2 Deal Negotiation Questions

1) I believe that NYS law allows buyer to receive a credit at closing either in the form of a lower sales price or brokerage commission rebate. Brokerage firm may not allow such rebates so lower price may be only option. Need to ask an accountant but rebate of commission may need to be deducted from cost basis for capital gains tax.

2) No way Board would agree to this especially in writing. Only option is to require seller to get approval prior to closing. Of course, Board will probably see this language in contract and let you know that such approval does not automatically transfer to you.

Both 1 and 2 are asking a lot so hope you have some leverage. In my experience, sellers generally look to work with easier buyers.

Well #1 doesn't affect the seller at all, only the listing agent. And in terms of leverage, I am an all cash buyer.

I am an NYS licensed real estate broker.

The problem with 1) is that you're assuming that the real estate contract has one commission, which is equivalent if the deal is cobrokered or not. However, many seller's agents use step commissions, so there's one commission if the deal is cobrokered and a different commission if it is not. So you'd need to check on each listing that you're interested in bidding on, and see what the commissions are on each one.
I agree completely with Ximon's answer on #2. In practice, you should just skip over those listings.

ali r.

Among the reasons a Board wants to approve all requests for adding a washer/dryer are: 1) they need to review plans and specs to insure proper electric, drainage and/or ventilation and 2) the building may have a practical capacity - i.e. adequate drainage - on the total # of washers/dryers it can safely handle.

Thanks for your responses.

Front_porch: I understand your point about the commission. As someone who doesn't have access to MLS, how would I go about knowing what the commission agreement is for a specific listing?

Ximon: Yes, I am aware. I guess my question is why couldn't a board approve all of these details before a closing if the necessary plans were provided? It seems crazy for me to "pass" on an apartment when the board would end up approving the W/D a week or two after closing. Thanks again.

Very unlikely a co op board would approve any alterations until you have submitted a full alteration plan (drawn up by an architect) for the proposed renovation. You cannot make board approval of W/D a condition of your contract as the board wouldn't even look at any alteration plan until after you've already closed on the apartment.

I agree with the other posters that if W/D is a must-have you should find an apartment that already includes it. Keep in mind that past approvals do NOT guarantee similar alterations will be approved in the future. Boards change, policies change.

Nycbuyer, The selling broker does not negotiate commission with buyer - just the seller. As Ali mentioned, their contract already may has provision for lower commission charged to the seller for a direct buyer which means there is nothing to negotiate for you. You can always work with a broker who offers rebate as in Keith Burkhardt. That way you are guaranteed that you will get some discount from the seller’s commission.

I'm not sure why you would care what commission the broker receives more than getting the price you want? Which would you rather have: a $1,000,000 contract price with a $30,000 rebate, or a $950,000 contract price and no rebate?
As far as getting a rebate, it probably should be legal, but as a buyer (who is not licensed) I don't think that you can make it a requirement for submitting an offer (although I'm not sure of that because I think the law allows YOUR broker to give you a rebate, but I'm not sure the seller's broker can, as opposed to just lowering the commission payable by the seller).

Nycbuyer; unfortunately you won't be able to get the board approval on the washer dryer until after you close.

As 30 said, just negotiate the best price you can. A number that you feel is fair and are comfortable paying. Market is currently fairly robust with most properties receiving multiple interest, meaning a listing agent isn't going to have to get creative with the commission to get a deal done. Asking for a discount from the listing agent after you've had an offer accepted is very unlikely in my opinion.

Keith Burkhardt

I think nycbuyer20 wants to make sure seller knows he is unrepresented and therefore commission to listing agent should reflect a discount that results in same net sales price to seller. I am not opposed to such a strategy but agree it's not easy in practice to do for reasons noted above. I am curious if such an offer - price plus sales commission contingencies - would be passed on to seller?

When we were purchasing as unrepresented buyers we put in our offer (which was low but not disrespectful) and made it clear to the selling agent that we wanted the deal done at that number, reminding them that there would be no split commission. The selling agent shaved a few points on her commission to make the deal happen at our number. IMO this is the best way to game that particular system.

