Commission Reviews Compensation Rule

When market conditions make it more difficult to sell real estate, sellers sometimes offer incentives to real estate agents to promote the sale of their properties.

These “compensation incentives” may be in the form of cash, vacations, or other prizes. They are in addition to the sales commission or compensation the agent would otherwise receive from the sale and are usually given after the sale closes. They are especially popular among homebuilders to focus attention on their properties.

Real estate agents are permitted to receive compensation incentives so long as they are fully disclosed to their clients.

Responding to recent reports that some buyers are not being properly informed that their agents are being offered  these special incentives, the Real Estate Commission formed an advisory committee consisting of real estate brokers, builders and consumer representatives to assist it in determining whether changes in its rules are needed to reasonably assure that real estate purchasers and sellers are properly informed of any compensation received by or offered to their agents from another party to the transaction.

The members of the Commission’s Incentive Disclosure Advisory Committee were Kimberly D. Alston (Greensboro), William C. Bass (Asheville), Cindy S. Chandler (Charlotte), Tony H. Jarrett (Greensboro), C. Nash Lindsey, III (Fayetteville), P. Robert Measamer, Jr. (Fayetteville), Hampton Pitts (Raleigh), Page Robertson (Wilmington), James H. Sears (Gates), Grady F. Watkins, Jr. (Holden Beach), and Assistant Attorney General Harriet Worley.  Special Deputy Attorney General Thomas R. Miller served as advisor to the committee and Executive Director Fisher facilitated the discussions.

After reviewing and discussing the relevant issues, the committee determined that proper disclosure of incentives of more than nominal value requires:

1.     That the disclosure be in writing and preferably accompanied by an oral explanation of the incentive arrangement, that it be prominent, and that it be acknowledged by the agent’s clients; but if the client fails to acknowledge the written disclosure, the broker may proceed with the transaction after noting this in his or her transaction records.

2.     That the value of the incentive be disclosed and, if other than cash, a description of the incentive item and its monetary value stated.

3.     That the disclosure by the agent be timely; i.e., preferably while showing properties for which an incentive is being offered, but in no event later than the making of the buyer’s offer to purchase such properties.

The committee then concluded that, since the current Commission rule on disclosing the receipt of sales incentives does not require that the disclosure be made in writing nor does it address the timing or content of the disclosure, the rule should be amended to incorporate the disclosure elements it identified.

At its December meeting, after discussing the committee’s report and recommendations, the Real Estate Commission initiated rulemaking to consider amending its Rule A.0109 governing the disclosure of compensation incentives.  A rulemaking hearing will be held in the Conference Room of the Commission’s Raleigh office on April 16 beginning at 10:00 a.m. during which the Commission will receive comments from interested persons concerning the proposed rule including any written comments received prior to the hearing.  A complete copy of the proposed rule and the Incentive Disclosure Advisory Committee report is available on the Commission’s website, www.ncrec.state.nc.us.

Pending action by the Commission on the proposed rule change, licensees are reminded that they are required by current Commission rules to fully disclose to their clients any compensation incentive they are offered and that federal law requires them to report on the HUD-1 form their “total sales/broker’s commission” including any compensation incentives.

This article came from the January 2008-Vol38-3 edition of the bulletin.