What Is a Kickback in Real Estate? Legal vs. Illegal
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Richard Haddad Managing EditorClose
Richard Haddad Managing EditorRichard Haddad is the managing editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
Selling and buying a home takes faith — faith that you’ll find a buyer who will offer you a fair price, or faith that you’re buying a home worth its price. You also need to have faith in the real estate professionals you select to guide the transaction. But what if you see something that might be considered an illegal kickback in real estate?
What’s legal and what’s not, and why is it important for you to know?
This guide covers kickbacks in real estate, shedding light on their legality, the forms they take, and the implications for those involved. It’s designed to help ensure your home sale or purchase is done with ethics, transparency, and trust.
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What is a kickback in real estate?
In the real estate world, a kickback refers to an unearned, typically illegal, payment made in exchange for preferential treatment or services. It’s a type of under-the-table agreement where one party receives something of value, usually money or a gift, in return for influencing a transaction or decision-making process.
Kickbacks can distort the market, inflate property prices, and undermine the integrity of real estate professionals. For these reasons, the practice of kickbacks is highly illegal in real estate. Here are a few examples of illegal kickbacks in real estate:
- A mortgage broker receives a payment from a lender in exchange for directing clients to that lender, regardless of whether it’s in the client’s best interest.
- A real estate agent gets a fee from a home inspection service for referring sellers or buyers, potentially compromising the impartiality of the inspection.
- Title companies offering gifts or financial incentives to real estate agents for steering business their way, affecting the neutrality of the agent’s recommendations.
Who might be involved in real estate kickbacks?
In real estate transactions, kickbacks can involve various players, each potentially influencing the outcome to the benefit of themselves or others. When it comes to kickbacks, the circle of involvement might include:
- Real estate agents or brokers
- Mortgage lenders or brokers
- Escrow agents
- Home inspectors
- Title companies
- Home appraisers
- Contractors or builders
Warning signs of a possible kickback scheme
Identifying a kickback can be challenging, but there are warning signs you can look out for. Being aware of these indicators can help protect your interests in a real estate transaction:
- Recommendations seem overly insistent or biased toward a specific service provider.
- The costs for services are significantly higher than the market rate without a clear reason.
- Lack of transparency or reluctance to provide detailed information about the relationships between parties.
- Unusual payment structures or fees that don’t align with standard practices.
- Offers of cash back, gifts, or other incentives without a transparent, legal rationale.
Why are kickbacks in real estate illegal?
Kickbacks in real estate are illegal because they can lead to unfair practices, inflated prices, and a breach of trust between the consumer and real estate professionals. The legality of kickbacks is primarily governed by the Real Estate Settlement Procedures Act (RESPA), which prohibits unearned fees and kickbacks in transactions involving federally related mortgage loans.
RESPA was enacted in 1975 to ensure that buyers and sellers in real estate transactions receive fair and honest services without the influence of unnecessary and illegal payments.
Which agency enforces RESPA violations?
The enforcement of RESPA violations falls under the jurisdiction of the Consumer Financial Protection Bureau (CFPB). The CFPB, established to protect consumers by carrying out federal consumer financial laws, oversees and ensures that all parties involved in real estate transactions comply with RESPA regulations.
Report potential industry misconduct
If you suspect a kickback scheme or any action that you believe violates real estate kickback laws, the Consumer Financial Protection Bureau (CFPB) provides three ways to report potential industry misconduct. Visit this link or call the CFPB Whistleblower Tip line at 855-695-7974.
Can an agent receive a fine for a kickback?
Yes, an agent and other real estate professionals can receive a fine for a kickback. According to the CFPB, civil and criminal liability is provided for violating the prohibition against kickbacks and unearned fees, including:
- Civil liability to the parties affected, equal to three times the amount of any charge paid for such settlement service.
- The possibility that the costs associated with any court proceeding, together with reasonable attorney’s fees, could be recovered.
- A fine of not more than $10,000 or imprisonment for not more than one year or both.
In addition to fines, agents found to be involved in kickback schemes may face other penalties or repercussions, including:
- Suspension or revocation of their real estate license.
- Irreparable damage to their professional career and reputation
- Being required to pay restitution to other affected parties.
