In purchases where buyer's brokers are offered half of a 5% commission, they may compete on price by refunding a portion of their commission to the homebuyer. A 1% rebate on the median-priced home would save the homebuyer $1,843.
Certain States Ban Rebates
In most states brokers compete on price for consumers' business. However, ten states have enacted laws that forbid brokers from offering refunds, denying consumers the benefits of price competition and driving prices higher than they would be in a more competitive market.
How do rebates work?
Some real estate brokers offer consumers cash refunds or non-cash incentives to encourage them to use that broker’s services. Rebates are typically cash payments from the real estate broker to his or her client after closing. Incentives may include gift certificates, closing-cost payments, or free ancillary services such as home inspections or moving services.
Learn more: Full-Service Discount Brokers
How do rebates benefit consumers?
Rebates can save consumers several thousand dollars in a single transaction. For example, if a broker offers to refund one-third of its commission to the homebuyer, the average buyer of a $300,000 home could save $2,500 to $3,000 (based on the 2.5% to 3% commission rates typically earned by the buyer’s broker).
Incentives, such as gift certificates for a home inspection, merchandise at a nearby hardware store, or moving services, give consumers monetary benefits from the transaction that they otherwise would not have obtained.
Offering rebates and incentives is one way that real estate brokers can compete for consumers’ business, leading to lower prices to consumers.
Do refunds and incentives pose any risk to consumers?
Some have argued that refunds and incentives can tempt consumers into closing on real estate transactions against their best interests. The Antitrust Division has found no evidence that refunds and incentives harm consumers. On the contrary, they can dramatically lower the price that consumers pay for brokerage services.
Do real estate brokers support rebate bans?
Some brokers support rebate bans as a means of reducing price competition. For example, when the Kentucky Real Estate Commission surveyed brokers about lifting that state’s rebate ban, here is what some of them said:
“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.”
Which states currently ban rebates and/or inducements?
Ten states currently have laws that ban rebates. Nine states have a full ban on broker rebates: Alabama, Alaska, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon, and Tennessee. In addition, Iowa prohibits rebates when the consumers use the services of two or more real estate brokers during a transaction.