Most of first time home buyers don’t know how commissions work during a home sale, and that’s ok. After all, if you’re reading this, you are most likely looking to buy a home or in the process of closing on one, which is really great!
The real estate process is not exactly as linear as we’d like it to be. Often, it’s a complex, fragmented process with confusing timelines and lack of transparency, which is what we are trying to solve for (see our vision).
Agent commissions can be complex, not to mention the fees and taxes involved in the buying and selling process.
And on top of all that, some of these fees and taxes vary from one state to another—so even if you’ve had experience in buying a home in Connecticut, you’ll need to reset your real estate brain for fees and taxes if you’re planning to move and purchase a property in NYC.
But while real estate commission, taxes, and fees can make you go loco, there are several fees-related things that you’ll need to remember when you’re planning to buy a home.
In this article, we’ll teach you the basics:
- How real estate fees work—the commissions in particular.
- How commission rebates work and some frequently asked questions on commission rebates. If you’re still wondering if commission rebates are real—they’re 100% legit (no catch here) and we’ll explain why.
Table of contents
- What is the real estate commission average?
- Listing Agreements
- Who pays the real estate agents?
- What happens when there’s no closing?
- What is a commission rebate?
- How does it work?
- How much is the real estate commission splits?
- Where is it legal to give commission rebates?
- Why can you give me a real estate commission rebate?
- How and when would I receive my commission rebate?
- What are the benefits of buyer commission rebates?
- How can I get started?
- How much can I save?
- Are real estate commission rebates taxable?
- “How can this real estate commission rebate help me?
Part 1: How Real Estate Commission Works
When it comes to real estate commission, the usual fee in the United States is 6% of the purchase price.
Usually, this is paid by the person selling the property to his/her agent, the listing agent.
At the same time, if you, the buyer, have an agent (the buyer’s agent) the listing agent will have to share his commission with your agent, usually splitting it in half.
What is the real estate commission average?
The average real estate commission is 6%, but this percentage varies on a case to case basis. A full-service brokerage requires a fee of 6%. However, agents may agree to lower percentages depending on their agreement with their clients.
Also, according to Curbed.com, agents may agree to a 5% commission for higher-value properties. This is also true if they are working with a regular client. In fact, according to CNN, the average real estate commission in the US has decreased from 6.1% to 5.1% in 2016 with the decline more evident in luxury properties.
Usually, the 6% commission is split between the seller’s agent and the buyer’s agent. The usual agreement between a broker (or an agent) and a seller is one that gives the agent the right to exclusively sell the home in the market. In exchange, the seller gives the agent a certain percentage of the selling price (typically 6%), which is split between the listing agent (the seller’s agent) and the buyer’s agent.
Generally, the commission will be split in several ways:
- Listing side
- Listing agent – the agent who worked with the seller
- Listing broker – the person for whom the listing agent works
- Buyer side
- Buyer’s agent – the agent who worked with the buyer in finding the property
- Buyer’s broker – the person for whom the buyer agent works
And when it comes to the division of commission among the brokers involved, it’s not always 50/50. Depending on what’s stipulated in the listing agreement, the listing agent may take the bigger share from the commission. Local customs dictate how commissions are split, so if you wish to know how much is paid to whom, be sure to ask around.
4 Types of Listing Agreements
These listing agreements establish the kind of relationship between you (the buyer) and your real estate agent. Here are 4 common listing agreements you may find yourself in:
1. Open listing
In an open listing, the owner is allowed to sell the house by himself. This kind of agreement also enables the owner to have open listings with more than one broker/agent.
However, this means that the owner will only pay the broker who can bring a buyer with a suitable offer. In an open listing, the seller gets the listing agent’s commission and will only pay the buyer agent’s commission.
Because of the terms of an open listing, this lacks popularity among full-service brokers.
2. Exclusive agency listing
While in this kind of agreement the owner still reserves the right to sell the property without having a broker, in this listing agreement, the seller can have a broker/agent to represent him.