Is there such a thing as a legal kickback?
In the context of real estate, the term “kickback” carries a negative connotation due to its association with illegal activities. However, there are several legal practices that might resemble kickbacks but are permitted under certain regulations and circumstances. These practices are designed to benefit the buyer, seller, or both, without compromising fairness or transparency in the transaction.
Referral fee
A referral fee is a payment made to a real estate professional for directing a client to another professional or service, such as a lender, attorney, or inspector. This fee is legal as long as it’s disclosed to all parties involved and does not influence the client’s decision-making process to the detriment of their interests. The giver is the professional receiving the referral, and the receiver is the one who provided the referral.
Finder’s fees
Finder’s fees are payments made to individuals for bringing a buyer and seller together or for discovering a property available for sale or rent. These fees are considered legal when they are transparently handled, properly documented, and comply with local regulations. The giver is usually the party benefiting from the new connection, and the receiver is the individual who made the introduction.
Closing cost credit
Closing cost credits are concessions made by the seller to the buyer, often used to cover part of the buyer’s closing costs. This practice is legal and can be a negotiating tool in the sales process. The credit helps to make the purchase more affordable for the buyer without resorting to unfair practices. The giver is the seller, and the receiver is the buyer.
Home buyer rebate
Home buyer rebates are discounts or refunds provided by real estate agents to their clients upon closing a sale. These rebates are legal in 41 states and can offer significant savings to buyers. However, they must be disclosed in the transaction documents and comply with state laws. The giver is the real estate agent, and the receiver is the home buyer.
Commission
Commissions are fees paid to real estate agents for their services in selling or buying a property. This payment is a percentage of the sale price and is split between the buyer’s and seller’s agents. Commissions are a standard aspect of real estate transactions, recognized as the primary way agents earn their income. The givers are the buyers and sellers, who indirectly pay the commission through the transaction, and the receivers are the real estate agents or brokers involved.
Agent commission note: On March 15, 2024, the National Association of Realtors (NAR) announced a landmark lawsuit settlement that will change the way real estate agent commissions are handled in the future. These changes will “decouple” seller and buyer agent compensation. Learn more at this link.
Is a thank-you gift considered a kickback?
A thank-you gift in real estate transactions is not considered a kickback as long as it is of nominal value and not given with the intention to influence a person’s business decision or to reward a referral or business transaction. Such gifts are often gestures of appreciation toward clients, colleagues, or business partners. However, the key is transparency and the absence of any obligation or expectation for referrals or preferential treatment.
What other actions are illegal under RESPA?
Several actions violate the Real Estate Settlement Procedures Act (RESPA), aimed at protecting consumers and ensuring fair practices in real estate transactions. These include:
- Requiring exorbitantly large escrow or other service fees.
- Charging fees for services not rendered (phantom charges).
- Accepting fees or kickbacks for referrals of settlement service business.
- Unearned fee splitting, where two or more parties divide a fee for services, one or more of which did not actually contribute to earning that fee.
- Not disclosing a hidden balloon loan
- Not providing a HUD-1 Settlement Statement or the new Closing Disclosure form to buyers and sellers, detailing all charges.
The bottom line on kickbacks in real estate
Kickbacks in real estate undermine trust, inflate costs, and violate laws designed to ensure fairness and transparency in the housing market. It’s vital for buyers, sellers, and real estate professionals to recognize what constitutes a kickback to avoid legal repercussions and maintain the integrity of their transactions.
For those navigating the complexities of buying or selling a home, choosing the right real estate agent is crucial. HomeLight’s Agent Match platform simplifies this process by connecting you with the top-rated, most trusted agents in the country. Our partners are committed to upholding the highest standards of ethics and professionalism, ensuring your real estate experience is transparent, fair, and rewarding.
Header Image Source: (paulbr75/ Pixabay)
- "The Code of Ethics", National Association of REALTORS® (December 2023)
- What is a HUD-1 Settlement Statement?", Consumer Financial Protection Bureau (September 2020)
- 'What is a buyer rebate?", Selling Later (August 2023)
- "Finder's Fee", Legal Information Institute (July 2021)
- "The Complete Guide to Real Estate Referral Fees", The Close (March 2023)
