Buyer rebates, on the HUD? It's clear as mud!

From HUD's website:

Paid Outside Of Closing ("POC"): Some fees may be listed on the HUD-1 to the left of the borrower's column and marked "P.O.C." Fees such as those for credit reports and appraisals are usually paid by the borrower before closing/settlement. They are additional costs to you. Other fees such as those paid by the lender to a mortgage broker or other settlement service providers may be paid after closing/settlement. These fees are usually included in the interest rate or other settlement charge. They are not an additional cost to you. These types of fees will not be added into the total on Line 1400.

Notice how anything marked POC is for the borrower's information and protection. The purpose of the HUD-1 is to clearly show all charges imposed on borrowers and sellers in connection with the settlement, not the professionals.

State of Illinois  

May compensation be paid to a principal to a transaction, even if the principal does not have a real estate license?

The Answer: Yes. Section 10-15(c) of the Act authorizes the offer or payment of compensation ("prizes, merchandise, services, rebates, discounts or other consideration") to an unlicensed person who is a party to a contract or lease. Of course, such compensation is not required. The payment of such compensation should be pursuant to the negotiations on the transactions. The payment of such compensation is not limited to payment by a licensee to the licensee's client - in other words, a seller's agent may pay compensation to an unlicensed buyer.

May a licensee offer compensation to solicit clients?

The Answer: Yes. Section 10-15(d) of the Act authorizes the offer or payment of compensation ("cash, gifts, prizes, awards, coupons, merchandise, rebates or chances to win a game of chance") to a consumer as an inducement to that consumer to use the services of a licensee, even if the consumer and licensee ultimately do not enter into a client relationship. Any advertisement under this Section must also comply with all requirements regarding real estate advertisements. Also, care should be taken not to offer compensation to unlicensed persons for referrals of clients - this is prohibited.

"If you are a buyer, you can receive a payment from your agent after the transaction closes. This comes from the commission paid by the seller and can give you thousands of dollars to get set up in your new home."
www.contactreagent.com/sfbay/

"After selling a home, real-estate agents often give clients a gift, such as a scented candle or decorative plate. Jeffrey D. Thomas received something more memorable: a check for more than $10,000."

By JAMES R. HAGERTY Staff Reporter of THE WALL STREET JOURNAL

Are real estate brokers operating the Alabama Real Estate Commission? Who is the commissioner? Those are the questions that might reveal a conflict of interest. States that don't allow members of the real estate industry to reside within the commission tend to be more for the "consumer".

Look At Georgia:

FAQ's : Offering Gifts, Rebates or Other Inducements

The third type of problem advertisements probably provokes the most calls and complaints to the Commission. Those are advertisements that promise a rebate or a gift to a prospective customer or client. In the 1970s the Commission had rules which prohibited advertisements which offered prizes, gifts, or rebates to prospects. Federal and state court rulings in the early 1980s overturned such rules. In rejecting such rules, the courts held that the first amendment to the Constitution protects what they termed "commercial free speech." Therefore, most advertisements which promise gifts, prizes, or other compensation to prospects or clients are acceptable as long as they are not misleading or inaccurate in any material fact and the licensee provides the item as promised. While giving gifts or other compensation directly to clients, customers, or prospective clients or customers is permissible, offering anything of value to unlicensed persons for providing leads to prospective clients or customers is not. (For additional information, please refer to, " SOLICITING PROSPECTS AND PAYING REFERRAL FEES .")

Maryland Real Estate Commission

"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."

According to my understanding of the aforementioned verbiage from the MREC, apparently only rebate money used for the closing is required to be on the HUD.

I don't know about the rest of you, but the statement above is as clear as the water in the Yucatan.

To answer the question that has been posed, we must first determine what the purpose of the HUD-1 is. Let's take a look at the information provided by NAR:

Question #3:

To provide consumers with cost information about the mortgage process, RESPA created the good faith estimate (GFE) and the HUD-1 closing document. RESPA requires that the HUD-1 form be provided to the:

1. Tax assessor
2. Next-door neighbor
3. Real estate salesperson
4. Buyer

Answer: Buyer

There you have it. RESPA created the HUD-1 form for the purchaser.

A RESPA compliance officer told me that RESPA does not investigate broker rebates to buyers.  Anyhow, they say to fax the request to disclose rebate on the HUD-1 settlement statement to settlement attorney.  If settlement attorney does not comply because lender or builder will not allow, (any) liablity will rest with those parties.  Lenders and builders should not be preventing the HUD disclosure.  They would be in violation, not the real estate broker.

Irregardless, real estate brokers are not going to get in trouble with RESPA for giving rebate savings to buyers.    

this is an old string but I'm re-researching some things now.  Been all over this with title companies and their attorneys, lenders, my own attorney and a former client who was a corp. lawyer, later became IRS research lawyer and gave me free, but sound advice.  Here in TX a Broker can always rebate his client and can also rebate the other party with all parties permission.  Rare, but their are some theoretical scenarios where it could come up. 

If the rebate is being used in connection with the closing and purchase, it goes on HUD.  If the rebate is rebate is post closing for post closing and/or non-purchase items, whether a $1,000 check two weeks later or your agreement to pay for one year's alarm system at $1,000; then it does not need to go on HUD.  If it's a top Maytag W/D costing $1,000 delivered a week after closing, that does not go on HUD. 

As for 1099 - any rebate is ABSOLUTELY not earned or unearned income.  To even consider that money, or goods, as income or payment for services would have you violating state and board law by paying a commission to an unlicensed person.  Or paying commission for no work done, or not procuring a sale, and so forth.  All sources who have researched for me or had issue come up agree that per IRS Publication {don't have file handy - you can go to IRS.gov and search for "rebate"} and other regulations, a rebate from a dealer / broker who received funds from the transaction and rebates some back to the client / customer should be considered as a reduction in the cost basis of the product / home. 

So a $6K Buyer Rep. commission with $1k cash/check rebated to Buyer will not generate a 1099, but will reduce purchase basis by $1K when they re-sell.  It should also come with a Hold Harmless agreement advising buyer to confirm tax treatment independently via IRS or CPA so that you aren't accused of giving tax advice.  

P.S. this has worked only when I already had captive client, so maybe it wasn't needed?  Difficult to sell to general public because they think that some how it's added on to sales price like car dealers, even though the economics of a Buyer's Rep don't work that way. They really do not see any extra value, believe it's all smoke and mirrors, and "kids" these days care more about decor than saving money!