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To rebate or not to rebate....that is the question.

Here's an interesting dilemma for you. Let me know how you would handle it. I have an appointment with one of my long time customers tomorrow to write a deal on a new construction townhouse. This particular buyer is the daughter of one of my investors. Over the last couple of years I have assisted this investor in the selling and buying of about 10 properties, including a couple of duplexes he is in the process of purchasing right now where my investor is paying my $6,000 fee.

This particular builder is paying me a x% co-broke plus a $10,000 bonus on the property we are placing under contract tomorrow. What I am wanting to do is rebate the $10,000 bonus to my buyer. I know what your thinking..."Broker Bryant why would you do that?" Well, the property that's being purchased is priced at $150,000. I feel that an almost $15,000 commission, just for taking my buyer into the model, is outrageous. Also, since these are friends and long time customers of mine, I feel the rebate is the right thing to do. The buyer is a young single girl and could use the rebate to furnish her first home.

Here's the dilemma. In Florida, I can legally rebate a portion of my commission, as long as it is disclosed to all parties that have an interest in the contract i.e. buyer, seller, agents and lender. Notice it says disclosed not approved. However, this particular builder has a clause in their commission agreement that I will NOT rebate any portion of my commission to the buyer. If I do they can refuse to pay me or ask me to repay the commission.

Due to this clause, I cannot place the rebate on the HUD1, as I would normally do. If I rebate it after closing, even though it's legal, I would be breaching my commission agreement with the builder and they could sue me.

My question is: How would you handle this? If it helps, I do intend to give my buyer the $10,000. I also intend it to be done legally and without breaking my agreement to the builder.

What am I going to do? Remember I am the Broker so don't I need anyone's permission.

I hope you enjoy my little test today. Now get out of the box and see if you can figure out what I'm going to do. I'll be back later to give you my decision. Have at it!!

Picture compliments of Danny Smith. Danny.....come home we miss you!!!

Posted by Bryant Tutas Broker/REALTOR(R) Tutas Towne Realty, Inc on 09/22/2007 05:44 AM

Comments (98)

buyer rebates, poinciana fl

98 Comments on To rebate or not to rebate....that is the question.

SEP

2007

Reserved Parking For "The Lovely Wife"...TLW...ROAR!

Blog Boy...

How am I supposed to comment when you won't let me answer the flippin' question? :)

Love that pic. Makes me wonder (again) where Danny disappeared to?

TLW...ROAR!

Take the money, Bryant. Think about all the people who you've wished you could've collected something from...(see my post today in a similar subject).

You can always donate the extra 10K to a charity if you think the total commission is wrong somehow. For my part, I view it as a confluence of the planets...not to repeat often.

I like the donating to charity (in the customer's name). Although, being a single mom myself, I am certain she could use the money.

Have TLW take her on a shopping spree ;-)

You will be paying taxes on that $10,000 of income, right?

Why not instead ask the builder to pass along the commission bonus to the buyer in the form of extras or upgrades? That would be a win-win for both the builder (the upgrades never cost them the full amount) and the buyer...and would certainly make your clients happy. For what it's worth, although tempting to take the extra $10,000, what this could do for you in terms of future business and referrals is, quite simply, priceless. :)

I'm gonna park to find out what you decide to do!

Bryant, if you really want to give the money to your client, why not give her a $10K gift in cash sometime after settlement or have her send you the bills from her furniture shopping spree and pay for that as a gift. The IRS lets you give gifts of $11K free of gift tax to as many people as you would like in a given calendar year. As long as there are no conditions attached, it can be an outright gift. You can't have a contract, agreement or writing stating that you are promising her this money based on a successful settlement. But I see no reason that you couldn't give her a gift after a successful settlement. It would not be a "rebate" nor would it violate your agreement with the builder. Once you get the money, it's yours to do with as you please.

DISCLAIMER: I am not a tax attorney or CPA, please consult your independent tax advisor for advice on this matter.

Is there a good reason why the builder cares what you do with the money? Ask them. They might ok the deal the way you want to do it.

OK very good so far. Let me clarify. I am NOT keeping the bonus. That's one thing I'm certain of. This investor is not only a friend but we do a minimum of 2mil in business a year. Keeping the bonus is not an option.

I love this problem! I would never have to address it since rebates of any kind are illegal in Oregon. But I have had similar instances where I'd like to share the love with my ongoing clients. So...

I'm thinking either reporting it as either a gift or marketing expenses. Or you could set up a trust for the client's child/children if they have any. I'll be watching this blog closely to see how it shakes out.

