It seems like an obvious draw for a real estate agent to offer commission rebates. Yet not many people know that these agents exist. According to Google Trends, each month the Chicago-area searches “real estate agents” upwards of 5,400 times, while there are only 30 searches per month for real estate companies that offer commission rebates. You would think that this number would be higher, considering that home buyers can save thousands to tens of thousands of dollars with a rebate.
Real Estate Commission Basics
First, let me give you a quick lesson on real estate commissions, and how they are paid. On most listings, the home seller and listing agent come to an agreement on what percentage of the total sale price the home seller must pay the listing agent for all of their work. Because it is unlikely that a listing agent can find a buyer on their own, they offer a co-operating commission to the buyer’s agents, assuming they find a buyer. This is the way agents who work with the buyers make money.
The co-operating commission given to the buyer’s agent is usually half of the commission that the seller pays. In the Chicago-area, that percentage is commonly 2.5%, although there are outliers. Home sellers should be advised to get the co-operating commission plan in writing, as without such, the listing agent can do whatever they want.
A History of Commission Rebates
Buyer’s agents, (and, on occasion, seller’s agents) have sometimes agreed to contribute a small percentage of their commission in order to prevent a transaction from disintegrating. The deal could be at risk if the buyers and sellers can’t come to an agreement on a reasonable price for the home, or if an issue has emerged during the inspection process that the buyers and sellers disagree on.
Managing brokers have discouraged this agent contribution since its inception. While I trained at Prudential Preferred Properties, it was pointed out to me that this was a terrible idea, because if the deal ultimately fell apart, that same contribution would be expected of the buyer’s agent on the next deal.
Eventually this practice led to some home buyers asking their agents to contribute money to the deal in order to encourage the sellers to move forward with the transaction. Managing brokers also disapproved of this practice: “Why would a portion of the money you work hard for go to the sellers?” Also, “What would agreeing to this say about your negotiating abilities?”
As technology has advanced, more buyers are able to screen properties on their own. Thus, the job of the realtor has become easier, and realtors can now earn hundreds to thousands of dollar per hour. Thus, to encourage buyers to work with them, buyer’s real estate agents are offering to share part of their commission with their clients.
How The Industry Has Responded To Commission Rebates
As you can imagine, traditional realtors find issue with commission rebates, as it eats into their profits, should they be forced to provide them. In fact, so many realtor organizations have found issue with commission rebates that the practice is banned (or restricted) in 10 states. Illinois has thankfully not instituted this ban.
The issue of real estate commission rebates is so controversial that the Department of Justice has gotten involved. They have begun encouraging consumer adoption of commission rebates, which is a great idea.
On a Web page published by the DOJ, several Kentucky brokers are quoted on their thoughts on lifting the real estate rebate commission ban in their state (which has since been successfully lifted). The comments essentially state that rebates would induce too much competition and be unprofessional…well, duh!. Like...competition is very unprofessional?
These reactions from Kentucky brokers don’t surprise me. It makes sense that longtime players of the real estate industry (or any industry for that matter) would resist change. But in the end, efficiency will win.