Buying a home is by far the largest financial decision and transaction most Americans will ever undertake.
In New York State the median priced home costs $450,000 but in New York City it is right around a million dollars. Another interesting statistic: Americans pay $90 billion for real estate brokerage services. The fees that real estate brokers charge nationally is typically 5 to 6% of the purchase price. These numbers have not changed over the past 40 years in spite of an increasing transparency, available technology and overall more education available to consumers.
In other sectors of the economy, the Internet has drastically altered the competitive landscape by reducing costs and enabling innovative ways of running a business. Traditional middlemen (from travel agents to stockbrokers) faced enhanced competition that has propelled them to evolve, bringing significant benefits to consumers. On the contrary, the real estate brokerage industry hasn’t modernized at the same pace, resulting in consumers paying higher commissions and fees than they should under a more competitive system.
Technology and the internet have greatly weakened the role of full-service real estate agents. In many parts of the country, the traditional “full-service real estate broker” faces competition from a variety of brokerage models, many of which use specialized softwares and tech platforms to reduce costs for the consumer.
The biggest lie of real estate brokers
“Brokers are free for home buyers since the buyer’s broker is paid for by the seller”. Buyer’s agents suggest that their services are “free”: this statement is false. It is true that on the list of closing costs, buyers broker is not listed as one of the expenses, however the buyer is actually paying for it as a higher sale prices. Just because sellers actually pay the broker fees does not mean they don’t markup sale prices to account for this cost. It brings the obvious question: what if you could receive a commission rebate from your broker? Traditional brokers do not properly educate home buyers on how the economics of real estate commissions work during a transaction. Most home buyers are not aware of how much their broker will receive as a commission; in most cases, buyers don’t learn how much agents make until they are sitting at the closing table!
Reduce broker fees by giving cash back rebates
Over the past three years, tech-focused startups looking to gain a foothold in NYC’s real estate market have exploded. Their goal: reduce broker fees by giving cash back rebates. Real estate agents are allowed under New York State law to give home buyer rebates to their clients. The New York State Attorney General encourages buyers and brokers to take advantage of commission rebates. As a tech start-up NestApple has given thousands of dollars of broker commission rebates to its clients without ever compromising on service.
What About Taxes
The IRS has also gotten on board to validate commission rebates or at least, it has said that these credits don’t count as taxable income to the recipient. The IRS has ruled that commission rebates are an adjustment to the cost basis. Of course, this basis might contribute to capital gains taxes down the road when buyers ultimately sell. If the property is your primary residence plus you meet a few other qualifying rules (“2 years out of 5”) , you may be eligible for the home sale tax exclusion: the first $250,000 in capital gain you realize from an eventual sale is tax-free (and $500,000 for married taxpayers who file joint returns)
In conclusion, offering rebates and incentives is one way that real estate brokers can compete for consumers’ business, leading to lower prices to consumers.