Broker Bryant you said you are receiving X amount commission + a bonus.Can you give the buyer the bonus because that is not your commission, it's a bonus? Just a thought.

OK...this is a toughie. Keep the rebate, provide the father your services for free, and have the father give the gift. Not sure that breaks any rules but...I will wait for your answer.

Have the 10K bonus money be assigned out to whatever store the buyer chooses to have her home furnished and have that reflect on the HUD1. We do this for items such as fencing and repair items when we can not give the buyer an actual monetary credit.

Another great topic...I often reduce/rebate commisions to my repeat clients...And have sold property for free just to get the deal done. Don't tell any of my other clients though. I have to eat somehow, espically in this market. For those of you out there who thank that is crazy, you are in this business for all the wrong reasons. Are we not here to look out for the clients best interest. I form tight relationships with almost all of my clients they trust me, and know that I will do whatever I can to look after there best interest. To answer the question...Are there any rules/clauses in the commission agreement about buying closing gifts. Anyone buying a new home is bound to need things...ie furniture, flat screen tv, etc...the list is endless. Explain the situation to your clients daughter and take her on a shopping spree. 10,000.00 dollars goes long way...Women love to shop...Not to mention is much easier to explain to TLW that you purchased a few closing gifts for a client than it is to explain a 10,000 gift....That might save you a few pop knots a home.

BB thanks for writing and I look forward to the next post...

I'll go with Brian....tax man!

The way I'd do it is hire an interior designer for the girl with the rebate amount as the budget. That way you are giving back (rebating) without your seller having problems. Everyone is happy.

So - in FL is it legal to go open an account at the local furniture store with say $10,000 as a personal gift to this family friend? OR What if you were to pay a $10,000 fee to TLW for consultation and she gave went shopping at the local furniture store? - I am really going crazy and the brain is shutting down from lack of nicotine - sorry I can not come up with any better - I really think I am going to flipping die.

Before I hazard a guess, I have to tell you that my last builder paid a new agent 36,000. (6%) for just "walking in the door". He had no idea he'd just hit paydirt. Sort of a stunned look on his face. ANYWAY, back to your dilemma: assuming that a REBATE is out as it correlates with this transaction, and you don't know for sure that the father would reimburse the daughter if you waived your commission to him (family stuff can be touchy) and you're determined not to be sued by the builder...and you refer to $10,000. cash, not rebate, perhaps you're going to make 10k worth of payments for her. Although that could be construed as a rebate...or, within the loan guidelines, you are going to request that the builder pick up her closing costs in lieu of most of the rebate, depending on the max contribution permitted...or you're going to forge a document that indicates that she's the broker, which is why the two of you are in stripes...I'll continue to ponder.

The problem that I see with Brian's suggestion is that you have to pay taxes on the income still, even if there are no taxes on the gift. This is a tough one for a Friday evening. Although you can't rebate part of your commission, can't you pay closing costs? Loan points? That is not a "rebate".

He's not coming back until one of us is right and it's killing me- KEEP GUESSING.

some body poke him...

OK I promise I'm still here BUT it's bed time....sorry:) I'll come back tomorrow with my first option even though it may change before the day is over. You guys have some very good suggestions though. Some I hadn't thought of and a couple that might work. I meeting with the bulder at 1:00.

Good night!!! :)

OK. My suggestion of a year's worth (up to 10k) of house payments could be accompanied with an escrow account for the INCENTIVE, not REBATE. I'm going to look each up as it pertains to real estate. Don't give her the furniture coupon- the minute that they have a " HALF OFF" sale after your recipient has spent the money, the gift would be...diminished.

BB, still can't stop laughing at that photo. Once someone walked into my office and asked me if I knew anything about an envelope they found in their car filled with $100 bills? I told them I had no idea what they were talking about.

Best

BB,

I would be straight up with the Seller and give him the option. Most likely I would reduce the Sales price to the Buyer and forego the extra Commission. I would do it that way because the kickback is not allowed in our State. The only thing that is allowed here is a small portion of lender allowed closing costs disclosed and approved by the lender.

That must be an old contribution by Danny. I miss his commentary and contributions as well.

OK, I have not read the comments. I say you already rebated it to the father. He gave it to his daughter.

SEP

2007

Legally rebate the portion of your commission that you can according to Florida law and reduce the price by the difference, waive the bonus. While your honestly and generosity are exemplary there is no need for you to have to declare the income.

When in doubt disclose and let the chips fall where they may.

IMHO you can never get in trouble if you disclose.

If someone wants to take me to the mat by interpreting this as legal advice have at it!

