Charleston South Carolina Real Estate

It is really a rebate, a kick back, or a gift?

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Rebate is from14th century English, in effect, to deduct. Re-bate is to “un-deduct” - or, simply, give back.  Now by this definition, and the usual concept of rebate we all well understand, the person who paid should also be the one to get any rebate - if a rebate were given. Right?  Hummm. Not so when we are talking about home rebates.

Before we talk about the intricacies of getting a rebate, it's helpful to understand the context within which rebating occurs.  So let’s talk rebates. In its simplest form, we all understand the concept of a rebate. Rebates have been around for a very long time and have proven to be a popular, effective marketing tool for businesses. Today, businesses use rebates in selling health and beauty aids, household supplies, cars, appliances, computers and even wine.  They are used to create brand awareness and loyalty and to help manage the production pipeline. Rebates are also used by governmental bodies for tax relief and for fiscal stimulus. And, they serve to build political good will with the happily taxed public.

Whether as a marketing tool or a governmental convention, the rebate is traditionally the return of money paid. With government rebates, they may even pay money out to people who did not pay anything to begin with.

Let’s consider rebates on homes in light of what we already know about the rebates. I want to focus on rebates to buyers (rebates to sellers exist, too). In some ways, the term “rebate”, when you're talking about homes, is a misnomer. The function and structure deviate from your run of the mill rebate with which we are accustomed. Like some government rebates, home rebate money gets paid in the form of a cash given to someone who never paid money into the deal in the first place.

Allow me to clarify that claim. When you buy a home, there is a complex exchange of funds, usually orchestrated by a closing attorney, who summarizes the transaction on a standard closing statement (HUD 1). The document records who paid how much and to whom. It clearly states that the agent or agents, if any, received a commission for their participation.

If two agents are involved, you often (not always) see that the total commission paid by the seller is split 50/50. If there is just a listing agent involved and no selling agent, the listing agent usually earns the full 100%. The commission is almost always paid 100% by the seller.

Here is how the home rebate happens:

The seller pays the listing agent a commission at closing. The listing agent pays a portion, typically half, to the agent representing the buyer as their compensation.  The agent for the buyer then pays the buyer, the agent’s client, a portion of those commission earnings. So the buyer gets paid a “rebate” but did not pay into the deal. In this situation there is no “re” in rebate. The buyer is paid cash at closing earned by another party in a transaction.

Of course the buyer did “pay” … exchange money for a home. The money for the purchase went to the cost of the home - not to paying the agents. The home seller paid the agents - out of the proceeds from the sale (out of equity if any). Thus, if there had been no buyer’s agent commission (the buyer did not have their own agent), the buyer would not get any money.

The rebate money to the buyer flows from his/her agent not from the seller because, at the instant of sale, the seller compensates the listing agent for services rendered. Next, the listing agent pays the buyer’s agent. The buyer’s agent then pays the buyer. This is one reason there were objections to rebates on the basis that they are actually illegal kickbacks.

Frankly, I think “kickback” far better defines the transaction than “rebate”. “Rebate” seems more palatable and less threatening and certainly sounds more legal. “Kickback” just sounds unscrupulous.  (big corporations pay kickbacks, politicians get kickbacks, etc). So we've adopted the friendly term “rebate” to describe this transaction.  But, if it looks like a duck, walks and sounds like a duck, it might just be a duck.

Is this good for the consumer? There are many examples of potential problems when money is given in exchange for business. For instance, what if the agent just donated money to a lender on behalf of  a buyer so they might qualify for a loan in exchange for the business? Clearly, that would present big legal problems for everyone involved. Somehow, the rebate is "OK" but the other inducement is not. Would there be a problem if  your doctor rebated to you a portion of what he or she got paid by you or by your insurance company? It sounds problematic to me. Is it OK for your financial planner or stock broker to rebate a portion of their commission? No - not unless you both want to go to jail.

Rebates represent just one more business model in a complex business. Still, I am not sure why rebates are permitted in light of what actually takes place during the transaction. They are clearly kick-backs of commission used to induce consumers to buy. They are not a "return" of money to the buyer that the buyer paid in - rather, they are a direct payment to the buyer of funds earned by a third party. 

Chris DeLoach, ABR

Charleston Real Estate

Published Tuesday, November 18, 2008 11:55 AM by Chris DeLoach, ABR, SFR, BIC