As a NYC home buyer who may have just heard about the concept of a broker commission rebate, you are likely asking yourself: are NYC broker commission rebates legal?
Fortunately, buyer broker commission rebates in NYC are fully legal. In addition, broker commission rebates are not generally considered to be taxable income.
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What do I need to know about the legality of broker commission rebates in NYC?
Broker commission rebates in NYC are 100% legal, despite what you may hear from traditional buyer’s agents and NYC listing agents. New York is one of 40 states where receiving a broker commission rebate is permissible and encouraged by law. Specifically in New York City, broker commission rebates are 100% legal as per the Real Property Law which governs the state’s property market.
Real estate commission rebates are actively promoted by New York’s Attorney General and Antitrust Division as a means of increasing competition in the real estate industry and ultimately reducing overall real estate commissions when buying and selling real estate in New York City.
Rebates Contradict the Status Quo
Broker commission rebates are rare in NYC because they are vehemently opposed by traditional real estate agents who have been earning full commission for the past three decades. If you ask an old school agent about buyer agent commission rebates, he or she will likely first say that rebates are illegal. If you point out that rebates are actually legal, a typical broker will be highly offended and simply refuse to offer a rebate.
Because the topic of broker commission rebates is a highly divisive subject among brokers in NYC, it’s especially important to make sure that any rebate you are receiving from your buyer’s agent is discreet. After all, how can you expect a veteran listing agent to treat your offer fairly vs. other offers if the agent is offended that you will be taking away some of his or her commission on the deal? Will a seller be open to negotiating as much on the price if they realize that they are basically paying you commission?
Where in the law does it say that NYC broker commission rebates are legal?
Broker commission rebates are legal in NYC as per Section 442 of the New York Real Property Law, Article 12-A. As per the excerpt below, broker commission rebates in NYC are fully legal and there is absolutely no limit on the amount or types of incentives a New York City real estate salesperson, associate broker or broker can offer to his or her client as a means of securing a client’s business:
How are lawmakers in New York encouraging broker commission rebates in NYC?
New York’s former Attorney General Eric Schneiderman issued an open letter to New York’s real estate community in 2015 specifically encouraging them to offer NYC broker commission rebates. In this excerpt below, you can see that the Attorney General makes multiple references to the fact that broker commission rebates are fully legal and encouraged in New York City:
What is a NYC broker commission rebate?
As a buyer in NYC, you may have heard that the services of a so called ‘buyer’s agent’ are free. But you may be asking: if my buyer’s agent is free, who pays the bill? And what is a New York City real estate commission rebate? How does a real estate rebate save me money?
A Rebate Is a Closing Gift
A NYC broker commission rebate is a cash rebate offered to a home buyer from his or her NYC buyer’s agent as an incentive for working with them on the home purchase. A buyer agent commission rebate is simply a much larger closing gift versus your typical bottle of wine or box of chocolates that a buyer’s agent offers his or her client at closing!
To better understand what rebates are, how they work, and how you can request one when buying in NYC, let’s take a step back and look at how a typical sale in NYC works:
A seller hires a NYC listing agent and signs a 6% Exclusive Right to Sell Listing Agreement.
In signing this contract, the seller agrees to pay a total of 6% commission when the property sells. If you as the buyer are unrepresented and have no buyer’s agent, the seller pays the entire 6% commission to the listing agent. If you are working with a buyer’s agent, the listing agent will split the commission equally so that the seller pays 3% commission to the listing agent and 3% commission to your buyer’s agent.
The key takeaway here is that sellers typically pay the same amount of commission regardless of whether a buyer’s agent is involved in your deal alongside the listing agent. If you are unrepresented, the listing agent will simply collect both sides of the commission and the seller will not save any money. Because the seller pays the commission bill for your buyer’s agent and you won’t achieve a lower sale price by being unrepresented, hiring a buyer’s agent is a no brainer.
You hire a buyer’s agent to help you with your purchase. Your buyer’s agent offers several services to help streamline the overall deal process.
The typical services provided by a New York City buyer’s agent include the following:
Now here’s where the real estate commission rebate concept comes into play. If you hired a traditional buyer’s agent who does not offer a rebate, your agent will collect his or her commission check at closing and walk away. If you are lucky, your traditional buyer’s agent will buy you a box of chocolates or a bottle of wine as a token of gratitude for you sending them a deal worth tens of thousands of dollars.
On the other hand, if you requested a real estate commission rebate your buyer’s agent will write you a check at closing for a portion of the commission he or she earned on the deal. While it’s certainly not permissible for a broker or salesperson to split a commission with an unlicensed party, brokers and salespeople are fully permitted and encouraged by the law to offer commission rebates (cash or otherwise) to their actual customers (buyers and renters).
Who pays for a NYC buyer agent commission rebate?
The average New York City real estate commission rate of 5-6%, which includes the buyer’s agent commission, is fully paid by the seller in NYC. When a buyer is unrepresented, the full 6% commission is pocketed by the listing agent. If a buyer has representation, then the 6% commission is generally split equally between the listing agent and buyer’s agent.
A Rebate Can Pay Your Mansion Tax
Because of the high median purchase price in the city, real estate commission rebates in NYC can end up being $30,000 or more. A NYC real estate commission rebate can significantly reduce your NYC buyer closing costs. If you are buying a property above $1 million, a NYC real estate commission rebate will usually cover your entire NYC mansion tax bill. Better yet, real estate commission rebates in NYC are completely legal and generally considered to be non-taxable income.
Why should a NYC home buyer work with a buyer’s agent?
When searching for a property in NYC, home buyers are presented with two options. They can either choose to search on their own and then work directly with the listing agent for a particular property. Alternatively, NYC home buyers can work with a buyer’s agent throughout the search.
Typical NYC buyer agent responsibilities include everything from the initial search through to submitting offers, negotiating, preparing a NYC co-op board package and guiding the overall deal to closing.
There are two compelling reasons to hire a buyer’s agent in NYC as opposed to being unrepresented. They are:
Receive a NYC Broker Commission Rebate – Requesting a NYC buyer agent commission rebate is an automatic way to save money when buying in NYC. The best part about receiving a commission rebate is that it’s an automatic discount which is on top of whatever other pricing concessions you negotiate with the seller. If you work directly with a listing agent, you are simply handing all of the commission to the listing agent without receiving any direct, monetary savings or benefit yourself. Requesting a NYC broker commission rebate will also save you from the risks of working directly with a listing agent under a dual agency arrangement.
Buyer’s Agent Representation in NYC is Free – Buyers don’t pay anything to have professional representation. Sellers in NYC pay 100% of all real estate commissions, including the percentage commission which is paid to a buyer’s agent. In addition, there’s almost always zero benefit to an unrepresented buyer in terms of getting a lower sale price by being unrepresented. This is because virtually all NYC home sellers sign an exclusive right to sell listing agreement with his/her listing agent obligating the seller to pay 6% commission no matter what. So if you are unrepresented, the full commission just goes to the listing agent as opposed to being split with your buyer’s agent.