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?
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?
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.