Discount brokers: Do they really provide 1 percent rebates to buyers?

In this article:

Real estate commissions can be structured in many ways, depending on the type of service provided and agreements between the parties involved.

1. Typically, the seller pays the real estate commission. Rebates occur when one or more of the agents involved divert some of this money to the homebuyer as an incentive to purchase
2. According to the US Justice Department, rebates “can dramatically lower the price that consumers pay”
3. Rebates are illegal in nine states and controversial in the industry

Are Discount Brokers' Rebates a Good Bargain?

Would you like $1,843 cash back when you buy your next home? Or, if you’re selling a house, how about a rebate of $4,385? If you hire a discount broker, you could see savings like this - or more.

Many discount brokers, as well as some traditional real estate agencies, are offering rebates to attract more customers and sweeten deals.

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They typically do this by reducing their commissions - often by 1 percentage point, but sometimes by 50 percent or even 100 percent. Then, they give you the extra money after the closing.

Some brokers also offer non-cash incentives such as gift certificates, free home inspections or moving services.

Are these deals a good bargain or too good to be true?

The answer depends on who you are and who you ask.

9 states have banned rebates

Long used by car dealerships and credit card companies, cash-back rebates are stirring a lot of controversy in the real estate industry.

According to the U.S. Department of Justice (DOJ), nine states have made real estate broker rebates illegal.

Alabama, Alaska, Kansas, Mississippi, Missouri, Louisiana, Oklahoma, Oregon and Tennessee have banned all rebates. Iowa prohibits rebates when more than one agent is involved in a transaction, and New Jersey allows rebates only to homebuyers.

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Understandably, many real estate agents aren’t anxious to compete by slashing their commissions.

Some agents oppose rebates because they eat into their profits. Others argue that rebates and non-cash incentives may tempt customers to pursue deals that aren’t in their best interest.

The DOJ states, however, that rebates and other incentives “can dramatically lower the price that consumers pay for brokerage services.” It is encouraging states with anti-rebate laws to repeal them.

The traditional commission model

Historically, the home seller pays the entire commission (usually 6 percent of the sale price), and the seller’s agent splits this fee with the buyer’s agent.

The split is usually 50/50, but it doesn’t have to be. In theory, the seller’s agent could keep all the money. Of course, this would slash the number of buyer’s agents (and therefore buyers) who visit the property.

Commissions are always negotiable, so any real estate broker could be a discount broker. You merely have to ask.

But don’t expect a “yes.” Most brokerages discourage their agents from offering rebates unless “something extra” is needed to close a deal.

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For example, if a buyer insists on a $1,000 repair allowance for windows, but the seller won’t budge, some agents will rebate $1,000 of their commission to the buyer so the deal can close.

The traditional commission model worked fine until the internet arrived.

Today, 92 percent of homebuyers use online real estate tools to locate and research properties - tasks that once required an agent.

This trend has fueled the rise of discount brokers, rebate brokers and “a la carte” brokers offering reduced commissions and rebates.

Full service, self-service, or something in between?

Instead of giving buyers a rebate (and rebates usually go to buyers), some discount brokers offer reduced commissions upfront. In exchange, they may provide fewer services - e.g., you have to contact sellers’ agents yourself to visit homes. But some still provide full service.

For a flat fee, many discount brokers will simply list your home in the Multiple Listing Service (MLS).

Real estate agents: buyers agents vs listing agents

Some industry observers claim that the expertise and advice of discount broker agents are inferior to what you’ll get at a traditional brokerage.

Because discount brokerage agents are often salaried employees who receive little (or no) commission, they aren’t as motivated as traditional agents. Critics also claim that these agents tend to be less experienced. Therefore, they may lack extensive marketplace knowledge and negotiating skills.

Rebate brokers, as the name indicates, attract customers via rebates. The kickbacks typically range from 20 percent to 50% of the commission.

Rebate brokers may offer a limited menu of services in exchange for the cash back.

A la carte brokers let you pick and choose the services you want, charging a flat fee for each one. They may rebate up to 100 percent of the buyer’s agent commission at the closing.

Many menu items provided by a la carte brokers - e.g., photography and MLS listing services - don’t involve licensed agents. For this reason, these brokers often appeal to For Sale by Owner (FSBO) sellers who are happy to do most of the agent work themselves.

Is a discount broker right for you?

If you’re a seasoned real estate buyer or seller, trading the assistance of a skilled real estate agent for a sizeable rebate may be a good deal.

If you don’t plan to rely on the agent’s advice, but only use her to (say) process the paperwork, why pay more?

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However, if you’re a first-time buyer, you will almost certainly need an experienced and knowledgeable agent. Without an agent’s assistance, you could easily pay too much for a home, purchase a property in a poor location or overlook big-ticket defects.

What if you can’t afford your “dream home” unless you hire a broker who will rebate part of the commission?

In that case, you should first ask yourself if you can really afford to own that house - not just buy it.