An exclusive agency listing agreement is similar to an open listing agreement, which means that the seller’s broker can cooperate with another agency or brokerage and may split the commission among themselves. But they only get paid if they sell the property. If the owner sells the property, they get no commission.
3. Exclusive right to sell listing
This is an agreement where an agent has the sole right to sell a property within a specific time frame (usually 3 months). In an exclusive right to sell listing, the seller won’t be able to list the property with another broker. In addition, the seller agrees to pay the broker’s commission even if he (not the broker) finds a suitable buyer for the property.
4. Net listing
This listing agreement states that the broker gets to keep any amount that’s beyond the seller’s price. While this is legal in Texas and California, this kind of listing agreement is illegal in New York City.
Who pays the real estate agents?
Technically, it’s the seller who pays the agents. Brokers and agents usually make money out of the deal through the commission. The commission, on the other hand, is part of the sale price, which is paid by the buyer, hence from the buyer.
Most of the time, the brokers don’t make more than the commission since the seller isn’t obligated to pay the listing agents (or brokers) more than the commission stated in the listing agreement.
What happens when there’s no settlement (no closing)?
For agents, no closings mean no commissions, since commissions are released after a successful closing. That’s why agents and brokers are motivated by the sale since successful deals would mean more profit for them.
Although no deals would mean no pay for brokers or agents, there are some exceptions where the seller is responsible for the commission even if the deal did not push through. There are instances where this applies, according to Investopedia.com, such as when the seller:
- refuses to sell or changes his mind
- is unable to deliver the property to the buyer within a reasonable timeline
- has agreed with the buyer to discontinue their deal
- is unreasonably adding new terms that are not included in the previous listing agreement
- the title has issues
- there is any fraud involved in the real estate transaction
- the seller’s spouse refuses to sign the deed even if the spouse has previously signed the listing agreement
Part 2: How Rebates Work
Now that you know how commissions work, we’ll now get to the good part—commission rebates.
What is a real estate commission rebate?
A real estate commission rebate or commission refund is simply money that you receive back after your home purchase closes successfully. Sounds too good to be true? It is!
When you purchase a home, part of the sale amount goes to the agents involved in the transaction. Typically, your agent (buyer’s agent) gets 3% of the purchase price and the listing agent gets the other 3%. The commission rebate is a fraction of the 3% commission your agent receives.
As an example, if you buy a $1 million apartment, your agent (the buyer’s agent) will receive $30,000 in commissions.
If you have a commission rebate of, for example, 50%, you agent will refund you $15,000 after he receives his commission.
How does it work?
Commission refunds are typically calculated as a percentage of the broker’s commission that is returned to the customer. Buyers may receive thousands of dollars in rebates depending on their agreement with their agent.
These commission rebates are given voluntarily by agents to their clients, which means that not all agents are able to offer this incentive to their buyers. Also, this means that buyers can’t demand a commission refund if their brokers do not offer this kind of incentive. However, should your broker won’t offer an incentive, it’s important to remember that you can always choose a different agent!
How much is the real estate commission splits?
Your real estate commission rebate actually depends on how much your agent would like to share with you. In some cases, agents share a fixed percentage (at HomeFlow we share up to 50% of our agent commission with our clients) and others deduct a fixed fee from the commission, regardless of the amount.
But how do agents feel about real estate commissions?
Seller agents won’t be affected by what the buyer’s agents would like to do with their commissions.
Traditional brokers may be less keen on having to share their commissions with their buyers since they want to earn more money. They will probably argue they have done a lot of work and that they need the full commission to cover their costs.
However, in cases where buyers are tech-savvy and putting in a lot of work, it would be wonderful for buyer agents to give the part of the commission back to their clients
Where is it legal to give commission rebates?
Commission rebates are 100% legal in New York City. In fact, NYC is one of the 40 states where commission rebates are encouraged. If you’d take a look at Section 442 of the Real Property Law Article 12-A, it’s there!
Despite rebates being legal, brokers aren’t keen on encouraging this practice because this may take a toll on their income. However, if agents are willing, it will enable them to help buyers save thousands on their dream homes.
