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Might Redfin Find Itself In Trouble with Redfinnians?

kaz_stewie2sadf.jpgI often swing by the Redfin site for a quick browse. The site itself is a suite of rich color (Google map colors), fun text (you maven, you), and simple navigation. Honestly, the site has managed to bring itself forward into conversational sweetness, the same way it made its search functionality into an offer making meaty goodness machine. I give many nods to Matt Goyer & the team at Redfin for their willingness to humanize their site and realize their market cannot just be techs excited about the use of Ajax. I mean, come on; most home buyers and sellers simply know a pretty site when they see one, and will certainly manage to find their way into a forum that directly answers their question- congrats on the forum success!

Again, I like to think of the Redfin site as an inspirational tool, I really do enjoy the permission I get when reading how they engage their consumer- use of PDFs, Images, incredibly fantastic use of copy, as well as the video? Video? I admit it’s been a month or so since I’ve really looked at the buy page, but this morning, I saw the video… As I sipped my cafe con leche, I watched this crazy insane video of baked to golden brown real estate perfection, admiring the imagery, use of human hands atop the drawn images, the marketing, the lay out, as well as the pace of the video- it was a marvel… until…

Now, maybe its just me, and my lack of IRS skillz (yes, with a z)- but it seemed to me that I may have witnessed a huge… I’ll just call it a mistake and offer the benefit of the doubt. What is the alledged mistake? Well, I am so glad you asked- Redfin promises its usual 2/3 rebate on a $500,000 house- this is utterly warm and toasty for the wallets of would-be Redfinnians. But the part that flew by at the speed of light was the part where the narrator says in regards to the rebate, “it’s tax FREE”. Whoa, it is? What!? I mean, unless Redfin is picking up the tax tab on the ten grand out of their five grand? Wow! Wouldn’t that be ubberly brilliant for the consumer! Way to go Red… wait, I smell a to good to be true.

I am updating this post because I found the IRS ruling regarding rebates or refunds at settlement to a Redfin client. Redfindid file with the IRS and request information regarding information and claims it feels the reply from the IRS was unambiguous to state that a rebate and or refund was not taxable income, however, this is one client and leads to this larger issue:

From Redfin: “Because you can only petition the IRS on your own behalf, not that of others, we could not ask the IRS to rule on the tax situation of each of our clients, only on whether we were obligated to report our refund as income. The IRS was also careful to say that a ruling on Redfin’s commission refund could not be used as a precedent for other brokerage’s commission refunds (though we don’t see why not).”

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The mistake I was referring to in the video is simple, we are not in the business to practice law, or IRS policy, why would we ever state that something is tax free if we cannot guarantee that it is completely. My point is simply that it is dangerous to promise something that is absolutely out of our control. The quote above only makes my point- seek the advice of a tax professional- and in most cases, I would imagine your CPA will suggest you account for it and allow the IRS to sort out the details.

Benn Rosales is the Founder and CEO of The American Genius (AG), national news network. Before AG, he founded one of the first digital media strategy firms in the nation has received the Statesman Texas Social Media Award and is an Inman Innovator Award winner. He has consulted for numerous startups (both early- and late-stage), and is well known for organizing the digital community through popular offline events. He does not venture into the spotlight often, rather he believes his biggest accomplishments are the talent he recruits and develops, so he gives all credit to those he's empowered.

13 Comments

13 Comments

  1. Joe Zekas

    November 24, 2007 at 10:31 pm

    I’m willing to bet that Redfin consulted a knowledgeable tax attorney before making its claim. Have you?

    It’s grossly irresponsible for you to take this position. The IRS position is that a cash rebate of this sort is a reduction in the purchase price, not income.

    Have you ever received a cash rebate when purchasing a car? Did you declare it as income?

  2. Benn Rosales

    November 25, 2007 at 12:09 am

    Actually, yes. According to our CPA who is also an attorney states simply that it is not up to us to decide what is or is not in a clients’ best interest- declare or not to declare– none the less, any rebate I receive comes off of the sales price, not into my wallet. I know better than to finance a gimmick.

    In saying that, and to use your word- the most responsible thing to do is to council the client that we are not tax attorneys and to see proper council- like, with your cpa? Like I said in the piece, someones going to have to account for that money.

  3. Teresa Boardman

    November 25, 2007 at 6:37 am

    In Minnesota REALTORS can not legally give tax advice. I suppose some do but I wouldn’t. It all sounds a bit messy to me.

  4. Benn Rosales

    November 25, 2007 at 9:33 am

    Teresa, same here, or legal advice. Which is why to say ‘tax free” implies fact, and I am not sure (which I stated in my article) if fact has been established. I noticed the words reduction of sales price and that is not actually what happens when a cash rebate is given to the buyer. Wouldn’t that only be the case if an actual principal payment was made. The IRS could argue that because the loan value was the sales price that the consumer did benefit as income.

    I think this is important because I would imagine a very large percentage of Realtors actually do rebate (when it’s a must do thing at least), the question is, do we 1099 or just pretend the money never was disbursed to us? I’m not paying tax on it.

  5. Vicki Moore

    November 25, 2007 at 4:02 pm

    Grossly irresponsible? I don’t think so. Sounds like a well thought out and educated assessment. Redfin is antagonizing and demeaning its competitors who are an integral part of their business plan.

    Because Redfin doesn’t have a local army of agents, they rely on the politeness or stupidity – take your pick – of other agents to open the door for their “clients” to view properties.

