What is a home buyer rebate?
A home buyer rebate is when your agent gives you some of the commission fee they earn on your purchase. You may also hear it called a commission rebate. Some agents and brokerages offer buyer rebates as an incentive to get your business. You can also try to negotiate one on your own, though this is difficult and, if successful, may cause your agent to provide fewer services.
Buyer rebates can potentially save you thousands when you buy your home. But they can be complicated and are never guaranteed. For starters, buyer rebates are only legal in certain states and on certain types of purchases. Home buyer rebates also require lender approval and are typically issued as closing credits that can only be spent in certain ways, like to cover closing costs or purchase mortgage points.
If you want guaranteed savings on your home purchase, we recommend working with a company that offers built-in cash back savings, like Clever Real Estate. Cash back offers a number of benefits over buyer rebates. Eligible buyers shouldn’t need lender approval, for instance, and you can spend the cash any way you’d like.
Our friends at Clever match you with top local agents from major brokerages like Keller, Century21, and more. Plus, eligible Clever buyers get 0.5% of their home’s purchase price in cash back after closing. On a $500,000 purchase, that’d put $2,500 back in your pocket.
- Buyer rebates can potentially save you thousands when you purchase a home.
- Buyer rebates aren’t legal in all states, require lender approval, and can usually only be used to cover closing costs.
- Negotiating a buyer rebate on your own isn’t easy and may result in reduced services from your agent. Agents who provide a rebate are giving up a part of their commission and may not take on their usual workload for less money.
How do home buyer rebates work?
Companies or agents often advertise or offer rebates as a percentage of the final sale price — for example, a 1% rebate on a $500,000 home would equal $5,000.
Sometimes agents offer rebates as a percentage of the fee they earn on the sale, which is a little more complicated. As an example, if an agent earns a 3% commission and offers you a 50% rebate, you’d get back half their commission, or 1.5% of the sale price.
You receive the rebate at closing, usually in the form of a closing credit. This means you can only spend it on certain closing costs, like:
- Appraisal fees
- Buying points on your mortgage
- Escrow fees
- Loan origination fees
- Transfer fees
Whether your agent or their brokerage offers a built-in rebate or you negotiate one yourself, the rebate amount should be specified and agreed upon at the outset, before you start touring houses.
A few important notes about buyer rebates
- Rebates must be disclosed to and approved by your lender.
- The promised rebate amount is never guaranteed in full.
- The lender typically dictates how your rebate can be spent.
- Rebates can’t be used to fund your down payment.
Advantages of cash back over commission rebates
We recommend looking for a real estate company or brokerage that offers cash back instead of commission rebates. Cash back comes in the form of a check after closing instead of a credit, which offers some big advantages.
Because you get cash back after the transaction, you can spend it however you want with no limitations.
Cash back isn’t subject to the same rules — i.e., lender approval — because it’s coming from a third-party outside of the transaction.
Even still, you should let your lender know you’re getting cash back just to be safe.
Real estate commission fees and rebates, explained
Commission rebates come out of the commission fee your agent earns on your purchase. So to understand how rebates work, you really need to understand how realtor fees work.
In a conventional real estate transaction, the seller will be on the hook for a total commission of about 6% of the final sale price. The two agents involved in the deal typically split the total commission:
- 3% goes to the seller’s agent, for marketing the home.
- 3% goes to the buyer’s agent, for bringing their client to purchase the home.
Your rebate is a portion of your agent’s 3% cut of the total commission fee.
So if your agent promised you a 50% rebate of their commission, that’d be equivalent to 1.5% of the final sale price.
Or conversely, if your agent promised you 1% of the final sale price, that’d be roughly 33% of their commission.
It’s important to clarify with your agent up front whether the rebate percentage they’re offering refers to their commission fee or the home’s sale price. Using the example of a $300,000 home below, the higher percentage doesn’t always equal the higher rebate.
|Rebate type||Agent's commission||Your home buyer rebate|
|0.5% home price rebate||$9,000||$1,500|
|10% agent commission rebate||$9,000||$900|
How much can you save with a buyer rebate?
