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Buyer rebates. Good business or potential fraud?

On Friday, I had written a post, that facilitated quite a discussion about our commissions and how we justify what we charge. If you read my post and the 110+ comments, it generated, you saw that the consumer, Mr. CandiBags showed up. He asked a pretty good question, that I would like to expand upon here.

How do you feel about Buyer's Agents rebating a portion of their commission to the Buyer? Well my immediate answer was that I could not care less. I am a listing side Realtor and it does not effect me at all. But then I started thinking about it. My new questions are:

How is a Buyer's rebate handled without it becoming mortgage fraud?
What do you do if the rebate is not allowed by the Lender?
When and how do you disclose this rebate?
Is this rebate credited on the HUD-1 statement at closing or do you cut a separate check after closing?
How can companies like Zip Realty, that offer rebates, overcome the legal ramifications?
What do you do if you got the Buyer's business, by the promise of a rebate, only to find the Lender will not allow it?

In Florida the law states: According to Florida Administrative Code rule 61J2-10.028(2), the sharing of brokerage compensation by a licensee with a party to the real estate transaction with full disclosure to all interested parties is not considered a violation of Chapter 475, Part I, Florida Statutes

What does your State's laws say about this?

One more thing, as a Realtor working for the Seller, if I receive an offer for my listing and there is a disclosure stating the Buyer is going to get a rebate, should I know the amount of the rebate and make sure, the rebate plus any Seller concessions, that the Buyer may be asking for, do not exceed the maximum amount allowed by the Lender i.e. 3% or 6%. And, should I make sure that any rebate is fully disclosed on the HUD-1 statement? If not, could we, inadvertently, be involving our Seller in a fraudulent transaction?

Buyer rebates. Good business or potential for fraud?

Posted by Bryant Tutas Broker/REALTOR(R) Tutas Towne Realty, Inc on 11/12/2006 03:39 PM

Comments (140)

buyer rebates, mortgage fraud, opinion, educational

140 Comments on Buyer rebates. Good business or potential fraud?

NOV

2006

"The Lovely Wife Here"

These are excellent questions that need answers...

When I hear the word "rebate" I think FRAUD...

I wonder if any of the AR Lawyers will step up...

They are here and they are very quiet...What's with that anyway?

TLW "The Lovely Wife"...Looking For A Lawyer...ROAR!

Interesting questions. As you stated, here in Florida it's ok to rebate as long as it's disclosed in the contract. As to the lender, that would be something for both sides to know prior to contract acceptance. And yes, definitely it would need to be on the HUD.

Speaking of HUDs, I wonder when having buyers' and sellers' signatures on the first page of the HUD will be required????

I do not have a probelm if someone else wants to give away services, but you do ask good questions. If they pay after the closing aren't they paying a commission to a non-licensed person?

Very interesting questions! Good points to ponder!

BB, you make me think on a Sunday night; not sure how I feel about that; but the topic makes me do it! I do not use Exclusive Buyer Agency, which means they can walk away from me at any time, which they usually don't so I don't worry about it. It also means they are already not beholding to me for commission. Second point. If they are looking for a rebate, it's going to have to be in the form of a closing assistance from the Seller: closing costs or downpayment; it will always be on my contract and disclosed to the mortgage company. In fact, I check with the mortgage company because sometimes it has to have specific wording to make it through their underwirters. Third: I am not going to ever accept an additional amount of money under the table from a buyer or seller (which would jeopardize my license) and I am not going to be a knowing part of a 'deal' which allows my buyer to get money under the table either.

How's that for clear. If a buyer is in dire straights and needs money to close, he or she will either qualify for an FHA no money down, a conventional no money down or IMHO, go back and save money and then buy a house?

What is it about Zip or any other place that would allow them to circumvent contract conditions or mortgage lending specs? Let me know, my inquiring mind wants to know!

Sharon, Good point about the HUD1 signatures. Now they sign the 3rd page which really has nothing on it. Kind of scary.

Carole, You are handling it right. If it ain't on the HUD1 it's fraud. I hope someone comments that works for a buyer rebate company so we can see how they handle it.

Randy, I would say that if it's not on the HUD1 it is fraud. Fed laws are pretty clear about this. Any money changing hands related to a real estate transaction must be on the HUD1.

Colleen come back after pondering and post your thoughts. I've been pondering this for a couple of days now.

TLW nothing wrong with buyer rebates as long as it is disclosed and allowed by the lender.

Illinois is the same as Florida. As to the Buyer rebate, thats in a contract between the buyer and their agent. Why should the lender care? The concern of the lender is what is the market value and LTV. Those items are not affected by buyers action. The seller gets his price with no rebates (kickbacks), and the loan to value is not affected. The parties involved are allpart of the transaction.

The lender may even bring into question the thought that there is an "Arm's length transaction" taking place between the buyer and the buyers agent....wondering if the buyers agent is going to have any vested interest in the property...

Scott

David, the lender cares because money is being given to the buyer. This is the lenders business and if it is not disclosed to them it is fraudulent. Period. The lender is doing the loan based on the buyer's credit worthiness and their financial situation. The buyer receiving money from any party in the transaction changes the buyer's financial situation and the lenders position. What if the loan is based on the buyer having a 5% stake in the property and 2% of this is coming from the buyers Realtor. Well now the buyer only has a 3% stake in the property, this reduces the lenders security. Unless this is disclosed and approved by the lender, it is fraud. Fraud is a federal offense punishable by prison time. This is not a grey area. IMO

when you have a contractor coming in after the close, lenders are usually very clear about checks being made out to a specific contractor, IMO, so exactly what Brian said above does not happen. They DO care

David the lender cares because they are the ones lending the money. By law the buyer must give them an honest account of their finances. The lender has the right to know how much of the buyer's own money is going into the deal. Getting a rebate from the Realtor changes the picture. The lender must agree to this. And it needs to be on the HUD1. Here are a couple of examples of fraudulent activity.

THE FOLLOWING INFO WAS PULLED OFF OF A MORTGAGE FRAUD WEB SITE. THE SITE IS LINKED ABOVE IN MY POST. CLICK ON MORTGAGE FRAUD. Broker Bryant

Loan fraud occurs when you (or a real estate agent, appraiser, mortgage broker, attorney, closing agent, others) make false statements in order to qualify you for a loan that's larger than you would be entitled to under the lender's guidelines.

Any false statement made to a lender is loan fraud.

Rebates and credits to any individual as a result of a real estate transaction must be disclosed on the settlement statement. If they are not disclosed it's loan fraud.

Undisclosed Concessions

This type of loan fraud occurs when someone gives money to the buyer for closing, but it is not recorded on the settlement statement. The seller might contribute funds to complete the transaction, and sometimes real estate agents give back a portion of their commission to make the deal work. In both instances, the funds should be approved by the lender and recorded on the settlement statement

Hope this helps.

Here is something to add to the mix. Third party lead generators, who now hold licenses in many states, are rebating to consumers AFTER the closing. These rebates include things like Home Depot gift cards, airline miles and cash, which they have used to incentivize the consumer into dealing with them. Of course, the rebate is funded through the referral fee extracted from the agent. I have never seen those buyer rebates on the HUD. Yet I know those big companies have done the legal leg work to know how to get away with it.

Rebates to principals in a transaction are legal in Michigan, with disclosure, of course.

Still don't like the Buyer rebates...Babe...They can take many forms and sometimes they are no where near a HUD...TLW...ROAR!

Hi Maureen, see that's what I'm struggling with. I know state laws vary. For example in Florida all you have to do is disclose it you do not need approval. BUT federal laws are what they are and any money that changes hands related to a federally backed loan must be on the HUD1 or it's fraud. I don't know how they do it legally, or they are just wiling to take the risk.

In NC, at least on the rebate deals I've seen from the other side of the table, no one cares as long as it's on the HUD-1 (and my favorite attorneys do page 1 signatures, you can ask your closing attorney to put the signatures there if you want). It's just beyond tacky to me, since we're all sitting at closing and Mr/Ms Rebate tells the seller they're going to reduce their commission by $x and have the seller pay that amount in buyer closing costs. haven't run afoul of a lender yet with the amounts, but i can see it happening. So will have to figure out if I can get the information up front at contract about rebates so we can make sure the amount of closing costs won't exceed the allowed...

Again, more work we full-service agents end up doing on behalf of the less-than-full-service agents. And still defending the commissions we definitely earn!

From the sellers' side, I personally think knowledge of the rebate will make them far less likely to negotiate - why ask me, the seller, for a reduction in what I'll accept when you're already receiving a percent or two (or another figure) off the sales price once escrow closes ...

What happens between buyer and agent, if legal, is their business not the sellers but I can see where sellers would be more firm in their price.

NOV

2006

This discussion is a good one. I see many creative practices used that I often ask the question: Is this legal?

I just can't imagine this not being required to disclose to the lender.