Also, brokers are not offering commission rebates simply because they want to earn more money. It’s also because other agents may follow suit once one local broker offers commission rebate and will set off a trend that eventually obliterates good commissions in the area. So yeah, at the moment, brokers want to keep commission rebates optional and unpopular so they can keep charging more.
Why can you give me a real estate commission rebate?
We’re able to give you part of your commission because we use technology to operate efficiently and streamline the home buying process in such a way that enables us to maximize savings. And we pass on these savings to you.
Also, savvy buyers nowadays do most of the legwork by themselves, like finding their dream property, we believe that is only fair to reward them.
We’re saying this because although buyers may do the work on their own and purchase a home without hiring their own agent, none of the commission will go to their pockets. In the case of buyers purchasing without an agent, the full commission (6%) will go to the seller’s broker.
That’s why modern buyers who are heavily involved in the home buying process should work with brokers who give commission rebates that reward them for their efforts.
In our case, we offer a full brokerage service and share our commission with you. Our commission rebate program offers rebates up to 50%, which translates to thousands of dollars’ worth of savings back to your pocket.
How and when would I receive my commission rebate?
By check after closing. If you prefer we can send you a bank transfer but the bank may charge you some fees.
What are the benefits of buyer commission rebates?
Let’s start with the obvious–cash! Having something extra to spend is great since there are plenty of other expenses involved in owning a new home.
On the flip side, it’s also great to work with brokers/agents/companies giving out commission refunds since they can be more transparent than usual brokers. Traditional brokers would typically want to do deals with properties where they’ll get higher commissions and will probably skip showing you properties where they’ll get lower commissions (even if the property in question is clearly your dream home).
Transparency wouldn’t be an issue with agents working with fixed percentage commissions (like us) though. We’ll share 50% of our commission with you, regardless.
So, how can I get started?
Whether you’re a first time home buyer or buying your Nth home, we’re here for you. Our process is super simple:
- Schedule a call or meeting to discuss your requirements.
- Find properties that you like.
- Visit open houses (with or without us) and add us as your agent when you sign up to receive your commission back.
- You can now go through the buying process with the help of one of our HomeFlow agents and our proprietary software. You can expect the same full broker service from our HomeFlow agents, who will assist you from negotiations and inspections to closing the deal.
- Get your 50% commission refund at closing when the deal is done!
The only thing you need to do right now is to book a call with us or send us an email through our website, and we’ll take care of the rest.
With real estate commissions, how much can I save?
With HomeFlow, we give up to 50% of our commission back to your pockets. For example, if you purchase a house that’s listed for $500,000, traditionally, the seller would give 6% of the sale price to the agents (buyer agent and listing agent) or $30,000.
Usually, the 6% commission ($30,000) will be split equally between the listing agent and buyer’s agent and they will get 3% each ($15,000). As your agent, we can refund up to 50% of our 3% ($15,000), which means you’ll receive up to $7,500 from us as your commission rebate, catch-free.
Are real estate commission rebates taxable?
No, real estate commission rebates are not taxable. According to the IRS’s internal ruling, commission rebates, these refunds are considered as a reduction to the purchase price so it won’t be taxable. However, this is not tax advice so make sure you consult your accountant when it comes to possible taxes involved in your deal.
How can this real estate commission rebate help me?
According to Zillow, the median listing price of homes in Brooklyn is $750,000 which means that you can save an average of $11,250 on Brooklyn homes.
With our 50% rebate, the possibilities are endless—you can choose to add the rebate to your existing savings or you can use it for something home-related, like the following:
- You can use the rebate to reduce closing costs and as an emergency fund for fees or taxes you may not have anticipated in the home buying process
- Fixtures and furniture for your new home
- Home improvement (countertops, new paint, and others)
These are only suggestions, but you can choose to do whatever you want with your rebate. After all, you’ve earned it!
We hope our article has given you insight on commission-related fees involved in your home buying process. And we hope that it has enlightened you on how our commission rebate works.
Commission rebates are awesome and it’s our mission to help our clients save by giving back half of our commission to you. If you have questions or if you wish to know more about how we work with our clients, please feel free to send us a message or book a call with us.