Regardless of Florida law about rebates, and how you plan to get around your contract with your seller, this flashes in neon lights "Warning- fair housing violation!" Your description of your motivation for this rebate - "young single girl" - describes three protected classes under the federal fair housing laws: age, marital status, and sex. 'Better be prepared to give the same rebate to "old married men" -

You hoo rise and shine! Anybody right here?

i am wondering if this is a cash deal? you might lower the selling price with builder 10,000 and give up bonus. you will look like a hero. note taxes on purchase will be lower.

OK BB - you have us all hanging on the edge of our computers waiting for what your idea is!! I can't come up with anything that hasn't already been said, so I'll just wait a bit and pop back by to see if you've checked back in.

Ann

Lowering the price by 10K won't work, because that won't put the money into the daughter's pocket for furniture, it will only lower her monthly payment. As Brian mentioned, you can do anything with the 10K after settlement. You also mention the investor's purchase of duplexes. Maybe you can adjust your fees on those so the investor saves, and he can gift 10K to his daughter.

Perhaps, if the developer won't allow you to give the $10,000. to your buyer, you can discuss it with your investor (the father) and he can think of a way he can give her the money and you credit his next deal with you. win-win.

Builders don't like agent rebates to buyers because they know that the agent rebates cause some buyers to bring an agent who then receives a co-op when, without the rebate, the buyer could have walked into the builders showroom without that agent. Of course, it's true. Buyers who are receiving a rebate are less likely to stray, which new home buyers have a way of doing with some agents. We often read about the agent who worked with the buyer for XX months only to find out one day that the buyer walked into a new home model and bought a house without the agent. The rebate stops that. This builder appears to have figured that out and will punish a broker who uses the rebate to generate new home co-ops. That, IMO, shows the builder's bias against agents. He doesn't really want to pay co-ops and prefers that buyers come directly to builders without an agent.

Normally, this would be handled in the contract by additional incentives from the builder to the buyer for upgrades and/or closing cost credit. But, it sounds like the builder may refuse to pay it if he knows it's going to the buyer. That stinks, but the builder doesn't have to pay any co-op at all.

The builder, however, has no control over the buyer's father, the buyer's children or their aunts and uncles or teddy bear or pet poodle although I'm sure he wishes he did.

"This particular builder is paying me a x% co-broke"

The way I read and interpret that is that the property is listed with another agent. If that is the case then the commission agreement is between the builder and them and the restrictions about what you can or cannot do with your bonus do not apply.

If that is not the case and he's paying you only a brokerage fee under some sort of commission agreement then I would simply ask him to give it to your buyer and explain why. $10,000 should be $10,000 to him no matter who gets it.

For the lower the price crowd; most builders don't like to cut prices for any reason because it could mess up the comps for future sales.

If you're forced to accept the 10K then I like the giving the father $10,000 worth of complimentary services for future transactions. Unfortunately that won't help his little girl right now unless daddy ponies up the cash which, being a father of two daughters myself, would likely be the case.

OK so I'm surprised this one got featured but........Thanks you Moderators!!!

Now here's my new dilemma........should I spill the beans now or wait until others have chance to respond?

BTW Lenns, response on the reasoning behind the builders refusal to allow a rebate is spot on. The deal I am working is with KB Homes. I had this same issue with them earlier this year and in that case did NOT rebate at all.

Several of you have suggested that once the deal is closed, the money is mine and I can do what I want with it. This is actually not true. It is true that I could just cut her a check and in all honesty no one would know the difference and life would go on as usual. BUT the reality is it would still be a violation of my agreement with KB Homes. So even though I could I prefer not to.

This post was written to show the issue with rebates. State laws and Fed laws do not agree. Then we have to deal with lenders and builders throwing their kinks into the system.

I have already decided how I'm going to handle it but even my way may not be right. Your responses have already given me some other food for thought and hopefully my meeting with the builder today will do the same.

Margaret, You mention a Fair Housing issue. Are you saying just by describing my customer that I am in violation? I don't think so. I would be in this same situation no matter who my buyer was. I make it a policy not to keep "bonuses" that I feel are out of line. Of course luckily for me I rarely if ever work with buyers so this doesn't come up. This is the 3rd time in 13 years!!! I believe I will just continue being honest and take my chances with Fair Housing. Fair Housing Laws were written for a reason and this isn't one of them.

I'll be back!!!

I'd have to get in line with the suggestion that you give the reduction to your investor down the road somehow, since he's a repeat client. Interesting dilemma-and I was wondering why in the world the builder would care about the bonus until Lenn offered her expertise.

