Real Estate Kickbacks: What are they?
Whether you’re a real estate agent or a first-time homebuyer about to go through the process, following the proper ethics around kickbacks will help you navigate the transaction easily.
Kickbacks are illegal payments or gifts that occur during the transaction. These laws were put in place to avoid any bribery and protect consumers in the process.
While not all gifts or rebates fall under the illegal kickback category, it’s essential to understand the complexity and how the law defines kickbacks.
What is considered a kickback?
A kickback in real estate is when a real estate agent, who has a fiduciary responsibility to the client, receives benefits or items of value for referring certain businesses or services.
These are usually illegal and considered bribes, as it is often in the form of cash or something of value like a gift.
If your agent recommends additional real estate services like escrow companies, title companies, inspection companies, or other businesses that are involved in the real estate transaction, they have to comply with the law and not be bribed to refer business.
This helps maintain the integrity of the transaction and ensures consumer’s interests are protected.
Can real estate agents give or receive kickbacks?
A piece of law called the Real Estate Settlement Procedures Act (RESPA) was put in place in 1974 to prevent unethical or illegal actions between real estate service providers and their clients.
Real estate agents and mortgage brokers must abide by this, and it falls under the jurisdiction of the Consumer Financial Protection Bureau. Under RESPA section 8a, giving gifts or kickbacks in exchange for business is illegal.
Specifically, it prohibits any “unearned” fees or bonuses paid for services that weren’t performed.
What happens if a realtor is caught receiving a kickback?
RESPA is civil law that applies to all federally regulated mortgage loans, including purchase loans, refinances, home improvement loans, land contracts, and home equity lines of credit.
RESPA will not cover transactions like all-cash offers or rental transactions where a mortgage is not involved.
If you are caught violating RESPA as a real estate agent or mortgage lender, you can face severe consequences such as:
- A fine of up to $10,000
- Up to one year in jail
- Held liable for three times the amount paid
These kickbacks, in certain situations, can also be considered tax evasion since they are unreported income for the agent.
If you have any concerns about when or who can give gifts during the transaction, it’s best to confirm with your broker or a real estate attorney to ensure you’re not violating any RESPA laws.
Difference between “referral fees” or “finder’s fees” and kickbacks
One key exception to RESPA is when a referral fee is paid between two licensed real estate professionals.
This can be done when one real estate agent refers business to another agent and end up doing a transaction with that client. Sometimes known as a “finders” fee, it is not uncommon for a real estate agent to pay a small percentage of their commission for referring a client to another agent.
This can be anywhere from a few hundred dollars to 25% of their commission, depending on the state they’re in and the agreed-upon fee between the parties.
Each state has different regulations that outline what constitutes a referral fee and how much an agent is able to give, so check with your local state’s board of realtors to confirm. Most states require you to be a licensed real estate agent to receive a referral fee.
But a few states will allow unlicensed individuals - like previous clients - to receive a finders fee for sending business to an agent.
However, this does not apply between mortgage brokers and real estate agents. It is considered an illegal kickback when a referral fee is paid between a real estate agent and another service provider. But if it’s a referral fee between two real estate agents, it is permissible.
Difference between “closing cost credit” and kickbacks
While providing gifts in exchange for referrals violates RESPA, not all credits or gifts to clients are against the rules.
A mortgage lender or agent can offer the buyer or seller a closing credit or gift for using them as their service provider — just as long as there are no expectations to refer other businesses to the lender.
RESPA allows for gifts, refunds, or discounts to the client if it doesn’t involve referring business to that provider.
In this case, an agent might offer to refund part of their commission in the form of a “closing credit” that can go towards the client’s down payment and closing costs.
These credits are legal in 40 states and allow agents to give their clients a little money back at the closing table if necessary.
Can you gift a client without it being a “kickback?”
Giving gifts to a client at the closing table or after they move into their new house is a common practice in real estate.
But does that count as a kickback? According to RESPA, as long as there are no strings attached to the gift, agents can give gifts to their clients.
These would be considered more of a thank-you gift and is a way to build a relationship with clients.
These types of gifts and rebates are okay, so long as the client is not expected to get a referral out of it. Remember that next time you want to thank a client for choosing you as an agent!
Final thoughts on kickbacks in real estate
While Kickbacks are illegal and unethical in real estate, there are some exceptions to gift-giving for your clients, and from agent to agent.
RESPA was created to ensure that buyers and sellers have full transparency and trust in the transaction. If you’re a real estate agent, make sure you’re following proper procedures to avoid violating RESPA laws.
Make sure you have a complete understanding of the law so you can avoid any RESPA-related issues!
TL;DR: Kickbacks are an illegal gift from a service provider to incentivize someone to use their services. In the real estate industry, kickbacks are illegal and should not be used.