BB:

If it's on the HUD, it's not fraud. Post facto (like Costco)...well, that might be another issue.

I still don't like the idea of giving the buyer a rebate. I agree, your questions are good. With the market slowing down, many people are trying to figure out ways to make a deal. I feel we maybe setting ourselves up.

Verly clearly, disclose in the contract and the HUD! The matter of lender acceptance is another matter. Lender policies may vary on whether or not this rebate may be acceptable.

Bottom line is, if there is a rebate and go don't want to experience an 11th hour...oops sorry about that, you best get this ruled on by the lender upfront and immediately.

By the way, in the second paragraph (first words) of my blog this morning I have a link to what I think originally set Candybags off, before he wrote to BloodhoundBlog.

On the rebate note, buyer (or seller for that matter) rebates are legal in Illinois by law. One downtown Chicago agency advertizes on the internet a 1% of sale rebate on any home buy they represent a buyer on. To avoid any perception of fraud, however, I believe this has to be on the HUD-1 and the lender will often reduce the purchase amount used for loan calculation by the amount of the rebate.

This is just what a lender often will (unfairly) do if an agent represents themselves in a deal and gets (rightly) paid half the commission, unless that is structured in a way that (without creating a fraud issue) it's not blatently obvious to the lender. To do this means having the commission paid to the sponsoring broker, and in turn the agent, which creates a taxable income event (which can be offset if you can very solidly convince your tax guy and deduct that amount from your tax basis in the home). To avoid the taxable event some agents prefer to have their half of the commission as a credit, which lenders balk at, and creates another issue - if it's not run through the sponsoring broker it isn't covered by E&O insurance (and may nullify that agent's coverage elsewhere on other deals). For that reason most agencies require all agents' personal deals to be run though the agency.

Personally I prefer a "clean deal" with no potential for problems as do most of you I woud imagine. Excellent Questions Bryant

Would a change of verbage to include must be disclosed and accepted by all parties involved clear up the matter?

Gabriel, thanks for responding. I will check out your post and link. I think the key to rebates is disclosure and lender acceptance. If those 2 things have been done then you are good to go. If not..................well you have just commited fraud.

What happens if a buyer wants to take the rebate in the form of closing cost credit? That would mean that money would not actually change hands. Would a lender still need to approve such an arrangement and would taking the rebate in the form of a closting cost credit have any impact on the total amount of money for purchase a lender would be willing to lend? Seems like a gray area.

Note to Gabriel - In more articles than I can count and in more blogs than I care to mention, real estate agents have been trying to draw parallels between themselves and doctors and lawyers for as far back as I can recall. The main factor that caused my BP to spike was, I think more than anything, the condescending tone of the censoring commie, Russell Shaw. I read his little post du jour, awash in all its self congratulation and I thought, "Who is this little JERK??" Then I saw his picture on said blog and I thought, "He even LOOKS like a little JERK." I didn't like his tone. I didn't like his snippiness. I didn't like his presumptiousness. I didn't like his self aggrandizing attitude. In short, I didn't and DON'T like HIM. He's a jerk. And that's when the bile and vile began to erupt!!

Sorry - that was me in the comment above. I started to feel the rile and forgot to include my ID........ >;<

CB...I suspected that was you...Good day to you...As you can see by my comments, I feel that rebates have the potential to backfire. They seem to have a way of creating more dishonesty in our business...Another touchy topic for me...I will let someone who works with Buyers answer your question...We only work with a handful of investors that have been our customers for many years..."TLW...ROAR"

CB, Buyer rebates ALWAYS have to be disclosed to the Lender. Receiving the rebate as a contribution towards closing costs is IMO the best way to do it. Just remember the Lender will only allow a max contribution of 3% or 6% depending on the type of loan. So as long as the rebate is less then this, you are good to go. The best rule of thumb is, "If it ain't on the HUD1 it is fraud". Use this as the standard and there will never be an issue.

I agree with you CB - you should be hot. I hate lawyer and doctor comparisons, too. I never want this industry dragged down to the reputation level of lawyers and my ability to see a parallel to a doctor is, well, nil.

The problem is there are so many people that join this industry just to do it as a side job when their family or friends are going to buy or sell a home. When 1/3 of the people in a licensing or license renewal course openly admit that's all they are there for - that's scary! I wish licensing was more difficult and education-intensive, even with a mentorship requirement, sort of like being a resident at a hospital before getting licensed as a practicing MD - hey, there's the doctor parallel (only if they ever institute such a rule)!

But I digress back to Bryant's original blog on a similar issue...

Gabriel - Point taken. I have no love for lawyers. My only reason for including them as a comparable is to demonstrate at the very least that it takes years of schooling to be able to call yourself a lawyer. Likewise the medical profession lest we forget ;)

You bring up an excellent point though. A LOT of people have gotten licenses for the sole purpose of "representing" family and/or friends. Have you found that trend to "cut into" your own business? What do you make of brokers who would hire such part timers? Seems to me that would be a GREAT way to end up in court as the agent's responsible broker. Truly, considering the level of expertise that one SHOULD possess in order to be allowed to counsel others on what is most likely the biggest investment they will make in their lives, an agent should at the very least hold an Associates Degree in business with an onus on finance. For those of you with years of experience, you have obviously shown that you know how to stay in business. In order to be called an "expert", you MUST have a minimum of 10 years experience no matter the field. I would personally consider BB, for example, an expert for a number of reasons.

today i saw a small street sign that said "Use me as your Realtor and receive 25% of my commission". I guess that an agent wouldnt fear of losing the buyer since they are tapping into something that appeals to all.. GREED.
As per Bryant's comment above, I agree that IF a rebate is in order, it should be towards buyer's closing costs only.
nick

Nick=Here are the rest of the seven deadly sins...TLW...ROAR!

How about an interest rate buy down?

BTW LW your seven deadly sins should be required reading for all real estate agents out there ;)

Hi CB, Using a rebate for a rate buy down is a good way of using the money. It would still need lender approval. As does everything. The lender holds the key to all concessions to the buyer. Whatever they allow is good, whatever they don't, is fraud. Unfortunately, there are a lot of consumers and Realtors that don't understand this. Mortgage fraud, is by far, the biggest issue in Real Estate today.

BTW my EM is BrokerBryant@gmail.com

CB...thank you. I wrote them for Realtors, as I am sure you can see...I try to link to them as often as possible...I do this in the hopes that the bad Realtors will read them and say "Hey Is she talking about me? :) Hmmm...I could be...TLW...ROAR!

FEB

2007

I just posted on this topic: Realtor Rebates. Free Money or Expensive Savings?

Love to get your feedback.

Frank

FEB

2007

well i just got backed into this issue. i listed a home. the seller said that another agent had offered them 2% regate on the purchase of a new home. they had already selected the home and asked me if i would match the offer. i wanted to but i could not match the offer. i offered to rebate 1/2 of my split at closing. we mentioned this to the builder when they signed the contract. one week before settlement, the builder/lender has told me that they do not allow rebates. i am sure it has to do with the incentive laden deal they offer buyers. i notified my client and they are non-plused. they have asked me to demand that the lender make an exception for them. they have told me that i have a moral obligation to pay them. i told them that my moral obligation was to obey the law and if the lender says no, i have no recourse.

i don't know how it will shake out, but i sure wish i knew the in's and out's of rebates before i opened my damn dumb mouth.

jmac

FEB

2007

When referred USAA buyers use Cendant Mortgage/USAA Savings Bank, they receive a cash rebate after closing. That applies to many other Affinity groups and is done in all 50 states and it is legal. These funds are not identified on the HUD 1.

Bernie, that is legal becuase it is approved by the lender (Cendant Mtg) as the lender they can handle the rebate any way they choose. BUT in Florida it must be disclosed to all parties of the contract (not approved, just disclosed). This does not necesarily have to be on the HUD. ANY rebate not approved by the lender is fraud.

FEB

2007

Great Blog. I have been researching this topic too. The entire issue is convoluted.

Lenders are giving loans to the public and are Federally regulated. The USDOJ is a federal entity too and it is defending these rebates tooth and nail. Rebates lower the buyer's transaction costs. This is good for consumers. A lender may want this as a price reduction which isn't practical. A price reduction of the sales price isn't practical, as it requires seller approval. A buyer broker's ability to compete on price & a buyer's right to negotiate a lower broker fee should not be dependant upon a seller's approval -- or lender's approval for that matter. The odd mechanics of the transaction preclude a buyer broker from competing on price without a rebate outside of closing. A lender can compete by lowering their closing costs and interest rate. A seller's agent can compete by lowering the listing fee to the seller. The seller can compete by lowering the sales price or increasing concessions. An appraiser can compete by lowering his/her fee. A closing attorney can compete by lowering his/her fee. What about the buyer broker???? This whole LTV issue is being instigated by the anti-rebate folks. It's a weak argument. These folks would rather see a buyer pay too much for a buyer's agent than to receive a rebate. This is just another attempt to muddy the waters.