    Their “clients” are oftentimes solely reliant on – as Redfin intimates – those greedy, unethical agents to provide access to homes, and of course ask any questions they like creating what? Creating agency and liability. Redfin agents are typically not local. They’re relying on my local expertise to get them and their client through the deal.

  6. Mariana

    November 25, 2007 at 4:46 pm

    Their video was very nice to watch, but they DO make some blanket statements that may end them in deep doo dood IMHO.
    First they say that the average agent pockets 3%. Um, no. Personally, no matter how tight I run my business, I rarely “pocket” anywhere close to 3%.
    Next, the 2/3 rebate is AFTER the closing? Is it on the HUD? If not, that is against RESPA, right?
    Finally, the tax comments are irresponsible. I know enough about tax law and IRS stuff to know that a real estate company should never make tax comments … especially ones that could potentially HARM the buyer.
    Thank you for bringing this to my atttention, Benn.

  7. (EX) Redfin Employee

    November 26, 2007 at 1:41 pm

    I used to work at Redfin. The way the rebate tax works is that Redfin is required to obtain a W9 from the buyer at the end of the transaction because the refund check is cut on a Redfin checking account check. Redfin began to market the refund as tax free after a ruling from the IRS and DOJ that stated that a company acting such as Redfin does may say it is tax free because it is not up to the company to ensure the client is claiming the funds. By obtaining a W9 Redfin has completed their obligations. It is up for the customer to decide whether or not they wish to claim the money as income. I’ve always thought it was odd since we collected W9s. Technically speaking if Redfin was to go through and audit and have a refund check tracked, wouldnt the customer be put at risk for an audit of how they handled the funds? Not quite sure on that note, but the above explanation is for why they can say it’s tax free…or at least how it was explained to me when I was working there in Seattle.

  8. Benn Rosales

    November 26, 2007 at 1:51 pm

    EX, basically, yes. That’s exactly my point. According to my cpa, whether the Broker sends out a 1099 is exactly what is answered in the letter from the irs, Redfin does not have to. So what would happen in an audit of Redfin- it would trail to the buyers. The buyers may then at that point be looked at thru the audit lens- that is how I cannot understand how it is tax free… to fully disclose, when speaking to my Cpa we were nott speaking about Redfin, we were speaking about our own business. Redfin is not the only rebating business in real estate. We simply have taken the measure of advising our clients to see their CPA in relations of how to treat their refund. Now, if Redfin has the magic answer, we’d like to know, I didn’t write this to throw Redfin under the bus- it is tax time and I think in the interest of transparency, we should be honest with consumers. They should be asking questions, don’t you think?

  9. (EX) Redfin Employee

    November 26, 2007 at 5:21 pm

    I do agree.

    I don’t think that marketing money as being ‘free’ when there are (dire) consequences for not handling the money properly is more than mis-leading. Especially when the company fully discloses that a good portion of its customer base are First Time Home Buyers. I think its comical that Redfin spends ad $ on these videos that hand hold through their process but mentions on the sly that while they say the rebate is ‘tax-free’ you should absolutely talk to your financial adviser to be sure.

    To me it always seemed like the IRS said, Redfin- it would be a great marketing play to use our ruling that its not your responsibility to make sure your customers are taxed on this rebate to attract more customers.

    Just so long as the 2 point asterisked disclosure is included.

    Bottom line, if you want to take the risk you dont claim their rebate on your income tax. If you dont want the risk, you’ll need to claim it. However, in the end you still are getting a sweet check at the end of your transaction, if you also took the risk to use a (possibly) inexperienced agent.

  10. Athol Kay

    November 26, 2007 at 9:31 pm

    “On the HUD-1, or it shouldn’t be done.”

    That way everything is simply applied against the buyers basis in the house, no different that if the seller pays the buyers closing costs.

    If the buyer walks away with cash at the closing, that’s no different than a mail in rebate on a TV. It’s not a form of income. Though as I say, everything should be on the HUD-1, and happen “on the table” at the closing. Not after the closing as a seperate transaction.

  11. (EX) Redfin Employee

    November 26, 2007 at 11:16 pm

    It is on the HUD 1. There is an amendment with the credit to the buyer (towards allowable closing costs and pre-paids)that is sent to the closing company.

  12. Glenn Kelman

    November 27, 2007 at 11:18 am

    I am not sure if your praise of Redfin is sincere, but thanks all the same.

    The Department of Justice has never ruled on the taxability of refunds.

    The IRS ruling is clear that a Redfin refund is not taxable as income; we cannot be involved in the individual tax returns of each client. I am not sure what more we could do to give our clients guidance on the taxability of their refunds, as the IRS ruling was the most definitive type of ruling that the IRS makes, one based not only on precedent but one that specifically evaluated Redfin’s business and its clients. According to our lawyers, there is no further action that it would be possible for us to take in this area.

    More than 1,000 of our clients have received a commission refund. None has ever paid taxes on that refund. Our average commission refund when we last measured it earlier this year, after one year of operations, was 1.952% of the purchase price, so it seemed fair to tell clients they could usually expect to get around 2% of the purchase price refunded at closing. If we could, we would tell clients the actual commission on each property along with all the other listing details. Most MLSs don’t allow this. Instead, it is our policy to inform every client as soon as we engage that client what the listing’s actual commission is.

    Our objective in explaining our service is to be simple; of course this involves making claims, but we try to base them on what has happened in the past or in this case on clear legal rulings. The objective of some critics seems to be to be complex, to create fear or uncertainty among potential clients, even in cases where there is none.

    Out of curiosity, who is the former Redfin employee? Is there any reason to be anonymous?

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