on the lookout for such realtors.
That said, there is no denying that many realtors have built a successful, client-oriented business by offering rebates. However, you should still do additional research before deciding on a realtor. Find out whatever you can about their reputation and read through their reviews to get an overview of their service.
11. The Bottom Line
Buyer rebates are getting increasingly popular as they benefit everyone involved in a real estate transaction. They help buyers save a considerable amount of money, and through them, agents can attract more buyers and close deals faster.
Rebates provide buyers with an extra cushion that they can use to reduce closing costs. It is not income, so you don’t need to pay taxes on it, making it a very lucrative offer for most buyers.
It is wise to ask for a buyer rebate from your agent. However, do not let a rebate lure you into a relationship with a wrong agent. Consider all the facts before you make a decision, and always read the fine print of every agreement.