Walks like a Duck, talks like a Duck…
There is a booming new business that consumers deserve to fully understand. It is called an “Affiliated Business Arrangement” or ABA. A new stream of income for some Realtors. You deserve full disclosure and whether your Realtor is getting an indirect kickback from his “recommended partners”
“Affiliated” businesses. Are they a Godsend, barely legal, just plain illegal, or just unethical?
FIRST OF ALL LETS DEFINE RESPA? (The law designed to stop kickbacks)
- “RESPA is about closing costs and settlement procedures. RESPA requires that consumers receive disclosures at various times in the transaction and outlaws kickbacks that increase the cost of settlement services.” Respa website.
Could a Realtor that is in “partnership” with a Title company, please help me understand why it is ok to skirt around this law? More frequently I am finding large real estate companies (and the agents) “partnering” with settlement companies and doing so in a manner that technically gets them around the kickback laws.
One Real Estate company even uses the loophole as a recruiting technique:
- “Mortgage and Title Income . We share income with our agents under a RESPA compliant platform. As the leader in this field we have developed the only legal way to offer you this additional income.”
Yippee!!! Translation: “We are smart, cunning and sneaky enough to have figured out a loophole to get around the basic intent of the law… at least for now or until we get caught.”
Another website lists the following reason for agents to join their Real Estate company:
- “Does the company own affiliated businesses? Do the agents share in this?”
But I thought the earlier company was the only one that knew how to do it legally?
So the law was designed to stop Real Estate Agents from getting a $100 or $300 incentive to drive business to a particular Title company. Yet that doesn’t stop the “brilliant” realty firms that found a loophole around this.
This is one of the loopholes as I barely understand it:
- The agent becomes a tiny % part owner in the settlement company’s newly formed subsidiary LLC . I don’t have the exact details, but this part ownership is a legal way for them to get an indirect kickback, since revenue can’t go to agents unless they happen to own part of the company. So while they don’t get directly $300 per deal, they get a year end revenue share that is somehow tied to the # of closings with that company. One Realtor said it isn’t tied to that, but I would have to see details before I believed that an agent would be allowed to own a part of 1 title company, while sending ALL your business to another
- And once the new year hits, a newly formed LLC is created to bring on new agents.
So please, agents that are part of these big companies, please help me understand how you rationalize this. While some of you might say that you have the client sign a disclosure form, how many of you with a straight face can tell me that your client “gets” that you are making $300 off them if they go with a particular company? As if we don’t make enough money on the deal, we need to bilk them for a couple hundred more bucks?
Most buyers sign that disclosure because:
- They think it is normal and are already signing 20 documents
- They feel pressured into it or confused
- They can’t read between the lines that say: “Your Realtor makes $300 if you use XYZ”
- They have no other alternatives.
Instead of the intent of the disclosure which is to let people understand that they have a choice and that their agent makes money if you sign that paper. Note that it used to be more common for the firm to make money, and not the agent. Now firms are sharing that money back with the agents as a recruiting technique.
What can you do? (I’m not one to bitch about something and not give suggested remedies)
- Avoid the companies that have these ABAs. If they do shady things like this, what else are they going to do that is shady? (see blog on Shady 10% Buyer Agent Bonuses or the blog “Don’t Trust Realtors that Sell You on Buying“)
- Demand that the Realtor put in writing exactly how much they are getting (once you get that in writing, send it to me to review)
- Ask the Realtor how he can justify this bonus/kickback/revenue share if he already agreed in another contract that a) he was making X% and b) working for you, the buyer.
- Demand that bonus in the form of a Rebate back to the buyer.
- If he won’t rebate his bonus, use another settlement company.
Aren’t you just jealous that you don’t have these partnerships?
No. I could easily get them and I have been offered them.
The conversation goes like this (but with a lender),
- Lender: “Let us be your in house lender and you can get 35% of the revenue”,
- I say: “Um, don’t you have to make a living and won’t that fee have to be passed on to the client?”
- Lender: “No, I’ll give them a great rate and you make $500”
- I say: “So why don’t I just pass on the kickback and you give the savings to the customer?”
- Lender: “Ok, lets do it!”
- I say: “No thanks, I don’t trust kickbacks, so how can I trust that you wouldn’t just charge $500 more (which is REALLY easy to do with loans as the fees can be hidden in a dozen places including a slightly higher rate)
Ok some Realtors getting revenue sharing might say “but the price is the same everywhere,” don’t believe your own BS. In the long term this is price fixing, limiting choices and a RESPA violation. When you limit competition through Realtor bribes, the consumer is hurt.
If an agent isn’t sharing reve
nue, but the firm has an ABA? Still watch out!
Ok some real estate companies won’t pay the agents a cut (they claim it is not legal, how convenient), but instead of rewards, they punish. They shun the Realtor if they don’t use their ABA partner. One large NoVa company stripped a top agent of her “#1 in office” title for not using the Affiliated Partners on her deals. How is that in the best interest of the client? So even if a Realtor doesn’t get paid, you have to wonder what it in it for them to push the ABA.
I wouldn’t be surprised if soon there is a class action lawsuit that will come after these firms and the Realtors that are colluding to the detriment of their client.
Are you ok with the “one stop shop”, even if the price is the same to you and your Realtor gets a bonus?
Oh and don’t get me started about $400 Home Warranties that frequently result in a $70 bonus to the company, and oftentimes passed back to an agent. Note that insurance can only be sold through licensed insurance dealers. Yet these 15% bribes are called “admin fees.” If an agent is selling you on a warranty, ask if he or the firm makes a cut on your sale, and ask for that bonus back.
If you have questions about something that seems shady, ask me, I’ll give you the inside scoop.
– Frank Borges LL0SA – Broker FranklyRealty.com
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