Legal Breakdown: Rebates and Inducements

IAR Legal Counsel Gabe Walsh and Attorney and IAR Instructor Jorge Gomez, Jr. are back with another Legal Breakdown! They do a deep dive into the topic of rebates and inducements.

Questions Addressed In Video:
1: Can I offer gift cards or cash, to a potential party to a transaction? Begins at 1:51 
2. Can I give gifts, or have a drawing, for every person who comes to an open house? (question not addressed directly in video, but this considers many of the same concepts as question one – further, if you are having a drawing or promoting a prize, the real estate commission rules put responsibility on the licensee to ensure such promotion follows gaming law and gaming rules and regulations – seek gaming law counsel for assistance with this issue). 
3. Can I donate money on behalf of clients for every listing I have and every transaction I close? (begins at 6:40).
4. Can sellers’ agents/buyers’ agents rebate a portion of their commission to a client in the State of Iowa? (begins at 12:30 – this is topic that comes up constantly and is often the subject of heavy debate). 

Disclaimer: This video is intended to be an education resource for Iowa REALTORS®. The information in this video discusses general legal information and is not legal advice or a substitute. Every situation involving areas of the law, such as the areas discussed in this video, are sensitive to the particular facts of your case, and therefore, you should always consult your own legal counsel to get legal advice.

If you prefer to read this information, please scroll below the video to read through the transcript. 

 

This episode was recorded live during IAR's Capitol Conference in February 2021. 

Topic one, rebates and inducements. Jorge, one of the big parts of my job, as you know, is answering questions for members on the Iowa Association of Realtors® legal hotline. Several of the questions I get, it seems a lot of these rebate questions sometimes come around holiday times, but there's several of them I get, and I just want to share with the viewers a few of these questions.

Can I offer gift cards or cash to a potential client in a transaction? You know, maybe you have a listing, you're a listing agent, and you're going to hold an open house. A question I sometimes get, Jorge, is, can I have a gift card drawing for everybody who comes through my open house as a way to sort of try to gain traction for people to come view this property? 

Another one, can I donate money on behalf of a client for every listing I have, for every transaction I close? That's another question. So this one comes up all the time, Jorge, in classes, I'm sure you've heard it before, but somebody will always tell me, Gabe, Iowa's an anti-rebating state, right?

 Sellers can't rebate portions of their commissions to their clients, can they? Buyers agents, they can't do that, can they? We're going to talk about that question as well, because it's an important one.

Okay. That's a lot of stuff. That's a lot of stuff to talk about, right?

First thing I think we should do, Gabe, on all those questions, as well as any other questions we're going to talk about today, I think we have to look at the code.

All right. And unfortunately, sometimes we just have to read the code instead of paraphrase. And this is one of those situations and these issues, I think, where we just need to read the code. So let me read a couple provisions of that code as it relates to rebates and inducements. And we're looking at Iowa administrative code 193E, and this is what the code says.

A licensee may present a gratuitous gift such as flowers or a door knocker to the buyer or tenant subsequent to closing and not promised or offered as an inducement. I think that's a key word, we'll get back to that, inducement to buy or lease, right? The code further goes on and says that a licensee may, may present free gifts, such as prizes, money, or other valuable consideration to a potential client, party to a transaction, or lease prior to that party signing a contract to purchase or lease and not promised or offered as an inducement to buy or lease.

Absolutely. So Jorge, when I'm listening to what you just read in those two provisions, the first one that you read seemed to talk about situations where there's some kind of gift after a transaction's been consummated or closed, right? Closing gifts, I guess, is in the industry. It would consider those.

I would agree. And I tell you, the many closings that I've done, I see that happen. It's a regular thing. The Realtors® will bring a door knocker, they'll bring a stone with the people's name on it. They'll bring a gift after the closing to show their thankfulness for their clients.
And again, when you read the rule, I mean, by the time the transactions close, when you come out with some kind of a gift or flowers or whatever it might be, I mean, at that point, it's kind of hard to see how it would be an inducement, right? I mean the transactions basically, I mean, it's closed at that point.

Correct. I would agree with that. But the second part or the second code section that I read there is, gifts to a potential buyer.

Okay. And I think that's an issue that can be concerning. I think the first issue is pretty straight, right? If we think about it, use our common sense. I think it's pretty straight. It's that second issue. Can I give a gift to a potential client as an inducement for that client to have me provide services to them?

So it seems to me what you're talking about, Jorge, is the key trigger word here that we need to deal with is inducement, right? Because there's at least a set of gifts even to a prospective client that are okay, is what the rules are telling us here. But what is an inducement?

I think to find out what inducement, Gabe, is what I do when I come to these things. Let's go to the dictionary.