That's reasonable, Squid but what if listing agent doesn't want to do that? Was your offer, including commission contingency, related to seller?

A) I agree with squid, and
B) I honestly don't know whether the seller's broker is required to communicate such an offer. While they are certainly required to communicate the purchase price being offered, as well as terms such as closing date, financing, Etc. There is no Commission agreement between the buyer and the broker so I am not sure they have privity to make such a demand.

>>>Was your offer, including commission contingency, related to seller?<<

Not as far as I am aware. As 30yrs points out, commission agreement is between seller and selling agent and has nothing to do with the buyer. We put in our offer, which the buyer thought was too low. We stood firm on our offer. The selling agent chose to shave off some of her commission to make the deal happen. She would have taken home less had there been a buy-side agent so there was incentive on her part to take the haircut.

If I found an apartment I liked and everything else worked, price, size, location, etc. I wouldn't let a W/D stand in the way. If you are looking at doorman buildings, there's nothing better than dropping your laundry bag off in the morning with the doorman and picking it up from the doorman, all washed and folded, on your way in in the evening. Just sayin'.

NYC buyer20, if you are curious about commission. You'll have to ask each individual listing agent. Even if you had access to the computer database many brokers use -- the REBNY Listing System -- it only lists the commission schedule if the deal is co-brokered. The commission schedule if the deal isn't co-brokered isn't listed in it.

also, FWIW, Keith and I are reading this market differently. I think it's soft, especially in the $1mm-$2mm price range.

While I do not many data points, two of my friends bought coops in 1.7-2.5mm range recently and both had to bid above ask due to a lack of supply for good coops. One of them even needs a lot of work. High end above $4mm is indeed slower but I saw an apartment in a building I know well go into contract within 2 weeks around $4mm, $1600 per square ft range.

We're definitely not seeing a soft Market in the 122 million-dollar range especially in Brooklyn. Every deal in that price point is gone into best and highest after the first open house. 135 Eastern Parkway was the latest. Above 3 million we're seeing it as a bit sluggish, however the best properties are still selling.

And I'm not one to talk up the market. We prefer a flat to even slightly declining Market. It's much easier for our clients to get deals done at attractive price points without lots of competition. Christian who works with me recently commented he felt this Market was a lot like 2014. I don't think it's quite that intense but it's been pretty close.

You can look at our website for a recent list of transactions. Everyone was a battle. The majority of our own listings have all sold fairly quickly, in most cases after the first or second open house.

That's just been our experience.

Keith Burkhardt

1-2 m range....

^^ Sorry let me clarify that "$1-2mm is slow" observation -- I'm talking Manhattan here. I agree Brooklyn is on fire.

But I can think of a handful of properties on the Upper West that I think are decently priced (or not far off) that continue to sit. I can also think of properties that are overpriced, that have been for months, and sellers aren't getting the memo.

And I'm out with buyers that are looking Downtown but not exclusively, and pretty much things they don't grab are around the next week for them to continue thinking about.

Since we are talking about rebates, I thought I would mention that I did a loan for someone who got my name from this thread, it was a purchase. I was very surprised to see that the buyer broker also on this thread meaning the Streeteasy thread did not have the rebate listed on the closing disclosure which used to be known as the HUD-1 statement. This is very erroneous. At minimum if the buyer is audited the IRS will hold the buyer responsible for the taxes on the rebate. All financial transactions must be listed on the closing disclosure. It 's also a RESPA violation and therefore it misleads lenders as far as underwriting and approval is concerned.

Yes, streetsmart. One might choose their poison but I think you either have to pay tax on 1) the commission rebate as regular income or 2) in the form of higher capital gains when you sell if the rebate is a credit to sales price. Love to hear from an accountant on this.

Sounds a little silly but I even wonder if a Coop Board might reject a buyer if the rebate is structured as a credit to price.

The IRS has ruled that rebates are considered an adjustment to price, there's no tax reporting or taxes to be paid on the rebate.

