Real estate bait - Industry insiders, legislature review ban on closing gifts

The Star-Ledger, July 15th, 2007

SAM ALI STAR-LEDGER STAFF

1214 words

English (c) 2007 The Star-Ledger. All rights reserved.

So, you've just closed on your new home and your real estate agent has sent you a $75 gift certificate to Home Depot as a token of their appreciation, thanking you for your business.

Nothing unusual.

A recent survey conducted by ZipRealty found more than 70 percent of the real estate agents in New Jersey said they give a closing gift worth more than $50, according to Patrick Lashinsky, the company's chief executive.

While that may sound like a nice gesture, it's actually a pretty big no-no.

In fact, it's against the law in New Jersey. And agents can be sanctioned or lose their license for showing that kind of gratitude.

New Jersey is one of 10 states where real estate agents and brokers are barred from offering homebuyers or sellers cash rebates or gifts of any kind with a cash value more than $25.

Lashinsky has been trying to get the ban overturned since his company set up shop in New Jersey at the start of the year. That's because ZipRealty's business model is built around giving consumers cash rebates.

The Emeryville, Calif.-based discount brokerage gives homebuyers a cash rebate at closing equal to roughly 20 percent of the commission it has earned on any home sale.

Since opening it doors in 1999, it has avoided doing business in states that bar rebates. But back in January, ZipRealty decided to make an exception to that rule and entered the New Jersey market, altering its business model slightly.

Since it can't split its commission with homebuyers here, the company instead donates the 20 percent portion to the United Way, Lashinsky said.

Now, Lashinsky is hoping a bill in the state Legislature that would overturn the anti-rebate policy will change that.

THE REBATE DEBATE

The New Jersey Association of Realtors has come out strongly against both proposals, arguing rebates would do more harm than good for consumers.

"Unfortunately, as superficially appealing as rebates may be, we consider them to be distracting gimmickry," Jarrod Grasso, vice president of government affairs for the state Realtors' group, said during a recent hearing on the issue held by the New Jersey Real Estate Commission. "The consumer's focus will not be on the choice of the firm providing the real estate brokerage services that best fit the needs of the consumer. The focus will be on who is offering the best rebate."

NJAR argued that since real estate commissions are negotiable in New Jersey, homebuyers and sellers already have flexibility in how much they are willing to pay for real estate services.

"NJAR believes consumers should be selecting a real estate professional based on his or her qualifications, services and rapport - not whether he or she is offering any type of inducements," Grasso said. "The focus of the home buying process should be on buying a home."

Not every Realtor is opposed to the concept of rebates.

Frank Constantino, a broker with Prudential Fox and Roach, which operates 65 offices and employs 4,000 sales agents in New Jersey, Pennsylvania and Delaware, is in favor of repealing the ban.

"Our experience has been that it has been very positive for the consumer" in Pennsylvania and Delaware, Constantino said. "Sure, it has been harder on us to be profitable and to perform. . . . But from our experience, it also empowers the consumer with more choices and gives them more flexibility without making them take their eyes off the ball."

Offering home buyers incentives to make an offer is nothing new in the world of real estate.

Anyone who has been in the market for a home in a down market has seen or heard a pitch - builders or sellers offering incentives such as granite countertops, a finished patio, a new car or the always-reliable cash rebate to help pay for "points" or closing costs.

In the face of declining home sales and rising inventories of unsold homes, these types of sweeteners are designed to coax hesitant buyers from their shells. And here in New Jersey, this type of marketing is perfectly legal.

The ban only applies to real estate agents and brokers.

GOVERNMENT PRESSURE

The proposed legislation repealing the state's anti-rebate law already has some powerful allies, including the U.S. Department of Justice, which for the past two years has been pressuring states that bar consumer rebates to overturn their bans.

Two bills are pending in the Legislature - an Assembly version sponsored by Assemblyman Patrick Diegnan Jr. (D-Middlesex), and a companion bill in the Senate sponsored by Sen. Nicholas Scutari (D-Union).

Scutari said on Friday he did not expect any action on the bill until at least the fall.

"It's certainly a consumer-friendly bill, but in terms of response from the Legislature or the public, I haven't really had any yet because it was introduced very late in the session," he said.

Diegnan could not be reached for comment.

According to a recent report by the Federal Trade Commission and the DOJ on competition in the real estate brokerage industry, rebates "can be powerful tools for price competition between brokers."

Today, 40 states and the District of Columbia permit brokers and real estate agents to offer homebuyers rebates.

In 2005, the DOJ filed a lawsuit against the Kentucky Real Estate Commission, saying the commission's regulations prohibiting rebates and inducements restrained competition in violation of federal antitrust laws. The lawsuit was settled in July 2005.

A VARIETY OF PERKS

Since then, brokers in Kentucky have started offering consumers all sorts of perks, such as 1 percent cash rebates on new homes, $1,500 toward moving costs and Home Depot gift cards worth hundreds or even thousands of dollars, said Bennett Matelson, an attorney with the Antitrust Division of the Department of Justice.

Aside from Kentucky, West Virginia and South Dakota took steps to end their anti-rebate policies last year after the DOJ launched investigations on the consumer impact of the bans.

"The existing ban on rebates impedes brokers in the state from competition on price and, in turn, causes New Jersey real estate buyers to pay more commissions than they need to," Matelson said.

Real estate agents typically charge sellers 6 percent commission on the price of a property, keeping 3 percent for themselves and sharing the remaining 3 percent with the agent who brought the buyer to the transaction.

On the sale of a $387,000 house - the average New Jersey existing home price in 2006 - a consumer may pay a traditional broker a fee of $22,842, with half of that going to the cooperating agent.

If the cooperating agent were to rebate 1 percent of that commission to the buyer as an inducement, that would come to $3,807.

"If buyers had received this 1 percent rebate on the sale of all 154,000 existing homes sold in New Jersey in 2006, buyers would have received over $595 million in cash," Matelson said. "This is money in the buyer's pockets that would otherwise go to commissions."


Sam Ali may be reached at (973) 392-4188 or sali@starledger.com.

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