Many business models exist in real estate today. Full service. Discount. For sale by owner. Some business models offer buyers cash back on closing. Let’s talk about how this works and why it isn’t really an advantage for you — based on a real life example.
Let’s talk about how cash back rebates work.
You buy a house for $800,000. Based on a 2.5% commission paid by the seller to the buyer’s agent (your agent) through the listing brokerage, the brokerage your agent works for stands to earn $20,000. What your real estate actually keeps from that depends on many factors: their “split” with the brokerage, the fees they have to pay, board and association fees and dues, marketing costs, business expenses, and taxes.
You may have heard of real estate agents or even real estate companies offering buyers cash back on rebate. Some offer 1% of the purchase price, while others offer 50% of the commission earned by the brokerage.
This sounds great — of course. Hey, if I were a buyer, wouldn’t I want to get cash back in my pocket when I close on my home purchase?
Yes… and no.
Firstly — you have to pay tax on whatever amount you get back from your real estate agent or real estate brokerage.
Secondly — many professional and experienced real estate agents don’t give cash back, because they offer something even better than money in your pocket. And this is based on a real life example from a colleague of mine which I’m about to share with you.
For the sake of privacy, I have changed most of the details of this example, but the basis of what happened remains true.
A buyer was in the market for a $1 million dollar house. They interviewed several agents, including agents that were willing to give cash back. They chose, however, to work with an experienced Realtor in their area who knew the market.
The Realtor was asked by these clients numerous times about a cash back rebate, and it severely hindered the negotiations whenever the buyer had put it an offer on a particular house they liked. They would always go back to the Realtor and ask for the rebate, instead of focusing on negotiating the price and terms of the home purchase.
No matter how many times the buyer and seller went back and forth, and amidst constant arguments between the Realtor and their client regarding the cash back rebate, the deal never came together.
Frustrated, the Realtor decided it was enough. The Realtor didn’t want to work with these clients any longer, and referred the business to another agent.
The agent ended up giving in to the buyers demands of a rebate of 1% of the purchase price of the home. And yes, they eventually got the home, but here’s where the buyers ended up losing.
In the first round of offers with their previous Realtor, the Realtor successfully negotiated a conditional sale of $900,000. The buyers, adamant about getting cash back instead of focusing on the sale price and terms, backed out of the deal.
The next Realtor in line who took on these clients ended up placing an offer on the same property. Except this time, it had gone into multiple offers. They ended up buying the property for $910,000.
Sure, they’d get a rebate of $9,100 (1% of the purchase price). But they did end up paying $10,000 more for it because they lost their opportunity of being the only offer on the table, and they didn’t value working with an experienced real estate agent who was guiding them through this transaction.
You might be thinking — hey, that’s not bad. Sure they paid $10k more for the same property, but they’re getting $9,100 back — so isn’t that almost a wash?
The answer: no.
On the cash back they’re getting, they have to pay income tax depending on whatever tax bracket they belong to. Right there, they’ve lost several hundreds to thousands of dollars of benefits from getting a cash back.
Secondly — the mortgage and land transfer tax is $10,000 higher on the purchase price of $910,000 versus if they had bought for $900,000. This may be an incremental amount, but the net amount they are spending is more.
Thirdly, the sheer frustration of having to go through the process twice, and the risk of losing the property the second time around, is very aggravating and stressful. It may not have amounted to dollars and cents, but I can assure you that wasted time does cost money.
Focusing your attention on getting a cash back rebate when you purchase a home is just ridiculous, and will end up costing you money (and it could lead to you losing a home that you really like).
Ultimately, choosing which Realtor or real estate brokerage you want to work with is your decision. You can focus on full service and getting an experienced real estate agent, or you can work with a discount brokerage to get cash back and pay low fees.
Discount brokerages and cash back rebate models cost you money when you look at the big picture.
When was the last time you went to a specialist (a doctor, lawyer, or any other professional), whom you expected to get a job done properly, and asked them for 50% of the fee they’re earning?
If you’ve ever experienced working with a professional who was cheap, low cost, or giving you a massive discount or rebate, how was your experience like?
I can recall countless examples shared with me by colleagues whose clients ended up returning to them after being allured by a low cost option, only to find out that the level of service and the performance results were significantly lower than expected.
At that point it was too late, and these clients either lost money on the sale of their home, or ended up paying too much when they bought their home.
Before you think about asking your real estate agent for a rebate, or to discount their commission, ask about what you really want them to achieve.
Do you want them to cut the listing commission and sacrifice their marketing efforts, which will result in your house being sold for significantly less than what it could otherwise sell for — or do you want your agent to invest in the marketing of your home and effectively negotiate a higher sale price?
Do you really want to get a cash back, taxable rebate cheque on closing your home purchase, or do you want your real estate agent to negotiate the best price, and quite realistically save you even more money when you purchase your home (in a downward market), or actually secure your dream home (in an upward market)?
Think about your priorities before asking for a cash back rebate or a discounted commission.
If you were to ask me this question, my answer would be a polite: no.
I don’t offer cash back rebates.
I don’t discount my listing commission.
Instead — I negotiate the best purchase price for your home, with the best terms, and I’ll save you more money than a rebate could ever offer.
And when you’re selling your home, I offer full marketing, experienced negotiation, and guide you through a successful sale which will put more money in your pocket.
The question is — which real estate agent would you rather work with, a discounter, or a professional?