July 13, 2000

Referrals offer risks, rewards

By TOM KELLY
The Real Estate Advisor

There is so much confusion among real estate agents and brokers about the acceptability of fees and liability of common referrals that some professionals are balking at taking the next step – and that step could greatly enhance their bottom line.

Here are some of the key issues:

• What is acceptable under many state laws is often illegal under the federal code.
  
  
• There are no clear composites that show the differences between codes.
  
  
• Agents are confused about the difference between settlement services and common home-related vendors.

For example, is it legal for loan officers to pay agents a commission for referring mortgage applicants? Some states says that can be okay, but the federal statue says no. What about real estate agents and loan officers receiving cash or gifts for sending customers to an escrow company? That's not allowed at either level.

Agents, who are subject to both state and federal laws, sometimes have been able to accept compensation for referrals to lenders within the same umbrella organization if full disclosure is given to the borrower. However, no compensation can be given by anyone involved in the closing process -- typically escrow officers -- for transactions brought to them by real estate agents.

In a capsule, according to the federal Real Estate Settlement and Procedures Act, anything of value given to seal the deal is illegal. Paying a referral fee for a necessary, ancillary service of a home sale is taboo.

A simple example would be the postcard you receive in the mail promoting a specific home loan or lender. If there are four names on the card – lender, title company, escrow and Realtor – all companies mentioned should pay a share. If the names are of equal size and contain the same amount of space,

the cost should be equally divided. If one company paid 75 percent of the cost of the card and mailing that would be deemed “value” and therefore considered a referral fee under RESPA.

Some laws and guidelines are in conflict with each other. For example, some states’ escrow laws prohibit promotional compensation to agents yet "normal, educational promotional material" is allowed in other cases.

Readers might ask, "What's the big deal here?" Isn't it the American way of free enterprise to woo efficient, productive people to help you get the job done? Is this an appropriate area for legislative involvement?

The goal is to keep the consumer from paying any more cash in a real estate transaction. Also in the forefront is the consumer's right to know that a variety of programs and services -- not just the ones offered or

suggested by the salesperson -- are available.

The confusion surfaces when brokers and agents consider common home services – landscapers, carpet cleaners, tree trimmers – in the same bracket as a “necessary” service required to close a deal. Russ Cofano, attorney and former general counsel to the Washington State Association of Realtors, now heads BeCentric.com, an online company which now provides the technology to help professionals facilitate a variety of home-related services. Cofano has had to address the liability issue many times because BeCentric’s latest tool, InTouch, puts professionals in the driver’s seat with many vendor choices.

“Brokers and agents regularly refer clients to vendors,’’ Cofano said. “A common Realtor myth is that the referring broker/agent will be liable if the vendor does a poor job. The chance of this happening is extremely rare.’’ Mark Hodges, real estate attorney and escrow specialist, concurs. “If an agent suggests a carpet cleaner, and the carpet cleaner ruins the rugs, the agent rarely can be held liable unless the agent knew the carpet cleaner had a history of ruining carpets,’’ Hodges said.

Instead of directing a client to a single vendor, BeCentric’s InTouch system allows these same clients to get connected to several vendors via a consumer friendly “reverse auction” bid approach. Then, users can read about previous user experiences with each vendor. It is the client, not the broker/agent, who selects the vendor.

“You have to remember that anybody can be named as a defendant in a lawsuit. If the carpet cleaner dyed the carpets blue, do you think the customer will go after the agent’s ’89 Buick or look elsewhere for deeper pockets?”

Those deep pockets are now, more than ever, believed to be hanging from the trousers of real estate brokers as they look to expand their businesses beyond commission-driven sales.

Providing names and lists of home-related services is a terrific help to new owners, especially those relocating from out of state. However, don’t expect to dive into a broker’s deep pockets – real or perceived – if the referred common service doesn’t work out. There’s a huge difference between recommending and guaranteeing.

Previous columns:

• Vacation is no time for worrying about escrow, 07-06-2000
• AIRD will mean big changes for appraisers, 06-29-2000
• Rules vary on renting your cabin, 06-22-2000
• Credit: You really are just a number, 06-15-2000
• Reverse mortgages have come full circle, 06-08-2000
• Virtual home tours are a big hit, 06-01-2000
• HUD forced to police its own programs, 05-25-2000
• New factors in local housing market, 05-18-2000