Monday, January 09, 2006

Rebates: Consumer benefit or agent pay cut?

One of the latest consumer-oriented real estate benefits getting press these days is the commission rebate to buyers. In essence, a buyer purchases a house and receives a 1 percent (or some derivative of the sales price) rebate back at settlement. On a $215,000 house (national average) that's $2,150 back to the buyer.
The debate goes something like this -- if the average commission is 6 percent and the average house is $215,000, then what's wrong with consumers getting a piece of the action as a rebate? Some states don't allow it, contending that the only people to benefit from the real estate business are licensed real estate agents -- not consumers.
As you can imagine, this practice has caused a lot of debate among practitioners. In states where rebates are allowed, it causes many agents to ante up to buyers who want to work with agents that will hand over part of their compensation. Meanwhile, agents who believe they should keep what they earn of the commission contend it's an unfair advantage for those who cut their fees in this manner.
A challenge agents have in debating this practice in an open forum is that federal law prohibits agents discussing commissions with each other (unless they work for the same company), without violating the RICO anti-trust legislation.
The January 2006 issue of Realtor Magazine documents the latest moves in states regarding the rebate debate. Depending on the state, agents "may be prohibited from or limited in the offers they can make to consumers, finds a new study from the Worldwide Employee Relocation Council Coalition and the Association of Real Estate License Law Officials."
Furthermore, "Fee Splitting, Rebates, and Other Incentives found that while most state statutes don't specifically prohibit fee splitting with principals in a transaction, wording designed to forbid sharing fees with anyone who doesn't hold a real estate license often keeps licensees in some states from offering fee rebates to consumers," according to the article.
When you consider that the commission standing alone does sound like a lot of money, why wouldn't it be in the consumer's best interest to get back a rebate? Especially when high-priced markets such as Washington, D.C., Los Angeles, New York, etc., are taken into account, the commission seems huge where the average sales price lingers more around the $500,000 mark. At 6 percent, that's $30,000.
It is a lot -- until you start divvying it up between the companies and their agents. First you have to split it in two -- half to the listing company, half to the selling company -- so the gross commission per company is now $15,000. Then the agent has to split that with the company. At 50 percent, the agent makes $7,500 on the transaction. If the consumer takes a third off the top (1 percent), then the agent makes $4,950 per transaction.
Agents face stiff competition from their colleagues. In Northern Virginia, for instance, the region has about 15,000 agents chasing a $20 billion market. Sounds like a lot -- but if each agent sold an equal share -- it would be only $1.3 million in sales, resulting in about $20,000 in income. You can see why full time agents get frustrated when a consumer wants part of their income with those odds against them.
Agents I've talked to are especially miffed that no other industry is constantly looked upon as being over paid and the consumer wanting something back from the service provider. In addition, they point out they only get paid if they are successful -- there's no commission for the unsold house or the rejected contract. (Lawyers get paid whether their case wins or loses, just as doctors get paid whether the patient lives or dies.)
Tips for consumers: Discuss your agent's fee and what services you're going to receive in exchange for the money you pay. Is it of value to you? There are various ways to get cash back in the transaction -- not just the commission. Be sure to find an agent who is good at negotiating. In a normal to soft market, sellers are very willing to offer up cash assistance to the buyer. Many loan programs allow up to 3 percent assistance from seller subsidies. Be sure you have an agent who knows how to negotiate on your behalf.
NOTE: States prohibiting rebates to unlicensed individuals:
Alaska, Kentucky, Louisiana, Mississippi, Missouri, New Jersey, North Dakota, Oklahoma, Oregon, South Carolina, Tennessee, West Virginia

No comments: