06/05/07: Conflicting Decisions On Commission Rebates

Real estate commission rebates are back in the news.

Last week, Tennessee Governor Phil Bredesen signed into law a bill that prohibits real estate agents and brokers from giving cash rebates to home purchasers. One of the arguments used by the legislators supporting the ban was that rebates encourage tax fraud, in that consumers would not report that money as income when they filed their personal tax returns.

The Internal Revenue Service has taken the opposite position, however. In a Private Letter Ruling, dated February 9, 2007, the IRS stated that such cash rebates are not income, but rather represent an adjustment to the purchase price of the home. (PLR 200721013).

It should be noted that a Private Letter Ruling is issued by the IRS and directed only to the taxpayer who requested such an opinion. According to the IRS, the tax code “provides that it may not be used or cited as precedent.”

Nevertheless, a PLR does reflect the thinking process of the IRS, and accordingly, it is safe to say that real estate commission rebates do not have to be reported as income by the homeowner who does get such a rebate.

According to the recently issued report on Competition in the Real Estate Brokerage Industry, prepared jointly by the Federal Trade Commission and the Department of Justice, rebates “can be powerful tools for price competition between brokers. And by returning money to home buyers, rebates can also benefit home sellers, because buyers will have more to spend on the home as opposed to commission payments.”

In Tennessee, however, the supporters of the rebate ban took the position that by prohibiting rebates, this protects consumers from backroom deals between agents and outside parties, such as referral services and mortgage lenders.

The Tennessee situation is quite interesting. On May 3, 2007, that State’s Real Estate Commission, presumably under pressure from the US Department of Justice, formally eliminated their earlier ban on rebates. Less than a month later, however, the Governor signed a law reinstating that ban.

Currently, only a handful of States do not allow rebates to be given to the home-buying consumer. There are no such prohibitions, however, in Maryland, Virginia and the District of Columbia.

As reported by the joint FTC/DOJ report, there is a trend in real estate toward “nontraditional brokerage services, and indeed in this Washington metropolitan area, a number of “rebate companies” have come on the scene. They vary in approach, and offer different forms and amounts of cash rebates.

If you are a potential homebuyer, it obviously is enticing when a real estate agent says “let me be your buyer broker, and I will give you a percentage of my commission when you buy your house.”

But you should not stop there. You should shop around and talk with a number of brokers. What experience do they have – and are they familiar with the neighborhoods you are interested in? And you should also consider whether you really need an agent at all. If you have access to a computer, houses – including condominiums and cooperative apartments – can be found on numerous local websites, including interactive photos of the entire house and its surrounding areas.

You can also do comparative price-shopping online. Many local jurisdictions list recent home sales on their websites. Zillow.com attempts to give what they call “zestimates” of market price on homes throughout the country.

Real estate has moved into the 21st century. While “caveat emptor” – let the buyer beware – may still be the rule of law in some states, the home-buying consumer now has the tools to make educated decisions – ranging from whether to use a real estate broker, to the kinds of mortgage loans they want to obtain.

Encouraging competition cannot only be accomplished through legislation. A smart, enlightened consumer is yet another important component in this equation