What's the dictionary say? The dictionary says, the Miriam Webster dictionary says, inducement means a motive or consideration that leads one to action or to additional or more effective actions. Wow.

Jorge, you're looking to buy a house, I'll be your Realtor®. I will give you $1,000 gift card right here, right now, if you'll sign an exclusive agency and brokerage agreement with me.

Wow. Is that an inducement?

Seems pretty like an attractive offer. It seems like it's going to motivate me to action, doesn't it?

It does, it does. I go with you, I'm going to get that gift card. Why wouldn't I go with you?

Right, exactly. And I think the point of the rules here we're trying to consider is we want to make sure that members of the public are making informed decisions about who they're choosing to guide them through perhaps the biggest transaction they'll ever make in their entire lives.

Oh, I agree.

And that's what's so important. But what about, let's say your town is having, I don't know, maybe some kind of affair where they're having a bunch of small business owners that are coming and telling the public about their services and you know, you're offering maybe $20 gift cards, $50 gift cards. You know, you're not trying to get anybody to sign an offer or a purchase agreement, but that sort of thing.

Well, would you consider that an inducement per the definition that I just read?
It certainly, at that point, seems a lot less inducing type behavior-

I would agree.

Than the other example. That seems to be the kind of thing that probably is okay.

But I think when Realtors® look at this, I think when they look at this, I think they have to really read the statue close and really define in their minds what inducement means. If you think it's an inducement for a potential client, be careful, probably don't want to go there. After a closing, here client, here's your door knocker, everything's fine.

I agree with you, Jorge. Absolutely. And again, we're trying to look at these issues, especially when there's gray area, and we're trying to act in the least risky way possible to try to protect ourselves, protect our public.

Yes. You know, there's something that I'm big on, Gabe, and that's something called issue avoidance. And what I mean by that is this. I mean that Realtors® on a daily basis, part of the profession, find themselves confronting issues. And if they can obviously address the issue, analyze the issue, and know what to do to avoid that issue, that's what they want to do. And that's what we're trying to do here.

Absolutely. Jorge, another question that comes up on the hotline fairly frequently is, if you are a Realtor®, if you have a listing, whatever, can you make a charitable contribution to a nonprofit for every listing you have? Can you make a contribution on behalf of a client for every closing you do if you're a buyer client, and can you advertise that? And if so, to what extent can you advertise? What do I need to be careful about? This one actually, Jorge, comes up quite a bit on the hotline.

Yes. And I bet it does, Gabe. It seems like a natural question that would come up from Realtors®. Can I give to charity? I mean, everybody's trying to promote their businesses and maybe this is one way to promote their business, but let me go back to the basic question we just got done discussing, and I want your thought on this. Do you think offering to give to a charity, could that be considered some sort of inducement?

You know, Jorge, I think it's a tough question. And when I think of this issue, here's the best thing I've been able to come up with. If I am giving you and offering you a gift card to list with me, if it's $500 or whatever, of course that's going to be some kind of a gift card or money that's going to be directly flowing to you, versus if I say Jorge, list with me and I'll make a contribution to a local charity, the Red Cross, I don't know, whatever it might be, at that point, maybe that's really important to you subjectively, but at the same time, I'm not sure that has the same benefit as giving you direct compensation.

And I would agree. I would agree. What benefit am I going to get directly, right? But let's go back to the code, Gabe. Can we do that? And that's on this charity thing, and I think the code is specific on, this is what your code says again, we're at 193E. Licensee may, may make donations to a charity or other not for profit, key, not for profit, organization for each listing or closing or both that the licensee has during a specific period of time. The receiving entity may be selected by the licensee or by a party to the transaction. Contribution may be made in the name of a licensee or the name of a party to the transaction, and contributions may be permissible if, and it goes down a whole list of things. So yes, I mean, if you read that code and you do it correctly, charitable contributions are allowed in the buyer code.

And there's a couple key things I read. I want to make sure I heard that properly. So according to the code, that situation where I'm the listing agent and you're a prospective client, I can choose the charity as the listing agent, or you could even choose the charity as the client. That's what the code says, right?

Exactly. Either one of us.

And I could make the contribution in my name as Gabe Walsh Realty, or I can make the contribution on behalf of you in your name, right?
Correct.

So again, there's quite a bit of options here for this code provision. What kind of things, if you're going to be making these contributions, what does the code go on to say that you have to do to make sure it's compliant with the rules?