Jmac,

Your client is right about the rebate. You agreed to work for a certain percentage. Anything above that amount is deemed an "unearned" fee by RESPA and should be returned to the buyer. You should call the USDOJ for advisement.

BROKER REBATES TO BUYERS ARE BENEFICIAL FOR THE CONSUMER AND ARE PROTECTED BY ANTITRUST LAWS. see DOJ

IT COULD BE A a section 8 violation of RESPA if broker does not send rebate check to buyer after settlement even if lender or builder will not allow on the HUD-1 (anyhow lender is informed if underwriter will not allow on HUD--underwriter could condition price reduction for rebate amount if they really do not approve). IF BUYER BROKER HAD AGREED TO ACCEPT A REDUCED COMMISSION, RESPA DOES NOT GIVE THE BROKER AN EXCUSE TO KEEP THE UNEARNED PORTION, IT IS THE CONTRARY BECAUSE KEEPING UNEARNED FEES INCREASES THE COST TO THE CONSUMER. See Section 8 of RESPA to see the criminal/civil penalties for keeping "unearned fees." Some state laws require it on the HUD, that is where state law conflicts with DOJ and RESPA.

RESPA IS ABOUT REDUCING THE COST TO THE CONSUMER! RESPA DOES NOT ADDRESS BROKER TO BUYER REBATES BECAUSE BROKER TO BUYER REBATES BENEFIT THE CONSUMER. RESPA WAS CREATED AS A CONSUMER PROTECTION ACT TO PROTECT CONSUMERS FROM BEING OVERCHARGED BY THE LENDER, REAL ESTATE BROKERS, TITLE COMPANIES AND OTHER SERVICE PROVIDERS. READ RESPA! There is a lot of confusion with the word rebate even at HUD.

THE BROKER TO BUYER REBATE HAS TO BE ON HUD (OBVIOUSLY) IF IT IS A CREDIT TOWARDS CLOSING COSTS/DOWN PAYMENT or source of buyer's funds for closing. If it is paid after settlement, it is not a source of funds for closing.

If it is paid after closing, how can the lender be impacted? Which borrower is more qualifed? The borrower whose broker would not share any commissions and used all the commissions to buy a new LEXUS for mr. broker or the borrower who received a portion of the commission as a rebate check after settlement which could be used to build reserves, pay down mortgage (lowering the loan balance), or payoff debts? Clearly, if anything, the latter is stronger financially and the lender is NOT AT RISK because the borrower is stronger.

If you take your buyer out for an expensive dinner after settlement, do you call the settlement company to make sure the $500 tab is on the settlement statement and approved by lender? or how about the tickets to opera or the gas you burned driving your client around town? Does all this have to be disclosed to lender or seller. There is not enough room on the HUD-1 for all this! It gets to be an absurd argument.

It is ironic that real estate brokers are using RESPA as an excuse to keep commissions fixed so that they do not have to compete on fees or commissions. If you tell buyers that it is illegal or fraud to give buyer rebates you could be violating antitrust laws. See NAR video on antitrust.

Nick, In jmac case, the builder can prohibit a commission rebate. KB homes is notorious for this. When you sell a KB home you must sign a commission agreement. The commission agreement prohibits you from sharing the commission with the buyer. Whether it's legal or not really has no bearing on it. The fact is you sign a legal document stating you will not rebate a portion of the commission either at or after the closing. Not quite sure why they would care, but they do.

I agree with you that State laws, RESPA the DOJ need to be on the same page when it comes to rebates. Also, the IRS needs to know about it. Do you 1099 the buyer? Or are they just expecting it to be free money?

Personally I have no problems with rebates BUT if the lender will not allow it or the seller(builder) will not allow it then I will not do it. I will not jeopardize my license by practicing in "grey" areas.

The FED law on mortgage fraud states that ANY information related to finances in a RE transaction MUST be disclosed to the lender. If not, it is fraud. It doesn't matter which buyer is more of a risk. That is for the lender to decide not the broker.

So in summary, rebates are legal if approved by the lender and allowed by the entity who is paying the commission. If not, it's fraud.

With KB Home, they have a "Broker's Forfeiture of Commission" Agreement you can sign. You can drop the sales price or apply in to settlement charges. Secondly, you can submit a rebate letter (coupon) signed by you & the client showing your pre-arranged agreement. It would violate the Sherman Anti-Trust Act if they disallowed it.

A rebate is a reduction of transaction costs and should not be taxed unless the home is sold within 2 years, as the buyer would incur a capital gains tax. The cost basis of the home is lower and thus the profit is higher. However, consult with a CPA. You are not paying the client anything, you are returning the unearned fee.

All these rebates are in the "gray" right now.

You say it's mortgage fraud???

In the final ruling between the Kentucky Real Estate Commission vs. USDOJ, the Commission agreed to reverse all investigations and all revocations of licensees who violated the rebate law. Now, all those rebates that were given were not on the HUD because it was not legal in Kentucky and is mortgage fraud -- according to you.

Here's the conundrum. If indeed what you claim is true, then why are the USDOJ and the Kentucky RE Commission supporting it? Go to the website of the DOJ and you can read the final agreement.

In my opinion, the lending industry doesn't understand what a rebate of commission really is -- so they arbitrarily oppose it because it is cash after closing.

Nick, I am actually in agreement that rebates should be allowed with proper disclosure. BUT until such time that everyone and anyone who has the power to revoke my license or force me to go to court to defend myself agrees, I will not rebate any commission unless it is on the HUD statement. My choice and my decision. Fortunately, for me I don't work with buyers so it's not an issue. One thing I do know for sure is that they cannot force me to rebate.

Good information Nick. Thanks for sharing.

FEB

2007

You're right, Bryant. It's your own decision to rebate or not. You aren't being forced to adjust your business, as you are an independent contractor. With that said, it's my right to incorporate rebates into my business model that SHOULD not be contingent upon the approval of other parties to the transaction.

From a lender's perspective, the purpose of "no cash to the buyer" was to prevent sellers from paying buyers. The seller has the ability to lower the price and that is what should be done. However, with a reduction of buyer broker's fee, the buyer broker doesn't have that power to lower the price. It is this very odd mechanism of the transaction that preclude a lower buyer broker fee without a rebate outside of closing.

My CPA says that you send 1099s to contractors that provide services. The home buyer is not providing services to the real estate broker and since the rebate is a consumer rebate on a purchase, you do not send 1099s. Check with your CPA.

It is fine that you do not do not offer rebates. But if you say it is illegal or fraud or if you say you get poor service from a rebate broker you could be violating antitrust laws because you are misleading homebuyers about the rebate model so home buyers have to pay inflated commissions which increases the cost of the realty transaction. There is rampant antitrust activity going on to keep commissions fixed and inflated and DOJ and FTC is working to stop this abuse.

If a real estate agent, mortgage lender, builder, or settlement attorney tells buyers that broker to buyer rebates is illegal or fraud or slanders their busines model, you can file a complaint with DOJ. See DOJ website.

http://www.usdoj.gov/atr/contact/newcase.htm

PROBABLY NOT A GOOD IDEA TO COMMENT ON COMPETING BROKERS LEGAL BUSINESSES ESPECIALLY SINCE YOU DO NOT OFFER REBATES AS YOU PAINT A CLOUDY OR "GREY" PICTURE AROUND THE LEGALITY OF THE BUSINESS MODEL.

As I have mentioned several times in my post and in my comments, I have no problem at all with buyer rebates. Nor do I have an issue with any other biz models. There is room in the market for all of us no matter how we handle our biz model. In most cases rebates are perfectly legal but not in all. If a buyer agent signs a commission agreement with a builder stating he will not rebate a portion of his commission and he does anyway, well in my opinion, he has a problem and can be sued by the builder for breach of contract. Also, if the lender states no rebate allowed and the agent rebates anyway, again he has a problem. Personally it's not a problem I'm willing to be a part of. If you rebate and have no problem with it them more power to you.

Hey Nick, I meant to mention that in Florida the rebate has to be disclosed not approved. The only issue therefore is the FED law or a builder prohibiting it by having a valid commission agreement signed. As a listing broker I do have the power to prohibit a rebate.

EDITED DUE TO TYPO: "I do NOT have the power to prohibit a rebate"

Bryant, I agree that anything related to the transaction should be disclosed to the lender.

"As a listing broker I do have the power to prohibit a rebate". Exactly! You can prohibit a buyer broker's rebate by not allowing a price reduction and that is why a rebate outside of closing might be necessary. If all parties are in agreement, then using the rebate for settlement charges is a good idea, but isn't always practical because of third parties. What's more, you, as a listing agent, are only obligated to share your commission with a licensed agent, not the buyer. However, once that co-op fee is earned and disbursed at settlement, then a buyer broker can settle up with his/her client per their agreement. Everyone needs to remember -- including all lenders -- RESPA was put in place to lower the buyer's costs, not drive them up. The USDOJ needs to have a talk with the lending industry regarding this issue to avoid the misinformation that is going around.