Buyer rebates can potentially save you thousands of dollars when you purchase a new home.
How much you’ll save depends on the purchase price and the structure of the rebate.
Use this table to get a better idea of just what a home buyer rebate would look like at different price points. Since our friends at Clever offer 0.5% Clever Cash Back, we’ll use that figure in our calculations.
|Purchase price||Potential savings (with 0.5% home rebate)|
The U.S. Department of Justice has a rebate calculator you can use to figure out your exact rebate amount.
Unfortunately, there are no guarantees when it comes to your rebate. While a company or agent may advertise a certain percentage, the lender could ultimately reduce that amount — or reject the rebate entirely!
Cash back, on the other hand, flows through a third party and is refunded after the transaction. As such, it’s usually not an issue for the lender. If you qualify for a cash back program, you’ll likely receive the full, promised amount and be able to spend it however you’d like. This makes cash back a better choice for most buyers.
Why do buyer’s agents offer commission rebates?
Buyer’s agents offer commission rebates to:
- Attract and retain new customers. Buyers may be more inclined to work with an agent who promises they’ll get several thousand dollars back. And since most buyers don’t sign exclusive contracts with their agents until they submit an offer, rebates provide more incentive for a buyer to stick with an agent throughout the process rather than shopping for houses with multiple agents.
- Make a transaction more affordable. Closing costs can be expensive. For buyers, they’re usually 3-5% of the sale price. On a $300,000 home, that’s as much as $15,000. A buyer who gets thousands of dollars back may be better able to afford these costs.
- Remain competitive. A growing number of companies offer buyer rebates. Agents may feel they need to do the same to avoid losing business.
How to negotiate a buyer rebate with your agent
Negotiating a buyer rebate on your own is possible, but it’s difficult to do if the agent isn’t already offering one. We recommend finding a real estate company that offers built-in rebates or cash back instead.
You have better odds of negotiating a home buyer rebate if you’re:
- Purchasing a high-priced home, as your agent will receive a large commission
- Working with a newer agent who may find it more difficult to attract customers
- Buying and selling a property with the same agent, so they’ll be getting both commissions
- Buying in an area where demand is low and your agent may not have a lot of other business
Many agents are resistant to offering commission rebates because it means they earn less money. They may not think it’s worth their time.
How to increase your chances of a rebate
To maximize your chances of successfully negotiating a rebate:
- Do some of the legwork for your agent. If you’ve already done the hard work of finding a property and you just need help making an offer, an agent may be willing to reduce their commission in the form of a rebate.
- Use the same agent to sell your property. Since the agent will earn a commission for both transactions, they may be more willing to offer a discount.
- Buy a property the agent is selling. Dual agency isn’t legal in every state, though, and there’s an inherent conflict of interest since the agent represents the seller too. Make sure you fully understand the risks before agreeing to a dual agency sale!
Is trying to negotiate a rebate worth it?
Even if you check all the above boxes, there’s still no guarantee you’ll get a rebate. In fact, unless your agent markets commission rebates, chances are they won’t be willing to give up any of their fees.
The good news is, you don’t have to negotiate a buyer rebate on your own. Instead, you can work with a company like Clever that offers guaranteed cash back after your sale closes.
Unlike home buyer rebates, Clever Cash Back comes as a check after closing, and you can spend it any way you like.
Plus, it’s guaranteed on eligible purchases, meaning you don’t have to meet lender restrictions like you do with rebates.
Where are home buyer rebates legal?
Home buyer rebates are legal in 42 out of 50 states.
If you live in these states, you can work with an agent that offers a rebate, try to negotiate for a rebate, or work with a company that offers rebates or cash back.
Some states do limit the size and type of rebate, so it’s important to check the regulations in your specific state.
States where home buyer rebates are banned
The real estate lobby has pushed to have rebates banned in eight states, including:
In these states, agents can’t offer you money back or any type of gift to entice you to use their services.
The U.S. Department of Justice takes the position that blocking rebates inflates the cost of real estate services and harms consumers. That’s why it supports legalizing rebates across the country.
