Picture this: A real estate agent takes a prospective home buyer around town on a house-hunting expedition. The agent shows the buyer a number of houses, and along the way, they both become hungry. They decide to stop for a sandwich and a soda. The agent turns to the buyer and says, “I’d be happy to treat you to lunch today, but I can’t do it because it would be illegal.”
That’s a joke, right? Not in Kentucky. Technically, it is illegal for a real estate agent in that great state to buy lunch for a hungry home buyer.
The sandwich and soda are considered to be an inducement to transact business and such inducements, which include all types of business gifts, incentives and rebates, are illegal in the real estate business in Kentucky and to varying degrees in some other states as well.
The U.S. Department of Justice and the Kentucky Real Estate Commission are investigating Kentucky’s anti-inducement law – and with good reason. There may be more to this ban than meets the eye, yet it appears to serve little purpose beyond restraint of competition at the expense of home buyers and sellers.
Kentucky’s ban is so strict that agents can’t offer prospects such modest inducements as a fast-food sandwich coupon printed with the agent’s name, a free holiday photograph to collect prospects’ names and addresses, or “any prize, money, free gift, rebate or other thing of value as an inducement.”
What? No house-shaped refrigerator magnets? No potholders, recipes or seed packets? No logo-emblazoned calendars? Not even little American flags with business cards attached to them? What possible harm could come to the public from such trinkets?
Freebies, giveaways and even rebates, are standard marketing practices that other businesses, presumably even in Kentucky, can use without such restraints. Businesses that want to offer trinkets or more costly inducements can do so while those that don’t want to aren’t obligated to copy their competitors.
The Kentucky Real Estate Commission has said it might ease its restrictions on inducements, but a narrower definition that would still apply solely to real estate really shouldn’t be acceptable. These laws, which serve little purpose other than to diminish competition at the expense of consumers, should be struck off the books; and if the states aren’t wise enough to do it themselves, the DOJ should step in and make the laws moot.
Eighty percent of Kentucky real estate brokers and agents responding to a survey naturally opposed any change in the state’s anti-inducements law. Their resistance isn’t at all surprising. The ban limits a method of price competition, potentially lowers their marketing costs, and facilitates the much-beloved “level-playing field.” That may be all in the industry’s favor, but it’s not in the consumer’s favor.
A state ban on commission rebates is particularly egregious. Set aside the commission split between the broker and the salesperson for simplicity’s sake, and it’s easy to see that a rebate ban cheats home buyers out of a potential price break. The seller pays the same commission to the sell-side broker and the sell-side broker pays the same commission split to the buy-side broker, regardless of whether the buy-side broker offers a rebate to the buyer. If a rebate is legal, the buy-side broker has the right to decide whether to rebate a portion of the commission split to the buyer as an inducement to transact business. Why should the state take away the broker’s right to make that decision as it best serves his or her own business needs? The buy-side broker and the buyer should be able to negotiate a rebate – or not – between themselves without the state’s interference.
A ban against rebates also could be construed as a state-sanctioned barrier to entry for discount brokerages in the state. It isn’t clear whether that’s Kentucky’s agenda; however, the outcome is the same regardless of the intent. Companies that use rebates as a core marketing strategy may hesitate to enter states where such practices are banned. That disincentive once again protects existing brokers from price competition and artificially raises the prices home buyers and sellers pay out of their pockets.
Marcie Geffner is a real estate reporter in Los Angeles.
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