Nick, Oh man. That was actually a typo on my part. I meant to write: "I do NOT have the power to prohibit a rebate". My point being exactly what you stated, I'm just paying the selling agent. What he does with his money is his business, as far as I'm concerned. If the buyers agent wants to handle the rebate as a reduction in the purchase price, then the easiest way to do it, is to negotiate an acceptable deal first and then suggest we lower the co-broke AND the purchase price accordingly. My sellers would have no issue with that. Then disclosure or approval is no longer an issue.

Nick I'm sorry about that typo. It messed up your response. I think you and I are the same page when it comes to rebates. It's just we are on opposite sides of the transaction.

Oh, I see. I misconstrued your statement.

However, a seller can prevent a rebate. He/She may not want to reduce the price or credit the agent's fee to settlement charges. Beazer Homes is notorious for this.

Great Blog. We need more input from others.

Nick, you did not misconstrue my statement. Definitely my error. Have you run into problems rebating? I rarely work with buyers. The one I did work with last year was a KB home. My intention was to rebate to the buyer but they were adamant that I couldn't do it. My buyer was upset but I made him a deal I would give him a future discount on a listing. He was OK with that. But KB really placed me in a bad position. I learned to not promise anyone a rebate unless I knew it could be done without the threat of being sued. I am not comfortable doing it outside of closing.

I wrote this post back in November so I guess it is ancient history except for us.

MAR

2007

IT WOULD BE A RESTRAINT OF TRADE IF THE BUILDER OR LENDER WOULD NOT ALLOW A BROKER FROM ACCEPTING A REDUCED COMMISSION AND REBATING THE BALANCE TO HIS CLIENT. SINCE ANY BUILDER RESTRICTIONS WOULD VIOLATE ANTITRUST LAWS, IT WOULD NOT BE ENFORCEABLE. IN FACT, THE BUILDER COULD BE SUED FOR VIOLATING ANTI-TRUST LAWS. IF A BUILDER IS RESTRICTING REBATES, FILE A COMPLAINT WITH THE DOJ OR FTC OR YOUR STATE'S ATTORNEY GENERAL. IN MANY CASES, THE BUILDER, LENDER, AND SETTLEMENT COMPANY IS THE SAME COMPANY. ALSO, THERE IS VERY STRONG EVIDENCE THAT REAL ESTATE BROKERS AND BUILDERS HAVE COLLUDED TO RESTRICT BROKER REBATES SO THAT REAL ESTATE BROKERAGE FEES REMAINED FIXED.

YOU ARE GIVING WRONG INFORMATION TO THE CONSUMING PUBLIC BECAUSE YOU ARE MISLEADING THEM ABOUT REBATES. A THIRD PARTY TO THE BUYER BROKER AGREEMENT CAN NOT STOP A BROKER FROM ACCEPTING A REDUCED COMMISSION, AND REFUNDING THE BALANCE TO THEIR CLIENT. IF A THIRD PARTY ATTEMPTS TO INTERFERE, IT WOULD BE TORTIOUS INTERFERENCE AND A RESTRAINT OF TRADE.

NO ONE IS GOING TO LOSE THEIR LICENSE FOR ACCEPTING A REDUCED COMMISSION AND GIVING A REBATE! DOJ MADE THIS VERY CLEAR IN USA VS KENTUCKY REAL ESTATE COMMISSION, READ THEIR SETTLEMENT! IN FACT, COMPETING BROKERS COULD AND SHOULD LOSE THEIR LICENSE IF THEY SAY IT IS ILLEGAL OR FRAUD BECAUSE BROKER REBATES TO BUYER ARE PROTECTED BY ANTITRUST LAWS AND ARE BENEFICIAL TO THE CONSUMER. THE BROKER CARTEL DOES NOT LIKE IT, BUT REBATES ARE HERE TO STAY.

Mr anonymous, we are not giving out wrong information we are having a debate to try and shed light on the issue and also the inconsistency between state laws, fed laws and the doj. I'm not in Kentucky, I'm in Florida. Florida laws states I can rebate anyone that's a party to the transaction as long as it is disclosed. Fed laws states that I withhold any financial info from the lender it's fraud. I'm not saying it's right or wrong I'm just telling you that there is a conflict between state law and fed law. I'm not an attorney.

BTW Real Estate brokerage fees are not now nor have ever been fixed. If you were in the business and out there competing everyday you would realize just how foolish that statement really is. It's propaganda not reality.

Mr anonymous makes a great point about Builders that will not allow the commission rebate . This is a clear violation. At the very minimum, it should be reflected on the HUD that the buyer will receive a commission rebate as "P.A.C" -- PaidAfter Closing. But until the DOJ sets the industry straight, it won't happen that way.

In my opinion, a seller could "technically" not allow a rebate for a price reduction or a credit to settlement charges, as the commission has not yet been earned by the agent/broker. A seller is not obligated to pay anyone but a licensed broker. A commission is only earned once a loan is funded by the lender -- not at contract signing. However, once the commission is earned & disbursed at settlement, then it then becomes an agreement between the buyer and his/her broker.

MAR

2007

SINCE THE BUILDER, LENDER, AND SETTLEMENT COMPANY ARE THE SAME COMPANY, THE BUILDER CAN KEEP THE BROKER REBATE OFF THE HUD-1, AND MOST ARE DOING JUST THAT! ONLY OPTION FOR BROKER IS TO SEND REBATE CHECK AFTER SETTLEMENT--AGAIN, REBATES ARE PROTECTED BY ANTITRUST LAWS. ALSO, THERE IS EVIDENCE THAT BUILDERS AND REAL ESTATE BROKERS HAVE COLLUDED TO KEEP BROKERAGE FEES FIXED, THIS HUD-1 ISSUE IS ONE ATTEMPT TO KEEP COMMISSIONS FIXED.

IF A REAL ESTATE AGENT, BUILDER, MORTGAGE LENDER, SETTLEMENT ATTORNEY SAYS IT IS ILLEGAL OR FRAUD TO GIVE REBATES, OR IT HAS TO BE ON THE HUD-1, OR REBATE BROKERS OFFER POOR SERVICE OR REBATE BROKERS CAN NOT NEGOTIATE AS WELL, THEY ARE MISLEADING THE CONSUMER SO THE CONSUMER WILL HAVE TO PAY AN INFLATED COMMISSION WHICH INCREASES THE COST OF HOUSING. IF YOU LOST ON A REBATE BECAUSE OF THIS, FILE AN ANTITRUST COMPLAINT WITH DOJ OR FTC.

The attorneys at the antitrust forum (attended by DOJ, states atty generals, FTC, HUD, state licensing commissioners, HUD) in DC talked about this issue. Since the consumer rarely buys a home, they can be easily influenced by real estate agents who say it is illegal or fraud to give a rebate which discourages them from seeking a discount or rebate, especially on the buyer's side. This misleading information causes them to pay an inflated brokerage commissions on the purchase of a home. It is true, many people think rebates are illegal because real estate agents are telling them this or clouding the issue by saying "Is it mortgage fraud?" or "I could lose my license if I rebate". Real estate brokers have been trying to keep commissions fixed for many, many years. Since rebate bans are being reversed because they violate the Sherman act, real estate agents are using confusion and distortion to keep these fees fixed.

OK so now I see where you are coming from. It's not about the rebate but the "fixed commissions" and "collusion". Like i said earlier. Hop in my shoes for few weeks and you will see how absurd these statements are. BUT I do agree with you on rebates. Just so you don't keep coming back with the same propaganda, I HAVE NO PROBLEM WITH REBATES AND I HAVE NO PROBLEM WITH ANY BIZ MODEL. I DON'T WORK WITH BUYERS EVER SO REBATES ARE NOT AN ISSUE FOR ME. I PAY THE SELLING AGENT WHAT HE DOES WITH HIS COMMISSION IS HIS BUSINESS. COMPRENDE?

Bryant,

Read your wife's comment about "Fraud". Mr. anonymous is speaking of this very thing. Now, she is either seriously misinformed or simply being disingenuous. In either case, the FTC frowns upon anything that might hinder free trade. I would suggest not using any comparison to "Fraud" or "illegal" to create a cloud of suspicion about rebates -- intentional or not.

Cheers!

Propaganda? Your the one that said "If it ain't on the HUD1 it's fraud", this is a false statement. The lender can be informed about the rebate without it being on the HUD.

Nick, I see what you are referring to. When I wrote this post as you can see, I am asking questions. The entire post is my thoughts. I truly have questions and issues about a rebate, that has not been allowed by the lender(whether rightly or wrongly) being given to a buyer "outside" of closing. "Outside" of closing, according to laws on mortgage fraud is fraud. If this is not the case then this law needs to be challenged and lenders need to be put on alert that they are not in a position to prohibit a rebate.