Jim, The commission and bonus are directly from KB Homes. And you are correct that they will NOT lower the price. New construction is rarely negotiable on price. Unless it's a custom builder or a builder building on "in fill" lots.

I'd talk to the builder and have them credit her with additional features on the property and potentially a portion of her closing costs. I can't imagine that they would refuse. It is going to cost them $10,000 either way. Isn't it a violation of RESPA to rebate a buyer $10,000 and not have it appear on the HUD?

OUCHCHHHH! In the state of North Carolina, we cannot give a rebate to a buyer unless it is reflected on the HUD. Remember....disclose, disclose, disclose! If it appears to be an inducement to buy, I guess I thought it would be illegal in every state.

In a strong military market, we provide a "cash credit" at closing to our active duty military buyers. We used to allow them to bring us a receipt from Lowes or another business if they wanted to use their credit towards a refrigerator, etc. but were told by the real estate commission that ALL REBATES must be disclosed to all parties via the HUD (can you hear them slapping our hands?). Reflect it on the HUD and only then, if the lender allows it. Usually, the lender won't allow the buyer to get back more money than they've put into the deal (including earnest money, taxes paid at closing, home inspection, appraisal, etc.). So if we've negotiated a good deal on behalf of our buyers for the seller to pay all buyer closing expenses, it doesn't leave us much room for the cash credit. I guess I was thinking this was Fannie Mae and Freddie Mack guidelines and was not any different from state to state.

We are very careful not to call our cash credit program a "rebate". That word implies money directly back to the buyer with no exceptions.

Personally, I think you are caught between a rock and a hard place and should just keep the money. I understand your desire to do something good for this "young single girl" but the stakes are high and a law suit would cost you more than the $10K you're giving to this buyer.

I like the idea of askingthe builder to pass along the rebate in the form of upgrades

Bryant:

Maybe you loan your friend $10,000.00 after the closing.

Some of these matters came up when our market was in a buying craze in 2003-2004-early 2005. Builders finally stopped selling to investor buyers because they knew the investor, often a real estate agent, would just settle and put out a for sale sign competing with the builder.

They had clauses wherein you had to agree to not list until after settlement and no for sale signs or for rent signs until one year after settlement.

I asked my attorney about those "hold over" clauses. His answer was rather what I expected, "If you agree to it it's contractually enforceable and if you do what you agree to not do, you can be sued and if you lose, you could be liable for damages". That was enough for me.

Now. I have those same builders contacting me about "great investment opportunities" with standing inventory.

I love this business. Tides come in and tides go out. One wave leaves shells and debris on the beach and the next wave comes along and washes it all away.

Can you not just lower your regular commission? Leaving the rebate intact?

BB,

I think that the simplest way to handle this is to write a company check to yourself for the bonus amount. Then write a personal check to the buyer. Yes, you will have to pay taxes on this amount, but that should not amount to a great deal. If you are concerned about the tax implications, then you can deduct what you perceive that amount to be from the amount of the check that you are write to the buyer. This way you are not giving the buyer a company 'rebate' and it should not be legally considered as such.

I've been in a similar situation and agree with your actions.

I wrote about a similar experience I had this past spring. It is my understanding that RESPA laws, which would supersede Florida law, will not allow you to give your buyers the cash UNLESS it is on the HUD. Once on the HUD, the lender must agree to it. You can rebate in the form of paying closing costs but I doubt that will use the full amount. Beyond that it could go to upgrades or a reduction in price but I truly doubt the builder will want a reduction in price. I guess if I were in your shoes I would try to work with the builder and see what they are willing to do. It think it is great that you are trying!

You guys in Florida have it tough, in California we would just slip her an envelope and call it a day. Oh yea, and 1099 her.

Take care!

RJH

Just stopping by and checking the 'notify' box, not participating but listening :D

opps...didn't log in. Let us know what happens!

I have been doing this on occasion so a buyer can use their own lender and get closing costs paid. It is solely to GET THE JOB DONE! I have had one builder say the same but I managed to push it through title and it ended up on the HUD-1. I would push the issue over and over until they change their policy. I mean really, are houses selling like hotcakes down there? :grin: This is not 2004, this is not Burger King and they can NOT have it their way!

I feel if you can get it through title and get it on the HUD-1, it's disclosed and not necessarily approved. That is a gamble though.

Ok, I read this last night, prior to the FEATURE :) Congrats....back again. I have no idea as to what you can do, it appears that any offering would be illegal. Renee had a nice suggestion & if it flies that would be excellent.

