You would think that something as basic and lucrative as real estate commission rebates would be pretty well known and sought after by home buyers but apparently, and shockingly, they are still a very well kept secret. A simple check of Google Trends shows that in the entire Chicago area maybe only 30 people per month search for real estate agents that offer commission rebates compared to 5400 monthly searches for “real estate agents”. Why there isn’t more awareness of this practice that can save home buyers thousands, if not tens of thousands, of dollars on the purchase of a home is a mystery to me.
How Real Estate Commissions Work
Just a quick tutorial on how real estate commissions are paid. The home seller typically agrees to pay their realtor (the listing agent) a set percentage of the sale price of their home as compensation for the listing agent’s efforts. Because the listing agent is highly unlikely to find a buyer for the home on their own, contrary to popular mythology, they offer buyer’s agents a co-operating commission if they produce a buyer for the home. This is how real estate agents get paid when they work with buyers.
The co-operating commission is often roughly half of the total commission paid by the seller. In the Chicago area 2.5% is a very common number but there are plenty of exceptions to that. Also, if it’s not put in writing the listing agent can pretty much do whatever the hell they want to do with the co-operating commission so home sellers are well advised to actually get the plan in writing.
A Brief History Of Real Estate Commission Rebates
Historically, buyer’s agents (and seller’s agents for that matter) have on occasion been willing to throw in a few dollars of their commission in order to get a deal over a hurdle that threatens to torpedo the whole transaction. Maybe the buyers and sellers are hopelessly a few hundred dollars apart on the purchase price or the buyers and sellers can’t agree on an inspection issue.
However, I can tell you that this practice has been discouraged by managing brokers as long as the practice has existed. During my training at Prudential Preferred Properties the instructor pointed out what a terrible idea this was because if the deal fell apart the buyer would then expect the same concession from their agent on the next deal.
Eventually a few buyers started asking their real estate agents to throw money into the transaction just to sweeten the pot. Of course, managing brokers really discouraged this practice too: “Why would you volunteer to give up a portion of your paycheck?” Here are a few of the suggested responses from my training: “I work hard for my money. Don’t I deserve to keep it?” “What would you think of me as a negotiator if I agreed to this?”
Nevertheless, as buyers have become more self-sufficient in their searches, using the Internet to rapidly screen properties and learn about their histories, the realtor’s job has become easier and easier and they can now earn hundreds, if not thousands, of dollars per hour working with the right buyers. Consequently, in a competitive move, more and more real estate agents are sharing their commissions with buyers as part of their business model.
What The Real Estate Industry Thinks Of Real Estate Commission Rebates
As you might imagine the entrenched, traditional realtors hate the whole idea of real estate commission rebates because, quite simply, it eats into their market share or their profits if they are forced to provide them. Realtor organizations in 10 states have even gone so far as to ban or restrict the practice of giving commission rebates – Illinois is NOT one of them.
Apparently the issue is so contentious that the Department of Justice keeps an eye on state laws and even has an entire Web page on the topic: Rebates Make Buying A Home Less Expensive. It looks to me like they are trying to do their part to promote consumer adoption of the practice, which is not a bad idea.
On that Web page the DOJ lists some quite comical comments from Kentucky real estate brokers who were surveyed by the Kentucky Real Estate Commission as part of an effort to explore lifting their own ban on the practice (apparently they did lift it):
“If we give rebates and inducements, it would get out of control and all clients would be wanting something. The present law keeps it under control.”
“This would turn into a bidding war, lessen our profits and cheapen our ‘so-called’ profession.”
“If inducements were allowed, they could lead to competitive behavior, which would make us look unprofessional in the eyes of the public.”
“I think this would just take money right out of our pocket.”
Yeah…competition is unprofessional!
These reactions shouldn’t be too surprising. The entrenched players in any industry are always resistant to change. However, the inevitable march towards greater and greater efficiency always moves forward.
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.