Anonymous, So now you want to get back on the topic? I was referring to "commissions being fixed and collusion."

This is my statement in it's entirety, and I stand by it:

***The best rule of thumb is, "If it ain't on the HUD1 it is fraud". Use this as the standard and there will never be an issue.****

For me, this is my rule of thumb. It is not a definitive statement it is a guideline.

Hey Nick, I guess we got the discussion we were wanting:) I have some office time today and will see if can bring some fraud experts into this discussion. Maybe they can help us all get a complete understanding of this very important issue.

Anonymous, please hang around as you opinion is needed. But let's stick to the rebate/fraud issue.

So far, I think all 3 of us are in agreement that rebates are a good thing and should be allowed. Where we start separating is whether it is completely legal or not if it's not allowed or on the HUD.

This is a great blog. Let's have a discussion from many participants.

One question, Bryant: Do you put your gifts to your clients on the HUD? Expensive Diners? Football tickets? Gift cards? If not, are you committing loan fraud?

Nick, in 13 years I have never given a gift to a customer of mine. They do however almost always bring me a gift. I always ask them for something from the house to remember them by. I have many times reduced my commission to the Seller, normally to make a deal work if we are a couple of thousand apart in negotiations. This is effectively a "rebate" to the buyer. Also, in 13 years I have never given a buyer a direct rebate. Of course this is due to the fact that I am rarely on the buyer side of the transaction. BUT I have done many deals with buyer rebate companies and have no issue with it at all.

BTW are you in the biz?

And Mr Anonymous, what do you do?

It does make a difference to know where your perspective is coming from. Let's get it out here so we are all on an even playing field. You know what I do. I'm an independent Broker and have been for 9 years. I've been a REALTOR(R) for 13. I work with Sellers almost exclusively. I close about 40-50 deals a year for about 9-10 million biz. I've closed a little more than 300 in my career and have never had a consumer complaint.

Team results or individual?

Rebates are good for the consumer and as such should be protected. However, it's just another chink ant the already weakened lending sector (the lender finances all of the rebates through higher prices and higher rates)

When will we just say "NO"? Can't we just get people to save up some money for a year or two and negotiate lower fees and prices?

Nick, I work by myself. No team. My entire companay is just me. I just recently hired a buyers agent to handle my buyer calls.

Brian, thanks for stopping by. I do agree rebates are still costing the buyer one or another. I too would much rather see a lowerr purchase price negotiated.

Ok. Me personally about 40 (10 Million a year), and buyer side only. Occasionally, I'll take a listing for a friend.

OK good Nick. We are on the same page. My average sales price is about $220,000. Most buyers are 100% financed with the seller paying costs. BTW have you joined AR yet?

There are several buyer rebate companies in my market. I just closed 2 deals with Zip Realty and was very impressed with the REALTORS(R). They were both really on the ball. Just so you know, I am not a part of the "discount broker", "limited service" band wagon. I do not believe the two are connected in anyway. "Discount broker" is a misnomer since fees are always negotiable and "limited service" has nothing to do with fee. I've had limited service from all sorts of REALTORS(R) regardless of what they charge. In fact, I'm sorry to say, limited service seems to be the norm these days.

I'm in GA so I'm not certain what AR is. My average sales price is about $450K. I have been in the biz for about 10 years. And yes, I'm in agreement that full service Realtors can provide crappy service while some discounters are on the ball -- or vice-versa. Price has nothing to do with it.

Bryant, you said: ***The best rule of thumb is, "If it ain't on the HUD1 it is fraud". Use this as the standard and there will never be an issue.****

Now let me ask you now about your business model.

Let's say you have a seller who would sell his home if he got $200,000 for it. This amount included your 6% commission. You then looked at the comps and informed him that the highest price of any home in his neighborhood that has sold was $195,000. The seller said, "I have to get $200K or I won't sell". You reconsider and agree to list at $200,000.

A buyer comes along and offers $200K with the seller contributing 6% toward closing costs. You present the offer and the seller says "No way. If he wants his closing costs paid he will have to give me $212,000 and then I'll pay 12K toward his closing costs." The buyer agrees. You draw up an executed contract and give it to the lender.

Would you or would you not inform the lender of how the sales price was artificially inflated to pay the buyer's closing costs?

Nick that's a very good question. First, all of my properties are Range Priced. So I would not have had a fixed price to begin with. But why would that be an artificially inflated sales price? It would be the price that the buyer and the seller agreed on considering the concessions the buyer asked for. Nothing artificial about that. The 6% contribution would be fully disclosed on the purchase contract and the appraiser would know that before he did the appraisal. It's one of the reasons they need a copy of the purchase contract. Assuming the property would appraise, for the higher price(which it probably wouldn't based on the comps you mentioned) there would be no issue.

In reality if comps are $195,000 and the deal is written at $212,000, it won't happen. Unless there is a fraudulent appraisal. The gap is too wide.

AR is ActiveRain, the site you are on. You should join up. It's a great place to network and learn. Here's the link. http://activerain.com/action/referrals/tutas

Cash Back Offers at Closing Are Illegal

EDITOR'S NOTE: Because of the intense and often off-topic nature of many of the comments left for this blog entry, commenting has been turned off, and all unrelated comments have been deleted.
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When I tell colleagues and customers that cash back at closing offers are illegal, an unexpected number of them are surprised. Real Estate agents frequently approach me and describe cash back deals that they were convinced were legitimate, while consumers wonder why I don't offer them myself. If you don't know what a ‘cash back at closing' offer looks like, take a gander at the following advertisement, which is currently posted on the Detroit version of Craig's List:

$249,999 - Luxury Riverfront Loft - Cash back at Closing!!

Luxury 1BR 1BA riverfront loft for sale.
- Best location in the city.
- Top floor unit with private rooftop deck.
- 13′-16′ ceilings
- 1160 square feet (plus deck space and inclosed deck storage)
- Reserved secured parking spot with extra parking for guests
- NEZ tax abated about $600 per year in taxes
- Really low utilities
- Great modern kitchen and bathroom with custom built shower
- This is a real loft not a new construction "loft condo".
- Luxury building (this is the least expensive unit in the building).
This is the perfect unit if you want to live downtown or work downtown and are tired of the commute. Not yet listed on MLS so get it now before I have to adjust price for real estate agent fees.
Cash Back: I want to get about $250K for the loft but am willing to sell at any price over that (whatever it appraises for) and provide anything above $250 back to the buyer at closing. So if $270K then I give you $20,000 at closing (that would more than pay for the first year of living here!), if $290K then I give you $40,000 at closing (that would pay for more than 3 years of living here)! Price is whatever you want it to be.
Serious inquiries only please.
Map locations don't seem to work perfectly. It is directly across from the Riverfront Omni Hotel at 200 Riverplace. 200 River Place Dr at Joseph Campau St. & Jefferson.

The above offer is illegal, and to understand why, just take a look at a 1003 (the Uniform Residential Loan Application) that every home buyer signs when they apply for a home loan. The 1003, which is authorized by Title 18 of the United States Code, Section 1001, is one of those documents that has small print that lawyers always tell you have to read before signing on the dotted line.

To paraphrase Title 18, section 1001, you cannot lie on a loan application or any other document related to a transaction. When a buyer, appraiser, real estate agent, loan officer, or another party provides a false statement of a property's value on a 1003 or any other document, they're lying, which means they are breaking the law.

As real estate professionals, our job is to know the law, act in accordance with it, and abort any deals designed to dupe anyone involved in a real estate transaction. That means we have to shut down cash back at closing scams before they close. The warning signs are readily evident:

The buyer places an offer on the property that's significantly more than the asking price on the condition that the seller kicks back all or some of the extra money.
The appraisal is obviously inflated.
Neither the buyer nor the buyer's agent has ever seen the property.
The buyer wants to use a different title company than the one that the seller's agent has chosen.
The buyer or buyer's agent claims that the extra money will be used for home repairs or renovations or paid to a contracting company to handle the repairs or renovations.

The logistics of cash back at closing scams vary, so the warning signs tend to morph over time, but the underlying law that's being broken remains the same. According to my fellow real estate fraud blogger, Rachel Dollar of the Mortgage Fraud Blog, "Whether it be through seller kickbacks, inflated purchase prices or ‘repair' costs, the common thread in these deals is that the lender is not informed of the true nature of the transaction." Whenever the lender is not informed, in writing, of the true nature of the transaction, the transaction is illegal. And if-as either a real estate industry professional or consumer in on the scheme-go along with the scheme, you become an accomplice, subject to prosecution.

So, what should you do when you smell something fishy? Put a stop to it! Inform all parties that cash back at closing schemes are illegal, and then call the lender immediately. The lender's phone number is on the closing papers, and, believe me, they'll be eager to hear of any pending deals that call for them to loan more money than a property is worth.

