Are Freebies Ethical?

Reveal conditions for your promotions.

September 1, 2006

Q: I would like to offer a prospect a free home warranty or other special promotion. Is it a violation of the Code of Ethics to offer or advertise free items?

A: It isn’t a violation of the Code of Ethics to offer or advertise free items or services to clients as long as you comply with Article 12 of the Code. Article 12 requires that REALTORS® “be careful at all times to present a true picture in their advertising and representations to the public.” The key to meeting the “true picture” test is to make sure that any conditions attached to the free offering are clearly disclosed.

Standard of Practice 12-1 provides that “REALTORS® may use the term free and similar terms in their advertising . . . provided that all terms governing availability of the offered product or service are clearly disclosed at the same time.” For example, if you require sellers to sign an exclusive listing agreement with you before they’ll be entitled to a “free” home warranty, you must disclose that condition in your ads or in promotional materials that mention the offer. Likewise, if a buyer must sign an exclusive buyer representation agreement to be entitled to the home warranty, you must disclose that.

On a legal note, be careful to check your state license law before offering free items or services to consumers. Some state license laws prohibit promotional offerings and rebates because they’re considered inducements to enter into a listing agreement or buyer’s agreement.

Q: A buyer’s agent who doesn’t belong to either my association or my MLS wrote an offer for his client on a house I’d listed. My client accepted the offer, and the transaction will close soon. However, the buyer’s agent has never requested or received a fee agreement from me, either orally and or in writing. Do I have any obligation to compensate him?

A: The answer to your question lies in Article 3 of the Code as interpreted by Standard of Practice 3-1. Article 3 requires that “REALTORS® shall cooperate with other brokers except when cooperation is not in the client’s best interest. The obligation to cooperate does not include the obligation to share commissions, fees, or to otherwise compensate another broker.” The basic premise is that cooperating brokers can’t assume that a listing broker’s “cooperation” will automatically include “compensation.”

Standard of Practice 3-1 explains the issue in more detail. “REALTORS® acting as exclusive agents or brokers . . . establish the terms and conditions of offers to cooperate. Unless expressly indicated in offers to cooperate, cooperating brokers may not assume that the offer of cooperation includes an offer of compensation. Terms of compensation, if any, shall be ascertained by cooperating brokers before [accepting] the offer of cooperation.” That means that a cooperating broker should ask, “Will you pay me for cooperation?” and, if so, “How much will you pay me?” before showing a property.

If the cooperating broker is a member of the MLS in which the property appears, the offer of compensation is made through the MLS, and the Code requirements are satisfied. If the cooperating broker is not a member of the MLS in which the listing appears, that broker hasn’t received an offer of compensation from the listing broker. Unless the cooperating broker establishes the terms of compensation in either an oral or written contract with the listing broker, the broker has no obligation to compensate the selling broker.

In your case, it appears there never was an offer to pay a cooperative commission to this broker or agent and thus no contract to pay anything to the cooperating broker or agent exists. Although you may want to consider some form of compensation in order to promote goodwill with the other brokerage company, you don’t have an ethical obligation to do so.

Bruce Aydt

Attorney Bruce Aydt, ABR, CRB, SRS, is a national real estate educator, a Missouri real estate broker, and past chair of the National Association of REALTORS® Professional Standards Committee.