I do think that your title is misleading though because ultimately you say that YOU WILL GIVE THE MONEY TO HER. So it is not the question :) Well unless you are referring to the builder's side of things ;)

Why don't you now tell us what you are planning to do......patiently awaiting in SW Florida....

The comment about giving the buyer a 1099 is interesting. What is the authortity for that?? I've researched this up one side and the other with accountants, my tax guy, my attorney and several title attorneys. They are all in agreement that the BUYER does not get a 1099 because they did not perform any service for the money. It is a gift. Nor is it covered under the "gift" tax laws because they are not hairs.

I'm not giving tax or legal advice, just the benefit of some procedures in my area.

In MD, if the money is used for closing costs, it goes on the HUD-1. If it isn't and is a gift after settlement, it doesn't. The broker get's a 1099 for the commission but the rebate is expensed as promotion.

Of course, your mileage may differ.

I'm curious why the builder even cares what you do with your rebate/commission. I would have an amendment/addendum to scratch this clause from the contract. I believe in full diosclosure.

What about buying some SERIOUS gift cards? Lowe's, Ikea, some other furniture stores... She'd be able to get the things she needs, and it would be a "closing gift" instead of a rebate.

Can you get an assistance program involved. Let them assist the buyer and you then contribute to the assistance program??? It then becomes a seller's contribution to the assistant program, but it helps the buyer. Something like Nehemiah... my 2 cents. Or did I misunderstand the quiz?

Buyers are not to get cash back at closing is what I have been told. Not even on the HUD. I am stumped but will return to see what you have done.

Bryant - You certainly sparked some great conversation and interesting thoughts and ideas on how this should be handled. Sadly, being a part of the finaning equation, I feel I have no legit added value to your scenario or the above-mentioned advice. I will repeat one thing you did say, Danny Smith come on home!

I don't think there is any non-conflicting way to do that. You will have to take a chance on the builder coming back or keep the money.

The most legal and ethical way to handle it is to reduce the price by $10,000. The builder shouldn't care if he gives you $10,000 in cash, or takes that $10,000 off the purchase price. Given the $10,000 is being financed as part of the purchase price, the only fair thing to the lender would be to not have it financed by reducing the purchase price.

Second best answer is to have that $10,000 be used as an upgrade to the lender's collateral in the form of a significant improvement to the property, such as a deck, wood floors, tile vs. vinyl. By using the $10,000 for upgrading the property, either via the builder or as an after purchase improvement, you are strenghtening the lender's collateral. Since the $10,000 was financed, it should not leave the property in any form.

If there would ever be a foreclosure, the lender should somehow be able to recoup that financed $10,000. It should not be used for a vacation, or any inducement that is not later recapturable by the lender, who financed the amount.

Just completed the requirements for my insurance, Life and Health, licenses. One rule that insurance agents adhere to is "NO REBATING" under any circumstance. Why the mortgage industry allows rebating is beyond me. Perhaps it the nature of most real estate contracts to offer concessions, however, if the concessions induce someone to use, "MY Mortgage company", or "My title company", then it should be illegal as hell! Supposedly real estate agents are not supposed to stirr customers but it happens all the time. They need to eleminate builder rebates and anything else that smells like an inducement.

I know..Just pay me for a referral fee of 10,000..and I will split it with him. (JUST KIDDING!)

You are very generous! I have done rebates for clients..but NEVER that much.

I like the gift idea but again... I'm no tax specialist or CPA! :) Sounds like a win-win situation either way you cut it. Great job with your business building!!!

Disclose it, do the right thing and let the builder do what they are going to do. I do not beieve that any judge would rule on behalf of the builder if it ever came to that. The press alone would be worth it if the builder did go after you. BUILDER SUES BROKER For GIVING HIS COMMISSION BACK TO HOME BUYER. I would pay 15k for that which is about what it would cost to defend a suit and pay back the 10k which...would never happen anyway.

OR, you could send the money to a charitable cause. My favorite is the Charitable Alliance to Save the Helpless. Their name is too long for checks so, you know what to do. Get the checks to me and I will distribute as needed.

Interesting dilema! Is there a way that you could "hire" her to farm this new development, and pay her $1000 per month to tell all the neighbors how great you are? Then you really can write off the $10K as a marketing expense.

I'm anxious to hear your actual decision.

The Universe delivered you the money, the moment you start to turn away the money the universe will say " Wow, I guess she doesnt need the income, Let's slow it down for her. Take the money and donate it if you want

Take the money, hire a nanny to watch my kids, fly Jolynne and I to Florida, put us in a sweet hotel and take us to a nice restaurant with you and TLW.