WWW.FLIPPINGFRENZY.COM

Ralph, Thanks for stopping by. How does this apply to buyer rebates that are not on the HUD i.e after closing? Or not allowed by the builder? I know you are a busy man but we seem to be going back and forth on this.

MAR

2007

In reality, Bryant, that home could appraise for $212K -- given that it upgraded. So, Would you or would you not inform the lender of how the sales price was artificially inflated to pay the buyer's closing costs? Simple question.

You see, the real lender would not know how the sales price came about. The real lender would only see a sales price of $212,000 with the seller contributing $12K in closing costs. The real lender is not truly informed. Would this be deception? What if the buyer defaulted on the loan and the real lender found out how this all came about? Should this all be disclosed on the HUD-1 to truly inform the real lender?

If your argument is that if it appraised for the value and the agreement is within the 6% seller concession, then everything is legit. The I say that Rebates are no different. There is no artificial increase of the sales price to cover this rebate to the buyer, as the 3% allocation for the buyer's agent is well within what is normal. This is simply a refund of real estate services and it is handled differently because of the odd mechanics of the transaction.

Nick, The Lender is informed. The contribution is in the contract. The price and the seller contribution is fully disclosed. There is NO artifcially inflated price. Not only does the lender and apprasser have the contract the apprasser also has a copy of the MLS listing showing the listed price of $200,000. I guess I'm just missing something in your question. Are you implying that a Seller agreeing to sell his house for more than list price is wrong?

The simple answer is NO, it's not my job to inform the lender of anything. I work for the seller. BUT all they have to do is read the contract. The transaction it outlined completely. There is nothing being kept from the lender. And everything will be on the HUD.

Your losing me on "artificially inflated" not quite sure what you mean.

OK I missed your second post. You're using the ole' circular logic routine. Nick as I have stated many many times I have NO problem with buyer rebates. You are not comparing apples to apples here. In the clolsing costs scenario everything is disclosed to te lender and on the HUD statement. The issue with rebates is, "are undisclosed rebates after closing legal?" The short answer is NO. Should they be? IMO maybe.

Are you concerned about rebates harming a lender? IMO, artificially inflating a sales price to cover expenses is more harmful to a lender than a rebate could ever be.

Or, are you just concerned that a rebate after closing is not on the HUD?

Then I ask:

When real estate brokers compensate their associates, is that on the HUD?

When the real lender rebates a YSP to the originating broker, is that on the HUD?

When the originating broker compensates their employees, it that on the HUD?

What about gifts?

I guess the question is, are you merely concerned about what is on the HUD or what might cause damage to a lender? If it is the later, I could name many more things that seem innocent on the surface -- but have the potential to harm a lender much more so than a rebate of commission.

Nick, first, paying an unlicensed person, in Florida, is a felony unless they are a party to the transaction. My concern is that all of my transactions are legal and do not jeopardize my license. As I keep mentioning I don't care what the selling agent does with his commission. My office(me) does not rebate, unless it is on the HUD. It's a choice. I don't do "gray" areas. How you choose to handle your business and rebates is your business.

My concern it what is legal and what's not. So far in this thread no one has posted a law saying you can rebate a buyer after closing, off the HUD and without he Lender being made aware of it.

Here's a real good article from Realtor.org http://www.realtor.org/rmomag.nsf/pages/lawjan06

Look at this way, if the lender has no issue with it then put it on the HUD if the lender has an issue with it are it is done anyway, with out their knowledge, and behind their back it is FRAUD. That may not be right and I may not necessarily agree with it but that's the way the lenders look at it. Maybe this will change over time if enough rebate companies take a stance on it. I'm not willing to jeopardize my license over the issue.

This is the standard I use: http://www.gcaar.com/legalcorner/docs/rebates_closing_costs.pdf

Nick this is Florida law:

61J2-10.028 Kickbacks or Rebates.

(1) Any real estate licensee who receives, or makes any arrangement or agreement to receive, directly or indirectly, any kickback or rebate, for the placement of, or favor in, any business transaction which forms a part of, or is incident to, any transaction(s) negotiated or handled by said licensee, is a violation of ss. 475.25(1)(b) or (d), or both of said subsections of the Florida Statutes, unless prior to the time of the placement of, or favor in, said business transaction, the licensee shall have fully advised the principal if any and all affected parties in the transaction(s), which the licensee is handling, of all facts pertaining to the arrangement of kickbacks or rebates.

(2) The sharing of brokerage compensation by a licensee with a party to the real estate transaction with full disclosure to all interested parties is not considered a violation of Chapter 475, Part I, Florida Statutes.

Specific Authority 475.05 FS. Law

Who are the interested parties? That is very vague.

The Maryland Real Estate Commission articulated it very clearly.

There are different requirements for agent rebates and buyer rebates, I thought we are talking about buyer rebates here.

Hey Bernie, we are. The second part of the Florida law refers to rebates to a party of the transaction.

MAR

2007

Hey Bryant,

You are contradicting yourself.

Bernie Krebs CRS, GRI wrote: "When referred USAA buyers use Cendant Mortgage/USAA Savings Bank, they receive a cash rebate after closing. That applies to many other Affinity groups and is done in all 50 states and it is legal. These funds are not identified on the HUD 1."

Bryant Tutas wrote: "Bernie, that is legal becuase it is approved by the lender (Cendant Mtg) as the lender they can handle the rebate any way they choose. BUT in Florida it must be disclosed to all parties of the contract (not approved, just disclosed). This does not necesarily have to be on the HUD. ANY rebate not approved by the lender is fraud."

So is it or is it not your contention that "if it ain't on the HUD, it's fraud"?

Looks like you are flip-flopping. Can't have it both ways.

"(2) The sharing of brokerage compensation by a licensee with a party to the real estate transaction with full disclosure to all interested parties is not considered a violation of Chapter 475, Part I, Florida Statutes."

Once closing has taken place and my compensation has been deposited into my checking account with all other income (25% RE income), and I spend that 25%, and I provide a gift card/rebate from my other 75% income to the buyer, will Florida still say I have to disclose that to other parties involved in the transaction? It just doesn't make sense, even if 100% of my income was RE related.

Bernie, please expound.

It is my understanding that the HUD only needs to reflect the rebate if the money is used in the transaction. A lot of rebates are paid a week or two after closing and have no impact on the transaction. Thus, do not need to be on the HUD. As far as I know, this practice has passed the legal tests. It's either a crime or it isn't. I have never heard of a charge, much less a conviction, regarding the practice.

OK, I stated "If it ain't on the HUD it's fraud" I also stated that this is a good "rule of thumb". I also stated it is the rule I go by. And I stated that State laws vary from State to State and that many are in conflict with Fed laws. The purpose of this post is to try and get clarity. It is my understanding that in Bernie's case the rebate is a direct rebate from the lender. If that is the case then there is nothing wrong with that that I can see. Most of this discussion is about Buyer Rebates after closing that are not disclosed or on the HUD. That in my opinion is illegal.

Nick, The money may not be used 'In" the transaction BUT it is still money related to the transaction.

Again, I am not an attorney. My stance has been consistent through out this discussion. This post is my strong opinion and it is the way I choose to conduct my business. My question is: If rebates after the fact are legal them why not just disclose them and put them on the HUD? Are you trying to hide something? Are you not putting them on the HUD because the lender won't allow it? The lender is the one putting up the money, they should have a say so about how it is used and they should be aware of any rebates. If you can't tell them, then it is fraud. Twist it anyway you want or try to justify it anyway you want. If you have to hide it, it's fraud.

Like I suggested earlier, why not just reduce the purchase price by the amount of the rebate? It really is a very simple way to handle it.

Rebates are perfectly legal( in most States) as long as they are handled in a legal manner. Check with your State's laws. If you read the article I linked to above, they used Alabama as an example. In Alabama, incentives(at closing) are legal, rebates (after the closing) are illegal and grounds for revocation of your license. That's their law. If I were in Alabama, I would not under any circumstances rebate a commission after closing.

BTW I just did a couple of deals with ZIP Realty. They disclosed the buyer rebate on an addendum to the contract. At the bottom of the disclosure it stated that this rebate would only be made if it was allowed by the lender and not prohibited by the seller(builder).

Now as a listing agent, I pay the selling broker, what they do with their commission is none of my business.

Bryant, your arguments are arbitrary and capricious. I don't have the time nor the inclination to continually explain to you -- or the lending industry for that matter -- what a rebate of commission really is. You need to contact the USDOJ and ask for clarification.

Nick, I can understand your point. I too am tired of going around in circles. Personally I don't need clarification from the USDOJ. I don't use rebates as a part of my biz plan. Rebates are a non-issue for me.

Hey it was fun though. Thanks for the debate. It's all "clear as mud" now:)

"It is my understanding that in Bernie's case the rebate is a direct rebate from the lender. If that is the case then there is nothing wrong with that that I can see."