REBATE OF COMMISSIONS

A recent IRS private letter ruling and court case dealt with the issue of the taxabillity of rebates of commissions. In a recent IRS private letter ruling 200721013(2007) the real estate agent would rebate commissions in one of two ways (1) after closing, the cash and loan proceeds are distributed to the seller and the agents, and after the purchasers agent receives the agreement or (2) the purchaser receives a credit at closing in the amount equal to the amount of commisssion the purchasers agent agreed to rebate to the purchaser. The IRS ruled that a payment or credit from the purchasers agent to the purchaser (i.e. a rebate) represents an adjustment to the purchase price of the home and generally is not includable in the purchasers gross income. The IRS also ruled that the agent did not have to issue a 1099 to the purchaser even if the rebate was more than $600.

In the case of Robert E. Corrigan v. Commissioner TC Memo. 2005-119, May 23, 2005 the taxpayer was a stockbroker. The taxpayer paid the brokerage commission rebates to a client while he was employed by a brokerage firm. The taxpayer reduced the gross income he received from the brokerage firm by the amounts he "rebated" to the client. The court ruled the rebates were not excludable from the taxpayers gross income but that they were deductible as itemized deductions as an unreimbursed business expense.

And you can clearly see here that's a Department of Justice looks very favorably upon real estate brokers providing commission rebates:

https://www.justice.gov/atr/rebates-make-buying-home-less-expensive

Keith

Extremely interesting, Keith. Would this IRS treatment apply when the rebate is paid to a licensed broker acting as buyer?

Also very interesting that ten states currently have laws that ban rebates. Could this be considered restraint of trade or anti-consumer protection? I love the quote from a Kentucky broker “If inducements were allowed, they could lead to competitive behavior". God forbid!

Keith, no one is saying that you can't pay the rebate after closing or that it is part of a purchaser's income. However the first case you cite it says the purchaser receives a credit at closing. This to me means it's on the closing statement. It also says after closing the cash and loan proceeds are distributed to seller (and others). This has to mean that the seller (and others) receives his money the same day, after the closing docs are executed.
The second example you cite is for a broker reporting.

I have no idea why a broker would not want to protect himself by having this info disclosed on the LE. It's no big deal. Not disclosing this as I indicated is a violation of RESPA and it's also mortgage fraud. Since 2007 we have had the financial crisis. A lender needs to know this information. Co-op boards have a right to know this too.

I agree with streetsmart on this one.

"two of my friends bought coops in 1.7-2.5mm range recently and both had to bid above ask due to a lack of supply for good coops. "

The problem I have with using this as a metric is as follows:
Someone looks at 40 apartments, finds the 1 out of 40 which is underpriced and decides that's the one they want to make it offer on. Well, that's the one that just about everybody else is also going to be making an offer on. So having a bunch of deals being done at or above ask isn't relevant if it doesn't include a comparison to the number of apartments on the market where deals are not being done. Or if someone else decided a different approach - only submitting low offers on apartments which were overpriced because the odds of them bidding against someone else on such Apartments is very small. So, just knowing that there are deals being done, with multiple offers, at or above asking price, doesn't tell you all that much with seeing the bigger picture.

30, What are you saying about 2 deals not making the market is true. However, I would not have thought that there will be a bidding war looking at the price and the work needed. But the open house was flooded. Naturally, the market thought differently. One was upper east side coop east of 3rd at 1200 per square ft needing a lot of work but not a gut with good light but no view.

Is shopping for an apt. that needs a lot of work a possible sign that many buyers are re-focusing on cheaper alternatives to buying new builds?

I think there are many people who just can not afford condos and min 15-20 percent premium for them vs substantially similar coop. They are forced to look at only coops. Another way to say is that low/mid end of the market has a strong bid as there is no new supply in this segment and that is what people can afford for the space they need. Will they move 10 percent higher? May be. 20 percent higher, people will get priced out again. I still see new high-end condos not moving. Interest rates have crept up. Any further will impact the market.

Just curious street-smart which apartment were you acting as the mortgage broker on, I don't recall working with you? I would have said hello. That said we do disclose to the bank that we're providing a rebate to the purchaser POC. I'm not sure why they would choose not to put it on the disclosure form. Because of how well-funded purchasers are, all are putting down a minimum of 20%, no FHA, all the banks we've worked with have had no issue with the rebate.

