What that Redfin Rebate Actually Costs You

Buying a home is one of the biggest financial undertakings that most people will ever attempt. It’s a tricky and costly process, complete with a unique set of major risks… and lifelong rewards.

When it comes time to buy, most people are concerned about two things: the quality of their representation, and the amount they’ll end up having to pay in the transaction.

Recognizing this, some brokerages and real estate service providers, such as Redfin, offer buyers the promise of a rebate. On the surface, this seems like a smart move for buyers. Redfin offers to put money right back into the buyer’s pocket at a time when they may need it – and, after all, who could say no to free cash?

But, needless to say, there’s a catch. There’s a little more going on to this rebate process than meets the eye, and it could actually put buyers at a disadvantage – causing them to pay more, for less effective representation. Here’s what you need to know:

How Do Buyers’ Rebates Work?

To understand how this refund works – and why it might ultimately fail to offer any real advantages to buyers – it’s important to first understand how compensation in the homebuying process typically works.

Generally, when the listing agent enters an agreement to sell a certain property, he or she agrees on total commission, typically around six percent of the selling price (though this is between the seller and the brokerage). Of that six percent, a certain percentage (roughly half) goes to the listing brokerage (where the listing agent "hangs" his or her license), and another percentage goes to the buyer’s brokerage (this is known as cooperating commission). From this percentage, the buyer’s brokerage then pays the buyer’s agent.

Commonly, this means that, when all is said and done, the buyer’s agent receives roughly 2.5 percent out of that six percent commission. All of this comes from the selling price of the home, meaning that it comes at absolutely no expense to the buyer. Buyers very rarely pay agent commissions.

Bear in mind that there can be exceptions to the process we described above. For instance, more experienced, or better producing, agents tend to earn larger amounts than other agents. It’s important to remember this!

So, now that you understand how agents get paid, we can explain where the Redfin refund (and other similar deals) come in. When you buy with a brokerage offering a rebate, they are promising to give part of the cooperating commission to you directly – which means that your agent is losing out on their (already limited) piece of the pie!

You see, if an agent promises a rebate of, say, 30% back to the buyer, their brokerage (let’s say Redfin) is going to find that cash by taking a slice out of the slice granted to them as cooperating commission. This results in the buyer’s agent ultimately making less than they could by working with a traditional brokerage. And that’s where the picture changes for buyers.

It comes down to asking…

What Kind of Agents Would Agree to a Rebate?

So, if the rebate process ultimately means that the buyer’s agent makes less, it’s worth asking – who would agree to this set-up? Who would work for less money overall?

Ultimately, all sorts of agents might agree to this – but many of those agents aren’t the sort you want representing you in this major transaction. They might be younger or less experienced. They might be juggling many different clients at once in order to earn what an agent would make working for a typical brokerage – meaning that they have less time to spare for your individual needs. Knowing that they’re going to make less, they might be willing to take any deal, just so that they can get paid quickly and move on to their next client.

The thing is? Real estate agents often get a bad rap… and, as much as we hate to say it, perhaps there’s something fair about that. There are a lot of people who get into business part time, or who get their license for specific reasons and then “dabble” after that. We could name plenty of other red flags in potential agents.

Ultimately, in this industry, a small margin stands out – and you probably want them on your side at this important time.

Do You Actually Save Money?

Yes, it's true, your discount brokerage will provide you a credit at the time of closing based on that prescribed rebate amount. Let's say it is 25-30% of that 2.5% cooperating commission. Let's pretend you are under contract for $300,000 on a two bedroom Rogers Park condominium. You could be due a rebate of more than $2,000. That's real money! But, did your agent get you the best deal on that condo? Could a more experienced agent have helped you negotiate a price of $295,000 or even $290,000? Maybe. In that case, that $2000 commission just cost you $8000!

Maybe your less experienced agent didn't help you find a great real estate attorney, or didn't go to bat for you during or after your home inspection. Are you stuck with a furnace that needs to be replaced this season? Is your new condo building about to levy a special assessment that will cost you $4500 for a new roof?

How far does your $2000 rebate go now?

Why hire someone who’s willing to work for less – particularly when their labor comes at no cost to you? If you could have a more knowledgeable, more analytical, more accommodating agent on your team, why wouldn’t you? Why wouldn’t you opt for the agent with the best working knowledge of your neighborhood? The agent who has proven themselves as a negotiator in more successful closings?

While you could get a percentage of your agent’s commission back as a rebate, with a deal like this, you’re actually more likely to pay more upfront as a result of poor representation. An agent with less understanding of your neighborhood and less understanding of your unique situation could ultimately mean less money in your pocket.

After all, what if the seller is represented by a more seasoned and competent agent, giving it their all because they know that they’ll be well-compensated for their unique skillset? It almost doesn’t sound fair! Do you really want a t-ball hitter going up against a major league pitcher?  

So, at the end of the day, buyers must ask themselves – is that $2000 “refund” really worth it, when it could mean a less successful transaction? Is it worth opting for a rebate when it could mean paying more, for less skilled and less personal representation?

Here at Real Group, we pride ourselves on standing out from the pack with personal care, unparalleled attention to detail, and strong negotiating skills. We have received the much-coveted Five Star Professional Award for Integrity, Communication, and Customer Service eleven times, and we consistently beat the market by 2.5-3.5 percent!

Ready to see what our stellar team can do for you? Drop us a line with any questions today! We’d love to set you down the path to real estate success.

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