Do you think for one minute that a buyer would accept a higher-than-par interest rate if the buyer was truly informed of how a broker would receive an undisclosed rebate (YSP)? Heck no. This too is fraud, IMO. But hey, it happens.

Obviously, the lending industry is getting over on the consumer -- so just consider our Realtor rebates as "leveling the playing field". The USDOJ is concerned with the consumer paying too much and that is why Realtor rebates are happening without any disruption.

Hey Nick, I just put up another post to see if we can get some new input. Here's the link.

http://activerain.com/blogsview/52710/Buyer-rebates-on-the

Don't get me started on YSP. Check out the mortgage industries debate on that one. It was pretty ugly.

http://activerain.com/blogsview/19738/The-Morgage-Industry-s

As far as I know, the rebate comes from the USAA Insurance Co. of which the buyer is a member, not from the lender which is an aba and Cendant is the handling contractor and the buyer is paid weeks after closing.

I think we have to look at what the purpose of the Florida law is. I don't think it's an agents giving a buyer some money after closing, HUD even does/did that

http://usgovinfo.about.com/library/weekly/aa080202a.htm?terms=buyer+rebates

and it was legal. If the intent is to commit faud or deceipt, the purpose obviously was illegal, but to give a buyer some money for clean up or repairs after closing are not something the buyer has to be protected from by the government.

Hey Bernie, If you would, pop over to the new post I just put up. I'm really trying to get as much new input on this as I can. We seem to be lost back here on this post from Nov. The more I have researched this issue the more interested I have become. Even though I don't do rebates it sure would be nice to have a clear understanding of what is and what's not legal. I guess a lot of that is going to depend on what State you are in. It sure would be nice if ALL states were the same on this issue and also on agency issues. But I guess that will never happen.

So what you are saying is the buyer has to join this Insurance co. in order to get the rebate or is it just a employee benefit? The reason I ask is that there are down payment assistance programs where the seller has to make a "donation" and then the money is given to the buyer after being "washed" through a non-profit. They are basically skirting the law by taking advantage of a loophole.

MAR

2007

http://www.realtor.org/rmoprint.nsf/pages/lettersmay06

The national association of realtors stated (see link above) that buyer rebates have nothing to do with RESPA law. I would assume that they therefore do not need to be on a HUD and are solely an agreement between a client and his Realtor.(assuming your state allows them)

You're right, Sue. RESPA states that rebates to buyers do not need to be recorded on the HUD, as this benefits the buyer. If you don't believe me, call RESPA.

APR

2007

You people just kill me! I can't tell you how many times I have had to correct real estate agents, loan officers and attorneys that say that rebates are not legal! (In my state of Illinois rebates are legal). Some states do require that the rebate be on the HUD1 statement.

Please read the following: "Incentives are not available in Missouri. In addition, certain states (including but not limited to Tennessee and Oregon) require that incentives be given as either a credit at closing or as a reduction of closing costs or to appear on the HUD-1 settlement statement. In addition, certain states (including but not limited to Indiana and North Carolina) require that the company giving the incentive accompany the buyer to the closing of the transaction". Incentives may not be permitted in connection with certain loan programs for the buyer/borrower. These include, but are not limited to, FHA and VA loans. Please consult your lender regarding whether or not you can collect the incentive in connection with your loan.

To just blindly state that all rebates given by any real estate agent in any state is loan fraud. Well, it's just sad how misinformed you really are. And you people are agents! It's this type of misinformation that could cost a homebuyer thousands of dollars in the form of a cash back rebate!

Hey, Bryant Tutas your post on 02/27/2007 couldn't be any more misleading! I give back one of the largest cash back rebates in the entire state of Illinois! I have sold three KB homes in Inverness Illinois. And, guess what? There was never any type of commission agreement that stated "The commission agreement prohibits you from sharing the commission with the buyer" It depends on which state your working in!

So, my dear misinformed friends! Please learn your trade before you open your mouth or put it in writing!

Bill, Thanks for reading. So what you are saying is that rebates are legal in your State and therefore saying that they may or may not be legal in another State is wrong? The issue being addressed in this post and my other post is that unfortunately State laws and fed laws do not match. There is no uniform law that works through out the country. That is the issue. It is impossible to make a definitive answer to the question "are buyer rebates good business or potential fraud?"

In my area KB homes does indeed have a commission agreement that must be signed by the agent prohibiting a buyer rebate either at closing or after closing.

BTW the title of the post is a question. And after over 200 comments on both posts the answer is still "it depends"

Personally I have no problem with buyer rebates. It's not my particular biz model but I have no issue with it. I'm a listing Broker what the buyer's agent chooses to do with his commission is his business.

Thanks for reading and commenting.

APR

2007

Why can't a rebate be given with FHA or VA loans. RESPA/HUD has never said that.

MAY

2007

Greetings All, I have just started a "Discount Broker" service in Aiken SC. My business model was designed to entice new buyer and seller clients by offering buyer rebates and seller's lower commission rates. I know from reading your incite-full comments that there are some very savvy people here that could help me and vice versa.

The first question is does anyone know of any lenders that don't have a problem with buyer rebates?? The concept is so new here that the local lenders heads are spinning. I do feel that we should be able to be competitive, I have my first closing shortly and I think I have to go to the Seller and her agent and reduce the sales price and my commission in writing for the HUD settlement 1 statement to the last minute changes of the loan price etc. I do feel that it's not beneficial for the economy to lower home prices to be able to "Give" my buyers a break. I'm sure every home owner would like to see the value of their homes rise instead of greedy Real estate agents continuing to line their pockets.

I give the exact same service as other companies but I'm able to work out of my commercially and residentially zoned residence and pass my savings on to the public which some real estate agents forget it our duty to protect and serve.

I called some companies in Charleston and they told me things like we give them 1099's or gift cards and I've seen the coupons online and in magazines. I think I'll have to call the DOJ tomorrow and ask how I can give my client his money that he deserves for letting me be his Realtor. I know I've paid for the odd home warranty and it's been on the HUD-1 and that's not been a problem, I'm hoping to just be able to pay some of my buyers closing costs or at least be able to buy their rate down. What could possibly be wrong with that as long as it's disclosed.

Again if you do know of any lenders that actually want to help their buyers I'd love to hear about them.

Ken, You should definitely check your states laws when it comes to rebates. Every state is different. Good luck to you.

MAY

2007

Thanks, I have checked and buyer rebates are legal in South Carolina. I'm just looking for lenders that allow rebates. It has to be on the HUD and that's where the lenders are baulking.

Ken, they should be OK with it as long as it is used to pay closing costs( a credit instead of a rebate). I've heard the DOJ may be coming out with a uniformed guideline in relation to rebates. The rebates companies in this area use a disclosure letting the buyer know that the rebate is subject to local laws and may be rejected by the lender or another third party. You can always use a reduction in the purchase price.

Ken & Bryant,

Using the rebate for CC's isn't always that simple. Many lenders don't understand the rebate and will not allow it as a credit on the HUD. I'm glad that I don't live in SC or NC or AL.

Ken,

Rebates use to be illegal in SC until the DOJ went on their campaign to fight the anti-competitive behavior within many states. SC quickly overturned their ban in the midnight-hour that was under the radar. The SC commission and other state commissions (SD, WV) did not want to pay for the expense of being sued by the USDOJ. However, the RE Commissions within those states are using the recordation requirement on the HUD-1 as a means to stifle the rebate practice. Lenders don't want to see it and they know it.

Thanks All, I did find out that Wells Fargo is on the ball and they allow my buyers to get their rebate as long as it's on the HUD on page one and on line 700 second page. Some Real Estate brokers I talked to in Charleston were just giving their buyers a check 1-2 weeks after closing as a gift, I thought this was a RESPA violation. I thought there was a cap of something like $20.00 (Fruit Basket etc)

I found some enlightening information at the link below.

http://www.usdoj.gov/atr/public/workshops/reworkshop.htm

Ken

Ken,

It is not a violation of RESPA to give a rebate after settlement directly to the buyer. Per the USDOJ, "Rebate" means a payment of monies or anything of value by, or on behalf of, a Licensee to a client or customer (or to a third party authorized by the client or customer to receive the payment) that is in connection with the provision of Real Estate Brokerage Services. Examples of Rebates directed to third parties include, but are not limited to, payments to charities, home inspectors, and moving services. A Rebate does not include compensation paid for Real Estate Brokerage Services to any third party who is not licensed in Kentucky to perform such services; this Amended Final Judgment does not authorize a client or customer to permit or direct such payments to an unlicensed third party for performing such services.

Here's an article that might be of interest. By JAMES R. HAGERTY Staff Reporter of THE WALL STREET JOURNAL
http://webreprints.djreprints.com/1010850475994.html

Nick, Thanks for providing additional info. This is the post that will never die:)

MAY

2007

Anyone catch the 60 minutes piece?

