Both federal law and Alabama state law allow real estate licensees to give prizes, money, gifts, and other valuable consideration (I will call “incentives”) to parties to induce them to enter into real estate transactions. If this sounds simple, do not be deceived.  Alabama state law does not allow a real estate licensee to give or receive a rebate in a real estate transaction. Federal law does not allow a real estate licensee to give or receive a kickback or unearned fee in connection with certain real estate transactions. As we will see, there are other hidden problems with the giving of such incentives. Prior to legislation in the 1992 Regular Session of the legislature, Section 34-27-36(a)(24) Code of Alabama 1975, as amended, (The Code) prohibited real estate licensees from giving prizes, money, free gifts, or any valuable consideration to induce customers to purchase, rent, lease, or list property. Although this provision was not deleted until 1992 by the Alabama legislature, it actually had not been enforced since a federal court enjoined its enforcement in 1986 (CAUTION, an incentive may only be given to a party to a transaction, i.e. buyers, sellers, lessors, and lessees).

Here are some examples of what the law allows a licensee to do: 1. Pay cash to owner who list property for sale. 2. Pay cash to a customer to get him or her to buy a home. 3. Give a car or refrigerator to customer to get him or her to buy a home. 4. Give one month’s free rent to a customer to get him or her to rent an apartment. 5. Pay repair expenses to get a buyer and seller to contract or close a sale.

Giving any incentive without violating another law depends in part on how it is given. All incentives must be given in advance or at closing and must be disclosed to all interested parties. Interested parties in the case of a sale are the sellers, buyers and lender or guaranteeing agency (FHA,VA or HUD, for example.) Section 34-27-36(a)(21) of The Code makes it a violation for a licensee to misrepresent or fail to disclose to any lender, guaranteeing agency, or any other interested party the true terms of a sale of real estate. Obviously, an incentive of material value would matter to these parties and must be disclosed at every step. No disclosure would violate this section of state law and invite FHA, VA or HUD to consider appropriate sanctions against an offending licensee. Criminal charges are also possible in some cases. A classic example is the undisclosed loan or gift to a buyer without which the buyer could not have qualified for a mortgage loan.

Giving the incentive in advance or at closing also helps prevent a potential violation of Section 34-27-36(a)(12) of The Code. This is the section which prohibits a licensee from giving or receiving a rebate in a real estate transaction. The effect of Commission rulings is that a rebate is any unearned fee, kickback, or thing of value given in connection with a transaction. A rebate is typically given after or outside closing and may not be received by a licensee or given to anyone (whether a party or not) in connection with the transaction. Remember, too, a rebate is illegal whether or not it is disclosed. Disclosure of a rebate does not make it legal.

Here are some examples of illegal fees which constitute a rebate: 1. Payment of a fee to a licensee by a title insurance company, a mortgage company, or a homeowner’s insurance agent for referral of business. Giving an expenses paid vacation to the licensee is a rebate. 2. Payment of a fee to a licensee by a carpet installer, a pool contractor, or landscape contractor for referral of business. 3. Payment of a fee by a licensee to anyone for referring a buyer or seller to the licensee

The federal law in this area is the Real Estate Settlement Procedures Act (RESPA). Although it is not within the Commission’s jurisdiction, licensees should be aware of RESPA’s provisions.  The provisions of the act are broad and complicated. For purposes of information, I am going to simplify the relevant sections here. Licensees should seek legal advice on compliance with RESPA.  Note, RESPA does not apply to all transactions. It applies only to certain transactions involving federally related mortgage loans. Generally, a mortgage is federally related if the loan is a first mortgage financing the purchase of a one to four family unit structure in the United States and is governmentally guaranteed, insured, supplemented, or assisted RESPA prohibits paying or receiving any unearned fee, kickback, or thing of value for the referral of business. Like rebates, it appears these payments are illegal whether or not they are disclosed.

Here are some examples of illegal kickbacks: 1. Payment of a fee by a title insurance company to an attorney or broker for referring business to the title insurance company. 2. Payment of a fee by a mortgage originator to a real estate salesperson for referring business to the mortgage company.  The best definition of an unearned fee is the common sense one which says an unearned fee is any fee paid which is not for the performance of legitimate services actually performed. Steering or referring business to a company is not considered a legitimate service. No law prohibits earned fees in connection with real estate transactions. A licensee may earn a commission split for referring a buyer to a listing broker.  A broker may legally earn a fee for originating a mortgage loan, provided the broker actually is the originator and does the work of an originator. Similarly, a broker who also holds an insurance license may legally earn a commission for homeowner’s insurance written on a property in a transaction.

Again, it should be noted that the information presented in the preceding article relates ONLY to people buying & selling houses in the state of ALABAMA and their agents.