Affiliated Business: The Nemesis of Reason

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Real Estate Services
Normally, I have no problem sharing my thoughts about affiliated business, yet for some reason found it difficult to do in an Active Rain post.  I have, in fact, relentlessly denounced affiliated business in the same manner as a preacher condemning sinful acts from the pulpit.

The concept of affiliated business in real estate transactions was born of the Reagan Bush brain-trust during the late 1980's.  The federal mood and agenda at the time was one that encouraged bigness of business.  It was thought that "deep pockets" paired with technology could create an environment that reduced costs and enhanced services for consumers who were purchasing or refinancing a home.

It all appears to be simple and reasonable enough.  An affiliated business arrangement exists when a real estate brokerage and a title company share the ownership of a title company.   By partnering in this way, real estate companies and agents are entitled to share in the profits of a captive operation. 

Keep in mind, there are any number of possible variations to the theme including joint ventures with mortgage brokers.  I'm trying to keep this post as straightforward as possible by dealing with only the title industry's perspective.

To be legal, and RESPA compliant, a lengthy laundry list of requirements must be strictly adhered to
.   The agent has to contribute capital to the venture in an amount equal to the agent's proportionate ownership interest.  Any monies dispersed have to take the form of a legitimate distribution of profits.   Also, the new company can't share space, staffing, or management with an existing title company.  It has to be a free-standing business that supports itself by offering core title services.  Establishing a legitimate affiliated business is an expensive and risky proposition that requires a great deal of planning, capital, and the involvement of an attorney familiar with RESPA implications.

It's patently illegal for a real estate agent to receive benefits, on a per deal basis, for doing nothing more than placing an order in an in-house pipeline.  By benefits, I'm referring to checks, sometimes called "hard dollars," or "soft dollar" inducements that offset desk or advertising fees.

The experiment that is affiliated business has been successful only in limited parts of the country where ownership records are available in the form of highly automated title plants.  Keep in mind: success is measured only in terms of benefits to consumers, not real estate professionals.  For the most part, the project has proven a dismal failure due to the very nature of abstracting and examining titles.  It's a process that's more closely akin to a professional practice, not a manufacturing operation that experiences economies of scale through increased volume. 

In many instances, consumers are horribly overcharged and subjected to inferior service because the title company in a directed business situation has no incentive to be anything other than mediocre and has to share profitability.  Restrained competition, never a good thing, inevitably results in complacency and exploitation.  It also has a tendency to attract those who aren't the best or the brightest.  Affiliated business doesn't have to produce stellar results or be the least expensive alternative, it just has to be good enough to pass for a close facsimile of the real thing.

Surely everyone acknowledges the benefits of competition:
  • Do we not encourage our children to engage in healthy competition to learn the value of superior performance? 
  • Can you imaging sending your children to school with the expectation of being average academically, socially, or athletically?
 Of most concern to real estate agents should be the contradiction between affiliated business and fiduciary obligation.  Is it possible to remain completely impartial when referring service providers while the promise of additional income rests in one particular provider?

I highly recommend a blog hosted by Minnesota attorney Doug Miller.  Ethical Practices in Real Estate offers practical advise that can't be found elsewhere.

In a recent post, Doug issued a relevant and timely warning:
  • Has your manager given you advice on how to address “objections” if your clients want to select their own title company?
  • When it's time to negotiate your commission split, does your manager or broker first look at how many files you’ve sent to the in-house title company?
  • Do you find that there is an unusual absence of marketing materials or presentations from outside title firms? 
Doug suggests that you "find another broker to hold your license" and a "class action attorney" if you "answered yes to any of the questions."

I happen to fully agree with Doug.  As attractive as affiliated business might appear at first blush, the business model offers numerous perils for real estate agents from a legal perspective and as a practical matter.
 
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Rainmaker
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Jon Boyd
Ann Arbor Real Estate Buyers Agent
Home Buyer's Agent of Ann Arbor

Ed,

I agree that many consumers are hurt by the ABA conflicts. In our market until recently the in-house title service was poor and the prices were high.

In the last two years some of our local brokers have greatly improved the quality of service from their in-house title companies, but they often still charge above market fees for closing and recording processing. We were recently able to negotiate a $275 reduction in these fees for our buyer, but I have to believe that few if any of the buyers that work with that brokerage ever receive a reduction to market prices for those fees.

 

The more dramatic conflict of interest though is what Lenn has already pointed out. Dual agency.

One of the larger offices in our area pays their "designated buyer agents" about 25% more if they sell an in-house listing. That is a shamefule conflict of interest and one that absolutely should be disclosed to the consumer. I doubt if that is ever disclosed.

I wonder if AR members in larger Ann Arbor offices would like to comment???

 

Also, I say "designated buyer agents" because that is what they are. They are not buyer agents. But that is a topic for a different post!

 

November 08, 2008 11:43 AM
Rainmaker
237,872
Benjamin Clark
Buyer's Agent - Certified Negotiation Expert
Homebuyer Representation, Inc.

Mom said not to say anything at all, so I'll just say, good post!

November 12, 2008 01:07 AM
Rainer
59,562
Sonja Adams
Samson Proprties

Great post with some really great information...thank you for posting!

November 26, 2008 08:33 AM
Anonymous #64
Anonymous
Houston search engine optimization

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May 14, 2009 02:28 AM
Anonymous #65
Anonymous
seo firm

Yes we guard our reputation also, but are careful about other companies.

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August 13, 2010 06:41 PM
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Rainer
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Ed Rybczynski

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