I recently was involved in a transaction where I was referred to a buyer from another agent. The referring agent was related to the buyer and instead of receiving the referral fee the agent wanted to rebate that amount to help the buyer with their closing costs.
Is this legal?
No, but the buyers agents, in this case me, could have rebated a portion of my commission to the buyer to be used towards their closing costs.
Let me unpack that answer for you.
As a rule of thumb I am not a discount broker. I believe that I provide my clients professional representation in their home purchase or sale and expect to be compensated fairly. By law, commissions can’t be fixed. Price-fixing is a per se antitrust violation based on the Sherman Anti-Trust Act of 1890. Real-estate brokers typically—but not always—price their services based upon a percentage (known as a commission) of the sales price. At the same time, they usually offer a publicly-announced share of that commission to a broker that brings in a buyer. To understand the ramifications of price fixing in real estate this article does a pretty good job of explaining the implications of price fixing and the conversation that goes around in real estate circles. Take a look at the Wikipedia entry for the Sherman AntiTrust Act of 1890 for additional background information.
However, in the case of a referral you need to understand how agents referring business to other agents work and how commissions are shared. Not withstanding the above paragraph I will share my commission (discount) in cases where another agent sends me business. Understand that it takes considerable effort and expense to gain a new client. When another agent who typically is in another geographic location has a ready willing and able buyer that plans to purchase a home in my area, they will call and say, for a certain percentage of the commission that I would receive they will give me the name and contact information for their buyer. In the event that I am successful in helping that buyer purchase a home, I will receive a commission on that sale. A portion of that commission, which is agreed upon before receiving the buyers name is then sent to the other agent when the sale of a property is finalized. That is common in our industry and it happens all the time. Their is nothing wrong or illegal about that.
Now to the heart of the question, can an agent rebate a part of their commission to a buyer to help with their costs of purchasing a home. In Colorado it’s legal as long as it’s disclosed in writing, and the lender is aware of it, and the rebate is allowed by the lender.
The United States Department of Justice has an entry explaining their position.
It is allowed by RESPA rules regarding rebates the entry in the guideline says yes.
Q: May a real estate agent rebate a portion of the agent‘s commission to the borrower? If so, how should the rebate be listed on the HUD-1?
A: Yes, real estate agents may rebate a portion of the agent‘s commission to the borrower in a real estate transaction. 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 to borrowers do not violate Section 8 of RESPA as long as no part
of the commission rebate is tied to a referral of business.
So in the case of the agent referring a family member and foregoing the commission, the amount that would have been paid to the referring agent would have been a violation of RESPA rules because the referring agents commission would have been the result of a referral.