Well, there's several things, but let me touch on a couple of them. And maybe the most obvious one is it has to be a not for profit organization. So, if you're going to make these contributions, Realtors®, either on your behalf or on behalf of your clients, make sure that it is a not for profit organization. You have a due diligence to make sure that is true. There also has to be a specific amount that has to be addressed up front, and the receiving entity does not act or participate in any manner that would require a license. So again, you're not profit. And the licensee, you, the Realtor®, the licensee, exercises, reasonable care to ensure that the promotional materials clearly explain the terms under which the donation will be made. And that disclosures, we would want to disclose to and have the consent of the client that this is what we're going to do.

And it seems like when you read the code, I mean, one of the things that it says is you have to make sure that the promotional materials clearly explain the terms under which a donation will be made. So the rules seem to sort of almost presume, if you will, that there's going to be a marketing component to this, that somebody might even advertise that for every listing I have in a period. But do you think there's situations where you want to be careful about what the language is? Because we're talking about inducements, right? We don't want to induce somebody to simply use our services because we're making a contribution, right?

Oh, absolutely. I think language is key here. You have to really spell out what you're doing while you're doing it. The conditions in which you will fulfill that charity, I think that's clear in the code. So Gabe, what have we learned?

What do we tell the viewers? We have to get to that point? I thought we were just going to read the code sections. Let them figure it out for themselves.

Well I'm sure they will too. But what have we learned?

No, I think it's very clear that when we're talking about these sorts of gifting, we're talking about giving something of value or any type of benefit, we're trying to do it in a non-invasive, sort of consistent across the board way. I think when you're talking about gifts to prospective clients, I would say that the lower the amount, probably the less likely it is to be an inducement. You start talking about a couple thousand dollars, that's kind of hard to argue that it is not an inducement. So again, I think just using some common sense on this doing the right thing.

Yes. The takeaway I have, Gabe, is this. They are allowed. Look at the code. The code tells you what you must do. It gives you a line of what you must do, and just be careful. Use your common sense. Be careful. Everything will be fine.

Absolutely. Okay. This is, Jorge, this might be one of the more fun ones of the day.

You have another one for me.

Oh, we have one more on this rebating topic. I would say this the big one to the top of this portion. Again, you've probably had this in a class before, where somebody will raise their hand and start talking about rebating portions of commission. And rebating portions of commission, meaning if I'm a buyer's agent representing a buyer at closing, if I'm expecting some certain sort of cooperative compensation, I have an agreement with my buyer client to rebate them some portion of that commission sort of to gain a competitive advantage or something like that.
And what's interesting is, somebody almost always raised their hand in class and say, well, you can't do that in Iowa. Iowa's an anti-rebating state. And you know, I don't think people are crazy for necessarily taking that position because all you have to do is get online and find some national blog or article that's been posted on this topic, and it'll talk about how like 40 plus states love rebating. And Iowa was one of these outliers, where rebating commissions isn't allowed.

Yes. Gabe, every time I'm in class or every time I'm talking to a Realtor® or a group of Realtors® and the word rebate comes up, the word rebating comes up, boy, my ears perk up. But there is going to be a discussion. And every time I've had this in a class there's been discussion and I'll tell you what. We could have 50 people in the class, 25 would say one thing, 25 would say another one.

Why we  are talking about this  - and then they'd look at me and they'd say, what do you think? And then their discussion starts.

I've had the same experience multiple times. So in those conversations, what do we say?

Well, I think the first thing we need to do, like anything, like any issue you have, is look at the code, see what the code says, right? The code talks about rebates. There's an actual section on the code which talks about rebate, and it says that, basically, there's two situations, I think, when it comes to rebate. I think it depends if you are the only agent, because you have exclusive agency relationship with a party, can you rebate to your seller? Can you rebate part of the commission to your buyer? Or if there's someone else, another agent also involved with that transaction, does that change the rules as so far as what can be rebated, if anything? And what kind of consent and or disclosure you need to provide in order to handle the rebate.

Yes. I think you frame the exact question in sort of what we need to consider, but again, let's go back and look at exactly what the code says here, because I think the language here, more than anything we'll say today, is so critical. And this code section we're going to talk about is 543 B, 60 A in the Iowa code. And it's actually titled, prohibited practices. What this section says, and I'm going to read this, because it's important that I get this right. A licensee shall not offer, promote, perform, provide, or otherwise participate in any marketing plan that requires a consumer to receive brokerage services, including referral services, from two or more licensees in a single real estate transaction as a required condition for the consumer to receive either of the following. One, brokerage services from at least one of the licensees or two, a rebate, prize, or other inducement from one or more of such licensees. So we're talking about rebates today. We're more concerned with the second prong of that part.

So what does that tell us? Does that tell us if there's two or more agents involved in the transaction you cannot rebate?