Iowa and home buyer rebates
Iowa technically allows buyer rebates, but it limits them to dual agency sales. Dual agency is when one agent represents both the seller and buyer.
These types of transactions are often suspect because the agent isn’t neutral. The agent will also be looking out for the seller, meaning you may not get the best deal.
Even where legal, buyer rebates are often highly regulated
Even in states that allow buyer rebates, they’re still governed by strict rules and regulations.
For example, you can never use a rebate to fund your down payment. Your lender will have additional stipulations.
Home rebates depend on your lender
Your lender has the ultimate say on whether you can have a home buyer rebate. That’s because a buyer rebate affects the cost basis of your home.
What is the cost basis?
The cost basis is the total amount you pay for your home. It includes the sale price, fees you paid during closing, and any other financial investments you make in the home.
Your rebate cancels out some closing costs, lowering the cost basis of your home.
Lenders use the cost basis to calculate your loan-to-value (LTV) ratio, which is the amount you borrowed compared to the value of your home. You can calculate it by dividing the amount of your loan by the cost basis of your home.
If your LTV ratio changes, your lender will need to adjust your financing to keep the ratio low. Ideally, lenders like to keep the LTV ratio at 80% or lower.
Here’s a quick example of how a $5,000 commission rebate on a home that costs $250,000 can make your LTV ratio too high.
|Home buyer rebate||Loan amount||Cost basis||LTV ratio|
|$0||$200,000||$250,000||80% (just right)|
|$5,000||$200,000||$245,000||81.6% (too high)|
Not disclosing a rebate can result in your financing falling through, or in worst case scenarios, mortgage fraud.
Cash back isn’t as regulated
Cash back doesn’t cause these issues since it’s distributed after closing. It doesn’t affect the cost basis or LTV ratio, so it’s usually not a concern for lenders.
You won’t have the chance to use it on closing costs, but it’s a nice way to replenish your bank account afterward.
While cash back technically takes place outside of the transaction and, therefore, doesn’t really fall under your lender’s purview, it’s still a good idea to disclose it to them, just in case.
Buyer rebates must be disclosed on your HUD-1 settlement form
If you’re getting a rebate as a closing credit, you also need to disclose it on the HUD-1 settlement form, which covers all settlement costs.
Your agent can help you figure this out. All of the rebate info goes on lines 204-209. You’ll also include the name of the person issuing the rebate, which is typically your agent and/or their broker.
Are home buyer rebates taxable?
According to the IRS, home buyer rebates aren’t taxable.
That’s because you aren’t actually getting any income with a rebate. It’s money you already had, just coming back to you at the end of the transaction.
That said, rebates could affect your taxes through cost basis. This is all the money you’ve put into a home.
Taking a rebate lowers the cost basis, which could affect capital gains taxes.
What are capital gains taxes?
This is the amount of taxes you pay on the increase in your property’s value since you bought it.
A lower cost basis up front can make it seem like your property gained more value than it really did, increasing taxes in the future.
Still, this tax increase should be pretty minimal. Also, you may be eligible for an exemption on capital gains from your main home on up to $500,000 in gains. If you’re concerned, talk with a tax professional to get advice about your specific situation.
First-time home buyer rebates vs. regular commission rebates
First-time home buyer rebates are different from the realtor commission rebates we’ve been focusing on in this piece. These rebates are offered by the state or federal government to help people purchase their first property.
The Housing and Economic Recovery Act created a federal tax credit of $7,500 for first-time home buyers, but this benefit expired in 2010.
Now, you’ll need to look a little harder to find a tax credit, grants, and other assistance for your first home purchase. Some options include:
- No-penalty IRA withdrawal: You can withdraw up to $10,000 from your IRA for a home purchase without the 10% penalty for early withdrawal.
- HUD grants: The U.S. Department of Housing and Urban Development (HUD) funds non-profit organizations across the country that can help you with buying a house if you meet certain criteria.
- FHA loans: The Federal Housing Administration (FHA) offers FHA loans to new homebuyers. These loans require a lower down payment than traditional loans and may come with lower interest rates.
