Kickbacks Are Common, and Consumers Foot the Bill
Your real estate agent may be making more money than he or she is telling you about when representing you in the purchase of a home or condo.
Many title companies, mortgage brokers, appraisers, escrow companies and home inspection services say they regularly get requests from real estate agents for a kickback in exchange for referring their would-be buyers. While this practice generally violates several federal and state laws, people in the industry concede that it happens all the time. It’s the consumer who really ends up footing the bill in the form of inflated fees for the purchase of real estate.
“There is an inordinate amount of graft going on,” said Claudia Queen, sales manager and vice president at Stewart Title in Glendale. “We get requests all the time from agents requesting money, trips, office furniture--the sky is the limit on what we’ve been asked.” Queen said that Stewart refuses to pay any so-called incentives, premiums, rebates or kickbacks to real estate agents who refer business. “I’m not going to violate the law and go to jail for a bit of extra work,” she said.
Indeed, Queen claims that one of her competitors is offering free trips to Mexico for every 20 consumers referred by a real estate agent.
Another title company, First American Title Insurance Co. in Oxnard, said it offers agents who refer clients reduced rates for limousine service provided by a firm associated with the company’s sales manager.
“There is some reasonable latitude given for us to provide normal business lunches, dinners, etc.” to real estate agents, explained Robert Noe, vice president at First American. “I really don’t see it as a problem.”
“I know of a real estate agent who’s entire advertising bill with a newspaper was paid by a title insurance company in return for 100% of his business,” said Linda L. McLain, president of McLain Escrow Inc. in Oxnard.
Just how much all of this boosts real estate transactions is unclear. But for home buyers who are usually already strapped for cash, every penny counts.
“Consumers don’t know this is going on. They rely on their agent to make an unbiased recommendation when it comes to various services.” McLain said. “The biggest problem is the lack of disclosure.”
“I know agents steer (business) and get kickbacks,” said Alice McCain, president of the San Fernando Valley Assn. of Realtors Inc. But, she added, “there are abuses in every business.”
Some agents collect a pay-back out of ignorance and others do it deliberately, McCain said. Either way, “that’s not how it should be done,” she said. “When I refer a client to a mortgage broker or title company, I expect the client to get good service--that’s all,” McCain said. “Your license and livelihood is at stake if you get any money out of it.”
While both the federal government and the state of California prohibit real estate agents from getting certain types of referral fees, the laws are routinely violated and there are also loopholes in the rules. Agents aren’t allowed to get so-called “naked referral fees” for simply referring business. If the agent does more than just refer the business, however, the money the agent gets back may not necessarily be considered a referral fee, explained Marcia Salkin, manager of public policy for the California Assn. of Realtors in Los Angeles.
There are other loopholes. Both state law and the federal Real Estate Settlement Procedures Act (RESPA) prohibit a real estate licensee from making money off a referral to service providers such as escrow, title, pest control and home warranty companies, said Steve Ellis, Los Angeles district office manager for the California Department of Real Estate. However, the department does not prohibit payment of a referral fee on any loans. And while the federal act prohibits a referral fee to be received by real estate agents, RESPA applies only to transactions involving federally insured institutions or financing.
And recent amendments to RESPA now allow real estate brokerage firms to form partnerships called “controlled business arrangements” (CBAs) with service providers and then split the take. It’s unclear exactly how all these new CBAs will work, conceded Salkin. “There is still a lot of uncertainty about the law and people have differing interpretations.”
The CBA exceptions to RESPA’s rules against collusion by members of the real estate industry will provide a way for brokerage firms to vastly increase their income, predicted Steven L. Bailey, an attorney and consultant to Safeway Financial Services, an Encino mortgage broker.
Bailey said he has already created partnerships between Safeway and three real estate brokerage companies. Now those real estate firms can legally get a cut of the fee earned by mortgage brokers, Bailey said.
Everybody in the real estate industry is looking for ways to make more money, Bailey said. Many real estate agents and service providers who don’t form a CBA will keep on violating the laws, he said. “It will likely continue to be a pervasive problem.”