Well I tell you what, a lot of people, when you have those conversations you were talking about that 25 on 25 in class? This is the code section right here that they're talking about when they say Iowa's an anti-rebating state. They say, look, there's two licensees, you have a listing broker, you have a buyer's broker, that's two, you have two licensees. You know, you can't rebate a commission, anybody in that transaction. And the question is whether that's what the language is actually saying. And unfortunately, Jorge, I've looked into this. I don't believe we have any case law or any real guidance on the topic. So here we are.

Yes. And I agree too, Gabe, I tried to find some case law on the topic and I couldn't find any. So it's a matter of interpretation. How does someone interpret that? How does someone interpret, can you rebate if there are two licensees involved in a transaction?

And sometimes again, don't rely on national blogs you see. That's another free lesson, free advice today, free tip. But sometimes you'll find something on the internet and it does get you thinking, because Iowa's often a footnote where rebating's not allowed. But another footnote you'll sometimes see is, well, the only situation in Iowa where you can rebate is if it's dual agency, only one licensee involved. And I've tried to think of an argument for why that makes sense, but I can't.

Let's go back to the first. Does the first scenario that we talked about, does that make sense?

Yes. Were you talking about where you have an exclusive agent representing a buyer, exclusive agent representing a seller? I mean, in that situation, I think the buyer's agent is providing brokerage services to their client. The seller's agent is providing brokerage services to their client. Nobody's requiring anybody in that situation to receive brokerage services for two or more licensees. So again, in that situation, it doesn't seem like that provision that we just read is saying no rebating there. That seems to be a situation where it makes sense that you'd be able to rebate. But what if you actually look on, Jorge, in the administrative code, 11.62 and 11.63.

And I have that right here. It says, 11.6, it says in a listing contract, the broker is principle party to the contract. Here's key. The broker may, the broker may, with proper disclosure, With proper disclosure, pay a portion of the commission earned to an unlicensed seller or landlord that is a principal party to the listing contract. This will be deemed a reduction in the amount of earned commission.

So, a listing agent, they have a client, that's a seller, they can rebate a portion to the extent they're a principal. It's their house, they're the seller, right?

How about the next provision?

Yes, 3.6 F.
A licensee shall not pay any undisclosed rebate to any party to a transaction. A licensee shall not pay any undisclosed rebate to any party in the transaction. So what does that tell us, if we're going to rebate?

Well, I think disclose, disclose, disclose, right?

If you're going to rebate.

We'll probably say that again today for another topic too, but disclosure is so important. But again, Jorge, why would the administrative rules... If the position were true, let's just take a step back. If the argument that all rebates in Iowa are not allowable, why would you need a rule in the Iowa administrative code that says, undisclosed rebates are no good. It seems to sort of suggest, naturally, that at least disclosed rebates, to some extent, may be allowable or permissible.

Yes. And I would agree. I think if you disclose and we're going to use that word over and over and over again, disclose, disclose, disclose, with the consent of your client, I think you can rebate that commission. And I can tell you this. In the closings that I've done, in the many, many closings that I've done.

How many is that, Jorge?

Oh, I don't know, Gabe. Now you're aging me. Right now, you're aging me. 35,000 plus whatever. I've seen the rebates. For whatever reason, I've seen the agent rebate part of the commission to their client. And sometimes they do it to make the deal go. Sometimes they do it for other reasons. But I've seen it. They do it the proper way, they give the disclosure, they get the consent, and they get the approval from the broker, and then they go forward and handle the transaction that way.

And that would likely be disclosed on the closing statement?

It would be right on the closing statement.

In other categories. Yes, absolutely. So again, if this is a super surprising topic to you today, and you just can't believe the answers and sort of the stuff that we've been talking about, again, we're coming into this at the angle where look there, isn't a lot of guidance on this and I'd be willing to bet if we got a group of 20 lawyers together to hash this out, we'd probably be all over the board.

I would agree with you, Gabe. We would be all over the board with those lawyers.

So again, if you're thinking about doing this in your businesses, your brokers, you should have that conversation with them. If your broker needs some guidance, talk to your legal counsel, make sure to vet that before you proceed down that sort of route if you have questions on proper ways to do this, and to what extent you can or cannot do this.

What you don't want to do is guess at these things. Don't think you're doing the right thing if you're not sure you're doing the right thing. So talk to your broker, your broker can seek counsel if they feel they need it.

But more than anything with this topic is, we really felt, Jorge, after we talked about what we were going to do for today, we thought that this was a topic that gets talked about and asked about enough that it's one that we at least needed to bring sort of out on the table here for further discussion where we can all continue to interact with each other and try to learn and grow and do our jobs better, right?
Absolutely.

 

Iowa Association of REALTORS

This article was written as a collaboration of IAR Staff members or invited subject matter experts.

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