Banks care about seller rebate so that purchase price is not inflated but not about broker rebating their commission. I have never heard of any mortgage related requirements to disclose broker rebates but would love to see a link to rule which requires as such so that I can get educated.

Respa is for consumer protection to disclose various fees paid by the consumer/buyer and charged by lender and related parties rather than preventing consumer from getting a better deal. Very easy to throw around acronyms.

Would love to see some rules which makes commission rebate by buying broker to buyer without disclosure mortgage fraud.

As far as why the interest in wrecks, possibly anxiety and trepidation about the market leading to people deluding themselves that they are somehow "creating value". In this case people deluding themselves that they are "Developers" and that the value of the apartment will end up being much greater than purchase price plus renovation cost. The delusion is usually a combination of under estimating the cost of the renovation (including cost to carry the unit during renovation, cost to live somewhere else while it is being done and the value of the time/aggravation that you have to deal with) and overestimating the value of the finished product.
Similar delusions occur when people purchase a unit with extremely high maintenance and do a straight mathematical calculation of the discount they should be getting but failed to factor in the negative premium involved.
This also happens with location. People by outside of the location they originally intended to, and convince themselves that they are getting a bargain when in fact they aren't getting enough of a discount for the sub-par location. Currently I think we are seeing a number of locations that are trading at an insufficient discount to Prime locations, for example Essex Crossing.

Before talking about mortgage fraud I simply said that unless the rebate is disclosed on the closing disclosure which was once the HUD- 1 statement, the purchaser could well be responsible to pay taxes on the rebate he received. If it is disclosed on the closing disclosure then it's not taxable.
The case Keith mentioned only addresses whether the rebate is taxable, not about whether the rebate appeared on the HUD-1, but in reading it, it seems that it is assumed that the rebate appeared on the HUD-1.

Keith, in my statement I said that the broker was on the Streeteasy thread, not on this immediate thread, meaning I did not want to imply that you were the broker which you were not, so sorry for the confusion.

@300

If is an unequivocal fact that it is a violation of the DOJ and of HUD If a rebate is not indicated on the closing disclosure. For whatever reason, it is the law.
If you would love to see some rules, pertaining to mortgage fraud, you can find it by doing a google search.

a300, have you ever undergone a banking audit lately.

Would love to see a link to the rule regarding "buyer's broker rebate" related to mortgage fraud. I have seen rules about seller rebates and appraisal issues which may inflate apartment price but not buyer's broker rebate.

I have heard that many old timers try to scare consumer by saying that buyer broker rebates are questinable. First they used to say it is illegal but NYS Attorney General clarified that. Now people talk about mortgage fraud if buying broker rebate is not disclosed on the closing statement - that is a new one. I would love to see a link to the law which says so. For IRS purposes, buyer’s broker rebate does not have to be closing statement to be cost basis adjustment. At the end the day, it is about consumer choices.

I have gotten buying brokers rebate in several transactions and deposited my checks with the lending bank who did not care about the rebate being on the closing statement. They do care about seller’s rebates.

I don't think that broker rebates will cause the next housing recession. Rather, the issue seems more to do with consumer protection, consumer options, fair dealing and transparency. The quotes from brokers in the article posted by Keith are truly embarrassing. Equally embarrassing is that elected officials in 10 states succumbed to such pressure from the brokerage industry.

Ximon I've been interviewed twice by antitrust attorneys at the New York attorney general's office. I can tell you they're very concerned about the practices of real estate brokerages. Although you can imagine I was quite alarmed when I received a voicemail from their office! However it was because someone alerted them about my company and they wanted to make sure that I wasn't being interfered with by other firms or brokers. There were some very interesting conversations that took place. The Attorneys were very thoughtful and very concerned about the protection of consumers rights in New York state and they were taking their lead from the Department of Justice.

Keith

Keith,
Where you ever able to get the stain removed from your pants from after receiving that voicemail message from AG's office? LOL

@30....no (:

Hi nycbuyer20: I am in the market for a small apt, and wondering if I should hire a broker or not (I do have a very good lawyer though). How is your experience as a self represented buyer? Do you mind share?