By General Counsel
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:
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:
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:
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.
Unlicensed employees and assistants are a valuable part of most real estate companies. Every qualifying broker is responsible for the actions of unlicensed personnel. A broker is free to set his or her own office policy with regard to what unlicensed persons may do, consistent with the constraints of the law. Exactly what these people may do without being licensed is the subject of many questions. The short answer is they may only perform these duties normally attributed to their positions and may not do anything for which a license is required, as spelled out in Section 34-27-30 Code of Alabama 1975. Also see Alabama Real Estate Commission Rule 790-X-1-.04.
Since the short answer is not practice oriented, the following is a partial list of some common activities which may be performed without a license:
An unlicensed person May Not:
Risk management is all the rage these days. A good business has some plan along this line. Your plan should begin with the basics, like licensee owned property. Too much misunderstanding continues about this subject. Misunderstandings lead to problems, which in this area come with a genuine double-whammy. Whammy one: Your license can be revoked for nothing more than dishonest acts. Whammy two: You might have no errors and omissions coverage for even simple mistakes. If you are a qualifying broker, add whammy three: You are responsible.
Let’s take E&O coverage first. The state group situation has changed since this was first written, but you should check your E&O policy. Most Policies contain an exclusion for personally or company owned real estate.
Remind yourself to take extra care in dealing with your own property. Do you, who are qualifying brokers, have procedures for your salespeople when they sell or rent their own property, and do you remember what to do when you sell or rent yours? An easy memory trick is to pretend all property in which you deal is listed or being managed by your company for the public. This will provide the proper guide every time.
Now, back to the basics of license law. Section 34-27-2(b)(1) Code of Alabama 1975, as amended, (the Code, hereafter) exempts owners of real estate from being licensed in transactions involving their own property. Real translation: The State of Alabama does not require every property owner to get licensed in order to sell or lease his or her own property. Fake translation: The license law does not apply to me, a licensee, when I deal in my own property.
Here are some real life situations. In which of these does the law apply to you? In which is your qualifying broker responsible for your actions?
The law applies to you in every one of them. Your qualifying broker is responsible for every one of them. This means there should be a sales or rental file in the office for every one. Any earnest money or security deposit must be turned over to the qualifying broker, and deposited into a trust account, unless a release is executed by the appropriate parties. The company RECAD office policy is to be followed, except where the RECAD law itself provides an exception. These answer apply even if you and your qualifying broker have agreed that these transactions do not have to be listed or "run through" the company. You and your broker cannot contract to waive requirements of the law.
The law also holds real estate licensees to a higher standard when dealing in property owned by them or their family. This is an often overlooked feature of the license law. Section 34-27-36(a)(2) of the Code provides for disciplinary action when "Engaging in misrepresentation or dishonest or fraudulent acts when selling, buying, trading, or renting real property of his or her own or of a spouse or child or parent." To possibly lose your license, all that must be shown is that you acted dishonestly. No other violation of law is necessary. To avoid any misunderstanding of what the law is, the Commission many years ago wrote Rule 790-X-1-.03(2). This rule says a licensee must abide by all provisions of the law and rules in dealing in his or her own property, or that of a spouse, child, or parent.
Yes, the law in the other states is similar, and it has been challenged in court in some of those states. The licensees lost those cases. We do not have an Alabama case, but I can provide you the cite for the most recent case in which the Colorado Real Estate Commission prevailed.
You should be able to construct a checklist for licensee owned property from this article. I hope the information will help with your risk management plan. Besides, we have a selfish motive. If you do it right, the public should have fewer problems. We all can benefit.
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