Cashback clauses can cause a variety of problems if they’re not executed correctly. To help, we've put together a handy primer on these clauses and a few REALTips to avoid cashback confusion.

What’s a cashback?

A cashback occurs when a seller agrees to refund part of their property’s purchase price, providing the buyer with the necessary funds to repair identified defects. 

Cashbacks should be approached with caution, as their use can impact financing. Lenders may view a cashback as a reduction to the purchase price and fail to fund the full mortgage required by the buyer. This can lead to closing delays and the buyer might need more cash to close. 

Although cashbacks have their place in legitimate transactions, a failure to disclose a cashback clause or refund agreement to a lender is considered mortgage fraud.

The role of REALTORS^®

REALTORS^® must ensure cashback clauses are based on legitimate information.

Advising a buyer client to “guess high” when determining a cashback amount could be viewed as contributing to an unsubstantiated refund. Remember: engaging in a contract with the intent to collect money on a cashback, either as a perk or to take advantage of a seller, is not engaging in good faith. Also, if a cashback is not disclosed to the buyer’s lender, it could cause an artificial inflation to the market and lead to allegations of fraudulent conduct.

If a cashback clause is being proposed to your seller, you must determine why it’s being included. You should also work with your client to verify the cashback amount is in line with reasonable and customary charges for that expense. If a comparison isn’t possible, ask the buyer’s representative to provide the information used to determine the amount of cashback. If the buyer is not interested in producing that information, this could be a red flag. 

If a REALTOR^® fails to perform their due diligence and goes along with a contract they knew was fraudulent, resulting in a lawsuit, REIX will not cover that claim.

The misuse of cashback clauses drives up the market artificially, which makes it harder for buyers to enter the market and makes the MLS^® System’s information less reflective of true valuation. This puts the REALTOR^® brand at stake, as REALTORS^® must continue to show clients and the public that bad news cases are not representative of the whole industry.

REALTips for cashback clauses

As a seller’s representative:

• Know why and whether the cashback clause is warranted.
• Substantiate the amount of the clause.
• Speak to a lawyer to see if the term is constructed correctly.
• If in the form of an addendum, ensure the document is sent to the lawyers, either by way of conveyancing documents or directly from REALTOR^® to seller’s lawyer (with permission from your client).

As a buyer’s representative:

• Verify that the cashback is related to real issues.
• Ensure the amount of cashback isn’t a “guesstimate” or inflated.
• Send the documents that contain the cashback term to the lender, with client permission, or direct your buyer to send them.
• Discuss alternatives to a cashback, such as a holdback or purchase plus improvements mortgage.

If you have any additional questions about cashbacks, please email CREB^® Member Practice at crebmp@creb.ca.