Active Rain Master Minds Challenge- March 2011-Online Buyers Rebates: What's the Best Solution?
I am part of the Mastermind Challenge; this month the question was on whether we endorse online rebate company's...very interesting dialogue and this is our answer written by my friend Jerry Newman with a lot of input from our team.
Active Rain Master Minds Challenge - March 2011 – Online Buyers rebates: What’s the best solution?
Rebates exist in many forms.
New home construction companies, such as INest offer plentiful incentives to the buyers, and these may include rebates as well (reported by INest as averaging $2300).
Sellers may offer some bonus to incentivize buyers to choose their home over other homes, although typically in the form of closing cost assistance or some giveaway (gift cards, vacation getaway, etc.)
Online companies offering buyer rebates exist in many varieties too, typically acting as part of a group purchase power exercise. These online companies all basically operate at the expense of the buyers agent, funding rebates via significant withholding from commission paychecks, or in some cases like Homes for Heroes, want brokers to pay a yearly or monthly fee, in addition to that 25% referral fee. While not actually in the real estate business, they hold out the “we can give you extra business” carrot to agents in need of extra income. To take that carrot is an individual choice to be made by each agent. The consumer may never be aware that their rebate is being funded at the expense of the agent representing them.
And of course buyer agents may offer rebates as well to encourage buyers to choose them over their competitors. Whether as an entire business model or solely on a case by case basis, is an individual agent business decision.
Online rebate companies have affected the consumer in a positive manner. The rebate money given to buyers and sellers provides them with more spending power, and potentially results in more consumers entering the housing market. Rebates act as a lever to encourage “fence riders” to commit to entering the market arena. Just as the 2009/2010 home buyers tax credits were designed to revive our real estate housing markets, rebates serve to provide a mechanism that beckons a return to a healthier housing market.
Whether online rebate companies have affected the industry in a positive manner is debatable. Within our own team we had a diversity of opinion regarding rebates in general and the role of online rebate companies! Many consumers have become more educated and knowledgeable about rebates, and many of them are not hesitant to ask agents for rebates up front, so perhaps the online rebate companies have made it more acceptable to broach the rebate topic with their agents. At which point, it becomes a business decision for any agent to consider offering a rebate.
Does it marginalize the role of the buyer’s agent? It shouldn’t, but how does one guarantee that buyer’s agents being pressed for rebates will fully honor their fiduciary responsibility to their client in the same manner as they would for a buyer not receiving a rebate? We’d expect agents who routinely offer rebates consistently to not have this fiduciary service conflict. On the other hand, for agents who intermittently grant rebates, what happens when there is a conflict between their need to provide service to both categories of buyers? Does the rebated buyer become secondary priority?
The choice for some agents to participate with online rebate companies may become a numbers game. The deduction from the additional revenue may be acceptable because of increased loyalty from the rebate receiving buyers because they want their money back! Additionally, the agent may be influenced by the relative cost of housing for their service areas. Most of our team members operate in locations that offer moderately priced homes, so rebating may have a larger impact on the overall success of our business vs. areas with higher cost homes that offer a much larger commission check for the equivalent work transaction.
Some states like Texas that offer rebates and discounts to buyers and sellers have defined the “minimum services” that are given to the consumers. As long as the consumers are satisfied with the level of service that they are receiving, it’s a win-win solution for them and their agents.
As far as agents who are willing to pay a fee, we again emphasize that this is an individual business decision made by those agents and may be a prime opportunity for them to increase and grow their business. This is no different that some agents choosing to pay for leads or other business generation. Some agents may decide to do rebates with every transaction, and others may decide on a mixture of rebates and non-rebate transactions with a shift away from rebates as business allows.
During our research on this topic, it was interesting to note that rebates are not allowed in some states. Here are the States that forbid any rebates. Two of our team members live and practice real estate in two of those 10 states. Again, it all comes down to how you read and interpret the laws in each state. Based on our findings, the laws in Alabama are quite ambiguous. For example, in Alabama (All incentives must be given in advance or at closing, and must be disclosed to all interested parties, thus making it a PRE-BATE instead of a rebate). NOTE: Pre-bate was coined by us (not Alabama law).
Should we embrace or discourage rebates?
Maybe there is no clear answer???? We don’t see a clear cut “solution” to online rebating as we don’t have a clear cut “problem” with rebating in general. There are pros and cons on both sides of the issue. Our preference is NOT to have another third party involved in the transaction. Commissions are ALWAYS negotiable and could be addressed directly between the consumer and the agent, keeping more of the dollars involved directly with the individuals MOST involved in the home purchase! Every market is different. Every agent’s needs are different. Fair and healthy competition is always encouraged in any market. As such, the goal of each brokerage and competitor is to have a competitive edge over their competition. Therefore, it becomes a “personal business decision” as to whether or not one chooses to rebate.
While we wouldn’t object to the elimination of online rebating BY THIRD PARTIES, we don’t expect the existence of these companies to be eliminated. Free enterprise provides a niche for their existence and we’re hesitant to recommend anything that infringes on both their right to exist and our rights as agents to utilize their services if we so choose. Understanding the ins and outs of these rebates will ultimately be very beneficial to everyone involved in the real estate transaction, and just maybe if the consumer understands that they come at the expense of the agent who’s working so hard to find them their dream home, they MIGHT just be a little less prone to reach for a piece of that check.
Jerry Newman, ABR®
US Army Retired
210-789-4216 Direct
210-696-9981-Fax
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