It's the right thing to do.

Wait...serious answer time.

Brett: Put down The Secret and walk away. I like your idea of donating it, but your words about the Universe are little distrurbing.

It's not about turning it away. Money comes into our life and flows out of our life. I think a better spiritual principle is that if you responsibly direct HOW money flows out of your life, you could be trusted with more.

YES, Bryant, I AM saying that "relative of a friend" is NOT a protected class, but "young single girl" is THREE PROTECTED CLASSES under the Federal Fair Housing Act. You need to be be aware of that. Especially since this post will live on in infamy on the Internet. If you're ever charged with a fair housing violation, I can see your reasoning for giving this rebate, described as you have done, as establishing a pattern. Maybe it's my D.C. mentallity picking up on this. Regardless of any other issues in this matter, I encourage you to describe your beneficiary differently. I can't bellieve other people aren't picking up on this.

BB,

Tough question.. I'm not an accountant but I believe you can draw up a separate document as a Realtor(R) contribution back to the buyer. As long as you claim it on your tax return.

What a great problem to have.........I kind of like what Gary Bolan Said.............What? I have no idea what your talking about! LOVE THAT PICTURE.........Dont let the Universe see it though........

Joey, you crack me up! AND I agree with you on this one.........I believe in the Secret-TOTALLY, but I believe wanting to GIVE will bring you MORE TO GIVE!

Come on BB........sup?

Since you are working other deals with the Investor Father, take the $10,000 from the other deal. No problem. Easy solution.

I did a deal with KBH and the commission agreement said,

"Broker acknowledges that it shall not pay, rebate or otherwise transfer all or any portion of its Commission or any referral fee to the Buyer, any relative of buyer or any member of the Buyer's household under any circumstances"

A bonus may be construed as a Referral fee.

That being the case you might discount any other present or future deals with them up to the $10K.

You can give TLW a $10K gift and she may want to gift it to the daughter. The problem with this method is that you'd have to pay the income taxes on the $10K.

BTW-rebates are not 1099'd. When you got a rebate for buying a car you didn't get a 1099 did you?

Giving money away shouldn't be this difficult.

Brian,

Of course, my first thought was to have a conversation with the builder to see if they'd make an exception.

But if they are goofy about it, if the father is a member of Brian's Frequent Buyer Club, can't you pass it onto Dad on the HUD1 of your next deal where you don't have constraints? Then he can pass it to his daughter.

Can't the money go to her dad? As long as he's not a party to the contract, there is no breach if you decide to give the funds to daddy to pass along to his daughter. Is the builder going to dictate who you are allowed to give legal gifts to? I don't think that's legal on any level!

Or you could always agree to renegotiate dad's paying your broker fee on your other transaction saving him $6,000, which I'm sure he would be happier paying to his daughter anyway. Don't know if you could extend that to other deals totalling the entire $10,000 but it's a thought. My guess is you'd like to make the investor happy because, as you said, you do a lot of business with him. Nothing shows this more than allowing him the ability to contribute to his daughter's purchase because of your generosity. Seems like it would make everyone happy!

I'm really enjoying the conversation on this dilemna but I am completely amazed at the many number of things that people seem to be willing to do that are completely illegal! Comments like adding the rebate to another deal (can't mix one deal with another on a HUD), the Fair Housing Issue (you did mention that you wanted to do this because she was a "single young girl"...how about an she was a divorced Mexican senior citizen"), and the fact that you're willing to do this without full disclosure. I completely agree that RESPA oversees what we all do and not what we do as individual licensing states. Don't get me wrong....I think you've got a big heart and are really trying to do something nice for your buyer....but the writing is on the wall and there is no client worth losing your license over. Pay attention to the warnings or we'll be reading about you in Realty Law.

Bryant, I would be taking to the builder, as it seems you are doing, if they are at all reasonable you shoud be able to work something out, closing costs plus some furniture of the buyers choice being put into the unit as a model and sol with the new furnishings since this is what you said they wanted to do with the money, If they aren't reasonable I would try and work it out with dad on his transaction to pass along to his daughter.

I think many are missing the point because if the rebate isn't on the HUD-1, it can be construed as loan fraud. I do like the ideas of hiring as a consultant and sending out the 1099 but you are swimming in murky waters.

I love how you see it from all legal options!

Hi folks. Sorry it took my so long to get back to this but I've been out working all day.

