Real Estate Agent Commission Rebates
For more than a decade, folks have been predicting big change in the real estate industry. It is a business built around information, so the internet should lead to greater efficiency and reduced costs. Commission rebates are one way value has been (and continues to be) returned to consumers. Will buyer agent commission rebates lead to a big change in real estate? Probably not by themselves — but indirectly they may be the key.
Commission rebates help home buyers.
With the internet, ”listings” (information about houses for sale) are readily available online. Real estate agents working for buyers simply don’t have to work as hard, so they can charge less. And when they do, they can rebate part of the seller-paid commission to the buyer.
The U.S. Department of Justice knows that commission rebates are a great way to return value to consumers. While Oregon (and a few other states) restrict rebates, the general informed consensus is that they work well.
How real estate agent commission rebates work.
I’ve been giving (and explaining) rebates for a very long time (that blog post of mine is seven years old, and I made the infographic). This is old hat for me!
Under the 100+ year old Multiple Listing Service system, a seller hires two real estate brokers to sell a home: the “listing agent,” who works for the seller; and the buyer’s agent (called the “selling broker”). The seller pays a total commission of up to 6%. The listing agent gets part of it, and the rest — almost always 3% — is paid to the buyer’s agent.
Because of the government’s role in the mortgage business, federal law controls how a rebate can be applied. If the rebate is really big, it can be difficult to use all of it. A buyer can increase loan costs by “buying down” the interest rate, but sometimes that doesn’t make much sense. So any rebate over $5k or so starts to run the risk of being “too big.”
In that case, there is only one solution: a price drop. Under NO circumstances can a buyer get funds outside of escrow. All funds must be shown on the settlement statement and fully spent at closing. Federal law requires it, and doing otherwise constitutes fraud.
So the excess is used to reduce the price. It’s a bit of a complicated formula, but essentially the price and the buyer’s commission are reduced by identical amounts. The balance of the commission then pays for all closing costs and pre-paids. Sha-ZAM! An automatic price break right there at closing, plus the buyer doesn’t have to pay any closing costs. That’s big savings!!!
Real estate broker commission rebates are not new.
The internet really gave buyers a huge new freedom. Before listings were online, a buyer had to consult a real estate agent to know what houses were for sale. There was no other option, listings were kept by the brokers.
Redfin saw the inefficiency. In 2004 it built a web site devoted entirely to giving buyers the ability to search and find homes of interest., online and by themselves. Buyers would then use a Redfin agent to draft the offer and hopefully buy the home — without the time needed to help the buyer find the home in the first place.
To get this value back to the consumer, Redfin rebated a portion of the 3% commission it earned from the seller. A really, really big portion. The early rebates were thousands and thousands of dollars (and the future seemed bright indeed).
Rebates have been used by various other “alternative models” in the years since. Craig’s first startup, WaLaw Realty, launched in 2009. By 2015 WaLaw had rebated more than $4 million.
Flat commissions make for giant commission rebates.
The secret to WaLaw’s massive rebates? A flat commission. With housing prices exceeding inflation since 1998, a percentage commission represents an ever-larger number.
Today, the average Seattle home costs $700k or so. At 3%, that’s more than $20k to the buyer’s agent. RobotAgent is a leader in flat commissions, and we charge $5k. So our buyer’s rebate at closing? A cool $15,000. That’s real money.
Commission rebates won’t disrupt real estate - directly.
Here is the irony. These massive savings are, apparently, not enough to cause meaningful change within the archaic industry. They’ve been around and promoted for over a decade, and nothing has changed yet.
Redfin has reduced its commissions to a nominal amount. While innovative, it has hardly disrupted the industry. It continues to look for ways to leverage the internet and introduce efficiencies (it’s latest effort looks a lot like RobotAgent). To the extent it succeeds, it won’t be because of commission rebates.
And no other commission-rebater has succeeded on any scale, either. Early adopter consumers? Sure, they love the model. But for some reason, consumers generally have not flocked to rebates, regardless of their amount.
However, perhaps rebates — and the early adopters who love them — can be used to launch a new and better model, one that ultimately leads to broad-based consumer adoption. That’s the theory, anyway. We’re about to see!!