Hey Nick, I did. thought is was pretty sad. I just wrote a post about it here.

http://activerain.com/blogsview/98617/RedSpin-simply-spun

MAY

2007

Tennessee is next. The USDOJ is going state-to-state.

http://www.costar.com/News/Article.aspx?id=1AA2A102CB39004FC1C14D3861733D58

"Following up on that promise, the Justice Department's Antitrust Division yesterday sent a letter to the Tennessee House of Representatives indicating that House Bill 2095, would deny Tennesseans the opportunity of receiving cash rebates from real estate brokers when they buy and sell their homes."

JUN

2007

So much for cash rebates in TN. Chalk one up for NAR.

OCT

2007

Nick and Bryant,

What do you think of the big online referral companies that give rebates after closing for using the agent that was referred to the buyer or seller? I don't believe these rebates show up on the HUD, and the buyer or seller has to send in their HUD to the referral company a few weeks after closing to show they completed a transaction with the referred agent (and then they receive their rebate). I can't imagine these large, well-known companies would be doing this if it was illegal. (There are the usual states where these companies don't offer the incentive.) Is this evidence that rebates after closing (and not on the HUD) are okay? Do you think these large companies are disclosing the rebate to the lender? (And if so, how would they be doing it?) Just something to think about.

NOV

2007

I just Google, is it legal to give rebates to buyers in MI, and this came up first.

Pretty cool. We've been debating on this post for almost a year now!!!

JAN

2008

If you buy a TV for $200 with a $100 rebate, is that illegal?

FEB

2008

We have been talking about this more often. I have looked at some models that do offer a buyers rebate, but they also limit the buyers access to an agent. Buyers get a limited number of showings and after that they pay an hourly rate for the buyers' agent's time. I am for bringing a value proposition to the table and not for giving away service. Sometimes we do more work for some buyers than others, but charging them for the time spent would not go over. Buyers don't feel that they are paying anyway. What are we rebating with?

FEB

2008

As a consumer I'm looking for the best deal. Buyers and Sellers are at the mercy of realtors who try to manipulate and trap them into contracts. Property values sore in part because realtor commissions remain the same while property value increase. For me it is simple... I have the cash to buy a home and I do all the research. The realtor who gets my business will spend a couple of days and walk away with up to 2%. The realtor who gives me 1% of MY MONEY back at closing has my business. Come on! Do you know of a realtor who has NOT cut their family or friend a deal during their career?

Look at Obama. He could not afford to buy the house and lot next door. What does he do? He gets a friend to pay full price for the lot so the realtor brokers a deal for Obama to get the house at a discount. Instead of his friend giving him a financial gift to buy the house (that Obama would have to claim on his taxes), he brokers a deal with the realtor and seller. Where's the ethics there? And he wants to be our President. Go figure.

States passing legislation to stop the free market is not good for our country. If a realtor offers free services, that's their business. The realtors who complain about discount brokers are insecure and need to grow up and join the free market.

FEB

2008

Stephen, I actually have no problem with rebates as long as they are above board. I also agree it's an area that should NOT be regulated by "the man". Let the lenders decide if they are comfortable with it or not based on the each buyers individual finances.

There does of course have to be some kind of disclosure to the lender to prevent mortgage fraud. To me that's the biggest issue. If it's not fraud I should be able to give my money to whoever I choose.

Thanks for stopping by. All opinions are welcome.

MAY

2008

Seems to be a lot of legal oppinions here. Anyone an actual lawyer? hummmm

Randy there is nothing wrong with giving opinions. It's giving legal advice to a customer/client that is wrong. On this post we are just having a discussion.

Here is an attorney's opinion on this matter. Is he right? I do not know.... He is clearly an attorney who represents lenders. Are there any objective attorneys out there?

Thanks for the link Stephen. In Florida rebates ARE legal as long as they are disclosed. In my opinion that disclosure needs to be done by having the rebate on the HUD1. Better safe than sorry.

You're welcome. HUD-1 disclosure certainly removes any and all liability for the broker; however, with that said, can a lender disallow a rebate without violating antitrust laws? There could be liability for the lender since rebates are protected by the highest law in the land. It's a conundrum.

JUN

2008

Fact: My wife owns a discount brokerage company in WI

Fact: Nobody knows anything regarding to rebates here.

We called Hud, and Fannie mae....they both said rebates are illegal and we have the email to prove it. We referred both fannie mae and Hud to the doj website..they both didtnt care. We called DOJ they say its legal...We told doj both Hud and fannie mae said the practice was illegal. The DOJ wanted the names of the people at fannie mae and hud..We gave it to them.

Lenders dont want to put rebates on the HUD....they say its illegal and then call fannie mae to confirm its illegal.

There is no official protocal here regarding rebates. To put it on Hud or not, does it need to be disclosed or not. Is it considered mortgage fraud if you dont put it on the Hud.

The consensus from much reading and resarch is in my opinion: If the lender lets you put it on HUD go for it..If you want the transaction to happen after closing it has nothing to do with the loan or mortgage...no need for disclosure....You can also let the lender know you are a rebate broker and not put it on the hud.

I can not find any specific protocal that says otherwise in WI.

I also can not find any instance of a broker or agent getting charged with fraud regarding buyer broker rebates.

The DOJ is 100% for rebates....The IRS says they are not taxable also. Who is going to charge you with fraud..?

If a company does not allow rebates cant that be obstrucion of DOJ federal rebate laws? just a thought.

Tony, I think that about sums it uo. No one knows and I don't think anyone cares. I have now posted twice on this and have recieved over 300 comments total and still no one has a definitive answer. So I think the only thing I would use as a guideline is individual State laws. Florida says they are legal as long as they are disclosed to all parties to the contract. Not approved....just disclosed.

Another point is : what does disclosure mean, verbal, written, assumed etc. When states say that rebates must be disclosed. This does not mean it has to be on the HUD. It usually has nothing to do with the HUD or closing. Disclosure is a broad term used in real estate I see all over the state statutes. It also could mean that you just disclose your rebate to your client...Unless it specifically states that you must disclose to lender, seller, other broker, world, etc...

Again who would enforce mortgage fraud? Isnt that the DOJ territory. And if its DOJ territory would it be State of Federal....from all the blogs everyone says its federal crime.......Repeating myself here....If the DOJ is all for rebates and they stated that is usually after closing...my opinion is that they would not see it as fraud or illegal in anyway regardless if its on the hud or not.

As stated by Bryan above....I dont think anyone really cares at this point.

I cant believe such a simple concept to help buyers and sellers is so confusing to every govt and lending agency out there...even the realty associations..have conflicting opinions....

I also think its funny how many people think they know the answer to this question of rebates and are unwilling to accept that they could be wrong and make blatent statements like : Fraud, illegal, Must go on HUD, etc.

Show me the LAW! some states may be specific but most are not. I Can not find a single federal law saying its illegal with disclosure on the HUD. Yes you can pull statements and phrases from HUD and Fannie mae but who enforces those....I think its the DOJ.

Enough ranting........I feel better now!

JUN

2008

"The DOJ wanted the names of the people at fannie mae and hud..We gave it to them."

So, what did the DOJ determine from their interaction with these entities?

AUG

2008

It isn't any business of the seller or their broker if my agent rebates me some of the commission.

It is the business of the seller and the broker if it affects your ability to purchase or not with this rebate.

Your lender will also have to know.

OCT

2008

I had a close friend use ziprealty for a home purchase a few years back (northern california), and from what I remember, they were quite shady. After my friend waited and waited to receive the "cash back" rebate and didn't receive it, he tried to contact his ziprealty agent. It wasn't after many many tries was he able to get an answer concerning his rebate. The answer he got from his agent was, "you didn't explicity ask for cash back, so we tacked it onto your closing costs".. but of course the closing costs seemed like the average amount and he didn't really see any deductions made in the paperwork, so it was like he never received a rebate at all. Anyhow, I hope Ziprealty's practices have changed regarding their rebates or perhaps the situation with my friend was just an "oversight", which I highly doubt. It seems to me to be just another scam.

SN, Thanks for sharing that story. That's incredible.

JUL

I am pro buyer rebates. I believe seller's and lenders, including new home builders, refusing to allow an agent to apply part, or all, of her commission to the purchase price or towards closing costs violates anti trust laws.

Interestly, as a former employee of 2 new home builders, 1 allowed an agent to reduce the price of a home by her commission, if saying the agent was purchasing for herself. However, a larger home builder I worked for would not allow any type of commission application or rebates to the buyer.

I find new home builders hippocritical in this regard. I mean, they will tell you I am giving you $10,000 off the purchase price if you use our lender, but now where is this disclosed on the HUD. We should all advocate consumer friendly services and not be against them. If I want to list a house for a flat fee of 1%, so be it and if I want to represent a buyer for a flat fee of 1%, so be it. Either way, the consumer ends up with more at the end.

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