I guess I opened up a can of worms on this one. First there are many ways to get the money to the daughter BUT any and all of them would be breaching the agreement with the builder. This is what it states:(Thanks Armando)

Now folks, any after closing "gifts", "envelopes", "shopping sprees" or what ever are entirely in breach of this contract. Would they know? Or would they go after you? I doubt it. But that's not the point. The point is you agreed in writing not to do it.

I met with the builder earlier today. My intention was to get the builder to agree to let my buyer purchase $10,000 worth of upgrades (at no charge) instead of giving me a bonus. It turns out this was all a moot point since the bonus advertised was only being offered on inventory homes and we decided to go preconstruction instead.

BUT if the builder wouldn't have agreed to use the $10,000 towards upgrades I would have had no choice but to accept the $10,000. Then I would have done two things. First I would have waived my fee on the purchase of the 2 duplexes for $6,000 and I would have just made up the $4,000 on the next property I participated in with my investor, the dad. It's not a rebate because I am just waiving a fee and it's not a taxable event. Simple and completely legal and I would not have had to breach my contract with the builder. Kind of anti climatic I'm sure.

This post and comment thread certainly illustrates the difficulties in offering rebates. I believe there are 11 States where rebates are outright illegal and several more where they have to be credits not rebates. A credit is at time of closing a rebate is after closing.

I wrote a couple of posts on rebates before and we have never been able to get to the bottom of what's legal and what's not. My policy is to only rebate if it is on the HUD1. That way it is fully disclosed and approved by the lender. If it's on the HUD I just don't see how you can wrong. If it's not on the HUD, even though that may be legal in some states(including Florida) you may be opening up a big can of worms.

In my opinion, the best way to compensate a buyer is to negotiate a lower purchase price. This probably won't happen with new construction but can be easily done on a resale property.

OK I want to address the comment related to "fair housing". Folks I'm as fair as they come. I do NOT discriminate in any way. I am very confident that me describing my customer is not in any way discriminating. I'm not advertising, I'm just stating a fact. If the FEDS or anybody else wants to waste their time charging me with a violation then I will be happy to fight that battle. It's all about intent and clearly my intent is not discriminatory. Sorry, I don't do politically correct. I do honesty.

To me, bonuses can place a REALTOR(R) in an awkward position. Especially if you have an agency relationship with the buyer. Because basically the bonus is being financed into the deal. It's not just free money. The buyer is paying for it and normally over a 30 year period.

Rebates, in my opinion should also be avoided completely unless you can place it on the HUD. I don't do rebate. It only came up in this case because of the bonus.

OK that's it. Sorry my response wasn't more exciting. But sometimes solutions are very simple.

Also, this is just my opinion so please let me know if I'm wrong.

Bryant,

I have to lean towards Lenn's advice. But, any non-arms length way of passing the 10K can be a problem. Bottom line---You pay taxes as income on the 10K, she pays taxes as income on the gift. As long as the gift doesn't correlate to the transaction it seems OK. Thanks, Fran.

send it to me!

I believe you did it exactly correct. As I said, the builder has no control over the buyers dad, uncle, aunt, teddy bear or pet poodle. I never take broker bonuses. Bonuses are always rebated to my buyer or the builder gives the buyer upgrades or additional closing cost credit.

The authority for rebates in Maryland is the Maryland License Law. The information covers my practice. If the money is used for closing costs, it goes on the HUD-1. If it isn't, it doesn't.

Rebates/Cash Payments. Section 17-604 provides that a licensee may not pay compensation in any form for the provision of real estate brokerage services to an individual who is not licensed. A person who is simply a party to a real estate transaction is not providing real estate brokerage services within the definitions in Section 17-101, and therefore may receive monies from a licensee. If the monies are used to pay settlement charges, that should be reflected on the HUD-1 form.

The agreement to pay compensation to a buyer in the form of a rebate of commission, or to compensate the seller either through a cash payment or a reduction of the commission rate must be in writing as required by the Code of Ethics, COMAR 09.11.02.01H. The Real Estate Commission has also taken the position that financial payments by a licensee to a party should be disclosed to the other party to the transaction, even if they are not required to be recorded on the HUD-1 form.

This is the law.

Woo hoo! I was right on the money!

There are so many good suggestions, I skimmed through since there were so many...

I would offer to pay the house payment for the first year, or so for the buyer. That would really go over well with most folk. It would give the buyer time to put away a years worth of payments herself in case she gets laid off, etc...

I love the builder upgrade idea too.

That's how I would've handled it and how I suggested in my comment.

Way to go Bryant!

I like your solution Bryant. I also liked the charity of your buyers choice idea. Then it would have solved some of the tax issues too. But your solution for the 'next' purchase is good.