- State-specific programs: Each state has its own programs to help first-time home buyers. Check with your state housing finance agency to see what’s available where you live.
You may be able to get both first-time home buyer rebates and normal home buyer rebates as long as you work with an eligible agent or real estate company.
Companies that offer buyer rebates
Some companies offer built-in rebates for eligible buyers — no negotiations required. We’ll go over our top three picks with widely available rebate programs below.
🏆 Top pick: Clever Cash Back
Clever Cash Back is not a rebate, meaning it’s not subject to lender approval and regulations. You’ll receive a check after closing and can use the money any way you’d like. Cash back varies depending on the price of the home.
|Sale price||Cash back amount|
|>$150K||0.5% of the sale price|
You are 100% guaranteed to get your cash back as long as you live in an eligible state. This means no jumping through hoops to meet qualifications or requirements.
Despite the reduced commission, Clever agents are full-service agents who have been carefully vetted. You’ll receive top-quality service while saving big on your purchase.
Redfin’s Rebate is only available for “eligible” buyers in select markets. Redfin doesn’t guarantee you’ll receive the amount it estimates up front.
While the company indicates buyers receive $1,500 on average, the rebate amount varies by market. Its structure does as well, with the rebate sometimes offered as a closing credit and other times as cash back.
With Redfin, your buyer’s agent also needs to make at least $6,500 in commission for you to receive a rebate at all. You also won’t qualify for a rebate if Redfin refers you to a partner agent from another company.
REX Real Estate Rebate
REX advertises a rebate of up to 50% of the agent’s commission. However, numerous restrictions, terms, and conditions apply, making it hard to actually qualify for a rebate.
To qualify for a rebate, buyers must buy a home that’s not listed by REX. Buyers also aren’t guaranteed to get half their agent’s commission in every transaction. You can only get a max of 1% of the sale price of the home.
Rebates are also structured as a closing credit, and thus can be used only to cover eligible closing costs.
Save on your next purchase
Rebates can potentially save you thousands of dollars, which is a great thing. But, there’s a lot of red tape and you shouldn’t necessarily bank on them.
That’s why it’s better to look for a company offering cash back, which is easier and more reliable.
Either way, savings like rebates and cash back are becoming increasingly commonplace. You should seek out opportunities like these if you’re in a state that allows it.
For cash back, Clever Cash Back is our top pick because you save thousands without needing approval from your lender.
See if you qualify for cash back, get free advice on your home purchase, and get connected with a top-rated agent in your area when you reach out to our friends at Clever today.
FAQ about home buyer rebates
How does a buyer rebate work?
A buyer rebate is usually issued as closing credits. With closing credits, you'll get a discount on some of your closing costs, but you're limited in how you can use them. That's why we prefer cash back. With cash back, you'll get a check after your home purchase is finalized, which you can spend however you want. Learn about our top pick for real estate companies offering cash back for buyers.
Can real estate agents give cash back?
While real estate agents themselves usually don't offer cash back, they can partner with companies that do. In this scenario, the real estate company will give you part of the agent's referral fee (paid to them from the agent's commission). Unlike home buyer rebates, cash back flows through a third party and is issued after the sale, so it doesn't have as many restrictions, and you can spend it however you want.
How can a commission rebate help you buy a bigger home?
Since you can use a commission rebate to cover your closing costs, you might be able to put more of your own money toward your down payment. Theoretically, this could help you afford a larger home. However, because commission rebates aren't guaranteed, it's not something you should bank on.
If you’re interested in learning more about buying and selling homes, these additional resources can help.
The 10 Best Home Buying Websites for 2021 (And Beyond): Zillow, Homes.com, and RealtyTrac are among the top 10 websites for home buyers. Learn about these and other websites that can help you find your perfect property.
Realtor Fees: Your Questions, Answered: Find out who pays real estate fees, how much they cost, and more in this helpful guide to the costs of working with a real estate professional.
Buyer’s Agents: What They Are & What They Do for Home Buyers: Buyer’s agents offer important assistance when looking for a property and making an offer. Learn how a buyer’s agent can help you throughout your purchase process.