Real Estate Buyer Rebates are Legal in California

There are a lot of talk and assertions by some on the internet that it is illegal or unethical for a real estate agent to provide a rebate to a buyer in a real estate transaction. While this is true in some states, it is not for California. For those states that ban such rebates, the Anti-Trust Division of the US Department of Justice (DOJ) is actively working to get those lifted to promote competition in the real estate industry to hopefully reduce costs in all states.

The historical problem associated with rebates in the real estate industry is one of kickbacks to other businesses, such as providing a kickback to a title company or another business to direct business a certain way. Through kickbacks, some agents were able to corner the market and prevent competition. This has been made illegal in all states through the federal Real Estate Settlement Procedures Act (RESPA). With regard to commission rebates to buyers, the issue is one of disclosure.

According to the DOJ and the Department of Housing and Urban Development (HUD), real estate agents may rebate a portion of the agent’s commission under RESPA. The rebate must be listed as a credit on page 1 of the HUD-1 in Lines 204-209 and the name of the party giving the credit must be identified. Real estate agent or broker commission rebates do NOT violate Section 8 of RESPA as long as no part of the commission rebate is tied to a referral of business.

As part of my business model, I provide buyer rebates to my clients when I only represent the buyer in a transaction. What I have found in today’s market is that lenders get a bit nervous when they see a large credit to the buyer from their agent. Thus, it is imperative that as the buyer’s agent to address this issue early with the lender as to how they will feel comfortable on how the credit is to be applied. I typically will credit the rebate toward closing costs and any extra toward the buyer’s down payment. I have found that lenders are happy to see the rebate so long as it does not show up as a surprise at the last hour.

As of this posting, the states that still prohibit rebates are: OR, AK, KS, OK, IA, MO, TN, MS, AL, and LA. Below is a link to the Department of Justice website page regarding rebates.

http://www.justice.gov/atr/public/real_estate/rebates.htm