BB: After I read some comments, I'd just skipped over the rest of it.

Instead of dealing with this dilemma of rebating vs. not, could you just take all of the commissions and rebates, and explain to your client the situation. Then in the next few transactions, just ask him to pay the buyer's commissions and you charge him zero on the listing side.

Would this be possible?

SEP

2007

So, does this mean Jolynne and I won't be dining with you and TLW?

Perhaps you can let your client go on a shopping spree after the sale closes -- you will end up paying tax on the money , but it would seem a legal way you can help the client.

Bryant -- I am glad that you came to a solution and builders are reabaing and dropping market homes to get off inventory but holding the line on TBB.

Bryant

Wow looks like I am late to the party on this one. I am glad that you found a solution. I agree with Ardell but I also like the use of the 1099. This is the type of problem that I love about real estate. The problem I have here is in the builder's contract language. As a business owner I concerned that it may violate consumer law or infringe on ones ability to compete in an open market. I do not agree with the insurance industry view of offering rebates or incentives as I am a supporter of the all American coupon. Furthermore it imposes on the right of ownership in the attempts to counter co-ownership but these are topics for another blog post.

Due to the problem in this case... being language based I would attempt to close the deal with builder upgrades (incentives are incentives and concessions can be almost anything) and should the builder refuse then I would hire the client after the close and do so as an independent contractor to offer marketing services promoting my real estate business (not properties but services) and then 1099 them. There are income taxes and then there is also operational cost (see an account).

In the future I would consult with the builder beforehand about any type of language and explain the current real estate inventory that is available on the market. Should the builder be concerned about broker ownership or other or co-brokerage then the language can be changed addressing an area of conflict and interest and not rebates.

Hey guys. This little exercise was certainly educational. I really appreciate all the participation.

One important lesson here is to make sure when dealing with builders that you take the time to really read through any registration forms and/or commission agreements.

Also, if you are offering rebates to the consumer be sure to have language that covers you just in case you are not able to honor the rebate. We can only promise things that we have complete control over.

There are a lot of ways to skirt around the commission agreement with the builder BUT do you really want to do that? The best way is to discuss it with the builder and try to find a solution together. If that doesn't work then you have to honor the agreement. Just because something can be done doesn't mean it should be done.

In our business we have many opportunities to do things that may not be right just because "everybody else does it". I know, I've done them. I'm certainly not perfect BUT we should strive to be better. Together we can up our game and rebuild consumer confidence in what we do.

OK I'm done preaching:)

Waive the bonus, collect it in the form of a lower sale price. Or do you want cash to go to your client?

BB, I totally agree with you and missed the point that you are currently working on the deal with her father. Great call and definitely a good lesson. Thanks for the post!

SEP

2007

I can't wait to hear how you figured this out? I would suggest approaching builder rep to see if the clause can be removed from the contract. I am proud of you. I always give bonus's back to the buyer by negotiating it in the purchase price.

BB, you say the best method is to negotiate a lower purchase price. Maybe. But what about buying down the rate on the mortgage. If the buyer is going to stay in the property for a while this might actually be better for them over time than a lower purchase price.

Bill Roberts

OK just checking in. My solution is a few comments up. Thanks for stopping by.

SEP

2007

A $10,000 rebate to the buyer on a $150,000 new home would be over 6% cash back. A lender would not allow that nor would it be appropriate. In this case, a price reduction is the only viable approach to pass the savings to the buyer; to do it any other way is merely a creative way to kick excessive funds back to the buyer -- and that includes giving it to the father with the understanding that it will get back to the daughter.

Rebates are legal and only require unilateral disclosure to all parties; but when excessive commissions from home builders are involved, it can lead to inadvertent fraud if the rebate isn't ratified on the HUD-1.

A rebate can be a price reduction, a credit toward closing costs, an interest rate buy-down or in the form of a check after closing. With the latter, HUD-1 disclosure is only required in a few states.

Disclaimer: The information contained herein is not legal advice nor should it be construed as such.

Stephen, In this particular case we are actually getting the builder to credit the bonus towards the buyers ugrades so it ended up working out well. The bonus actually went from $10,000 to $5,000 since we didn't buy an inventory home. Rebates are NOT legal in all states. There are states that specifically prohibit rebates of any kind. I do agree the best bet is to disclose any rebates or credits on the HUD1. That way there is never an issue with fraud.

SEP

2007

While there are 11 to 16 states that prohibit or restrict rebates, a commission credit to the buyer for closing costs is pretty much legal in any state -- including Alabama and Tennessee.

The big debate involves post-closing rebates.

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