Buyers Cash Back Explained

You may have heard of realtors offering a cash back, in this short blog we will explain what it is, and how it works.

What is a cash back?

Cash back for buyers is an incentive offered by the real estate agents for their buyers. In a typical real estate transaction the sellers signs a contract with the listing agent, in the contract one of the items outlined is a commission, part of the commission is received by the listing agent (agent representing the seller), and part of the commission is paid to the buyer agent. Typically, the total commission on the sale of the residential real estate property in Ontario is 5%, of which the listing agent receives 2.5% and the buying agent receives 2.5%.

Cash back is simply a rebate of the portion of the commission earned by the buyer agent paid to the buyers.

How much can I expect to receive in the form of the cash back?

That will depend on the agreement you have with your agent, the amounts can vary drastically, in some cases the amounts are small, in others quite significant. In many cases the cash back rebates are calculated as a percentage of the commission received by the buying agents, in other cases it is a set amount.

Do all agents offer cash back?

No, many agents do not offer any rebates.

Are agents offering cash back rebates not as good as the agents who don’t offer any rebates?

In principle there should be no difference, and in practice there is no difference as we explain below, this is simply because being a full fee agent doesn’t guarantee high quality, and being a cash back agent doesn’t guarantee inferior services. We ourselves offer full services with our cash back, have dealt with many agents, and have found that there are great full fee agents and cash back agents, and there are terrible full fee agents and cash back agents. Simply put offering a rebate doesn’t determine the quality. You will find rebates offered by many well established brands in the form of cash back, mail in rebates, discounts, limited time offers, price reductions, coupons, promotions, and the list goes on, in simple terms where there is a competition there will be incentives to entice the clients. In the GTA the competition among the realtors is fierce hence some agents offer cash back, in other, smaller markets where the competition is not as fierce the rebates are not common at all.

What services do cash back agents offer?

It depends, some offer full services no different from a full fee agents, others reduce their offerings, limit the advice, limit the number of showings and so on. The bottom line is you have choices, highest rebate is often not the best option since you don’t get full services, and most people look for a combination of experience, quality, full services and a reasonable rebate.

How to ensure I get my cash back?

Simply put get it in writing, make sure you understand the details of the cash back rebate and sign a contract. Do not relay on a verbal agreement or a promise, keep copies of emails, texts and insist on written contract.

When will I receive my cash back?

The cash back will be paid after the transaction closes. Some buyers hope they will be able to use the funds for the down payment or lawyer fees but that’s not the case, you will not be getting the cash back on the closing day. Typically, you will receive it within few weeks after the transaction closes, it takes some time for the funds to be disbursed by the lawyers, the payment must first be received by the brokerage since the lawyers will never pay directly to the agent, the brokerage will process the documents and issue the payment to the agent shortly after, in most cases our buyers receive funds in around 2-3 weeks after the closing.

Who is paying the cash back, the brokerage or the agent?

It depends on the brokerage, some pay the cash back directly to the buyers, others pay the full net commission to the agent who in turn pays the agreed cash back amount to the buyers. In our case our brokerage issues the wire payment to us for the full amount of net commission, once we get paid, we issue the bank draft to the buyer.

What about the cash back if I am selling my property?

When you are selling your property, it doesn’t make sense to pay the commission and then get it back, it’s much better to negotiate the lower commission rate to begin with instead of cash back. In general the cash back situation applies only to buyers and their agent, not the seller.

Is cash back a taxable income?

No, it’s not as long as you are purchasing a principal residence. The commission cash back is no different than receiving a mail in rebate, cash back from a credit card, loyalty rewards, travel points, none of them are taxable incomes and are considered discounts. Banks have been offering cash back mortgages for decades and these were never taxed in the hands of the person receiving the rebate.

With that said there are some agents and brokerages that incorrectly claim that this is an income and want to issue a T4A to the buyer. Before you sign anything check with the agent to confirm they are treating the cash back correctly and no T4A slip will be issued.

What about the cash back on investment property?

If you are purchasing an investment property, or any property that will trigger a capital gain or income, the cash back will affect the adjusted cost base of the property. For example, if the total cost of the property including all fees was $500,000, and you received a cash back of $5,000, the final adjusted cost base will be $495,000. When buying the principal residence the cash back also reduces the ACB, but since the principal residence is exempt from capital gains when sold the calculation is meaningless.

We hope we have been able to clarify how the cash back for buyers works, if you have further questions please let us know.