Myth: It is illegal to rebate your commission. 
Fact: There are some limited legal ways to rebate a portion of your commission.

By Marcus Simon, attorney

Many buyer agents have begun to offer to credit a portion of the real estate commission to their clients. It is not illegal for an agent to offer to pay money to a purchaser as an inducement to have them sign an exclusive agency agreement. However, this practice can lead to other problems for both purchasers and their agents further down the road, particularly at settlement.

Anytime a purchaser expects to receive a cash credit at closing, it is essential that they make their lender aware of the amount and nature of the credit as soon as possible. The lender will need to adjust the financing appropriately. Failure to do so can easily result in the lender disallowing the payment to the purchaser and possibly causing the entire transaction to unravel.

Commission credits can be accounted for correctly in a number of the ways on the HUD-1 settlement statement:

1) The seller may give the purchaser a credit at closing and reduce the commission paid by that same amount. The listing broker and/or agent must agree to this, however, as the broker is party to the listing agreement, which is a contractual arrangement between the seller and the broker. The seller may not be able to alter the commission amount or split on his or her own initiative.

2) If the listing broker or agent objects to a reduction in the commission paid, the selling agent may collect the full commission on page two of the settlement statement, then show it as a credit to the seller on page one. The seller then credits the same amount to the buyer.

3) A third method, which doesn't involve the seller at all, is to simply show a credit from the selling agent to the buyer on the buyer's side of the settlement statement.

Solutions two and three are problematic as they may create an issue under Virginia's Wet Settlements Act. Virginia law requires that all funds be received by the settlement company prior to recordation, and that no funds, including commissions, be disbursed until after the title documents have been recorded. If a commission credit is being used as part of the down payment, then arguably not all of the funds required to settle are available until the commission is actually disbursed.

The biggest problem with all three of these scenarios, however, is that the lender often is not willing to allow cash credits at closing. Most lenders will not allow any escrows, and may limit cash credits to the amount of closing costs actually incurred. Some loan programs do not allow for any closing cost credit. Third party credits, which include a credit from the real estate agent at closing, are often forbidden as well. Underwriters may treat the credit to the purchaser as a reduction in the sales price, affecting the loan to value ratios. Lenders have strict requirements regarding the source of funds of the down payment and the purchaser cash contribution at closing.

In order to make clients happy and "save" the transaction, there may be pressure brought on the settlement agent or the real estate agents to manipulate the numbers on the HUD-1. A real estate agent should be very wary of these schemes and avoid being made a party to loan fraud. It is important that the HUD-1 settlement statement accurately reflect the entire transaction.

KICKBACK: An offer to pay a third party to win a client's business. 
Example: A lender pays $1 to an agent in exchange for the agent referring the buyer to the lender.

Is it legal? A kickback is viewed as increasing the costs to consumers without providing anything of value. In certain circumstances, such as those covered under the Real Estate Settlement Protection Act, a kickback may be illegal.

REBATE: An offer to return part of a payment to a client to induce the client to use the firm's services. 
Example: A real estate firm offers to give back $1 of its commission to a client in exchange for the client using the firm's services to purchase a property.

Is it legal? The offering of a rebate is generally viewed as a legal and ethical part of negotiating compensation. State and Federal regulators have taken the position that such rebates ultimately reduce the cost to consumers. Any attempt to prohibit, restrict or discourage the negotiation of commission is considered an illegal restraint of trade under established antitrust law.