Last week, I got a call from a real estate agent who wants to interview me to be one of his referral partners, one of his preferred lenders.
"Aaron, I have heard great things about you. I read your newsletter each month. I know you know what you are doing and in today's market, that's what I need," he said.
I was thrilled. I love getting those calls. We set up a meeting for this Wednesday at Starbucks. Doesn't every real estate meeting take place there?
Anyway, today, this agent calls me. "Aaron, I have a client for you. Give him a call."
Even better. We haven't even met yet and I am already getting business from him. I was thrilled again.
Then he said, "By the way, we can discuss my referral fee on Wednesday when we meet." Before I could say another word he hung up.
I could only shake my head in amazement. Wednesday's meeting is not going to go as well as I originally expected. I now know why this guy needs a new lender as a referral partner.
This isn't the first guy who has asked me for a referral fee. I would say in my career, no less than 20 agents have asked me.
I would never, have never, and will never pay someone money or a gift or anything for a referral. Period. End of story.
Because it's illegal. The funny thing is I shouldn't even have to write this blog because everyone knows it. So thank you for letting me blow off some steam.
The Real Estate Settlement Procedures Act (RESPA)
Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan.
Violationsof Section 8's anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties.
In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.
Now, I have seen enough episodes of "Oz" to realize I wouldn't last very long in prison. And if the additional threat of huge fines and loss of income in the career I have chosen and have spent years building isn't enough to dissuade me from giving you a measly kickback, one more thing is....fairness to the borrower.
Let's just play a quick numbers game.
First, you need to understand that most responsible, respected mortgage lenders, who do any real volume, get nowhere close to 3% on a deal like a lot of agents do. If we are lucky, we get to 1-2%. Sometimes even less than 1%.
However, let's say we get to 1.5% on your deal and the rate for your client is 6.500%.
On a $300,000 loan this is $4500. Now certainly this lender has some brokerage to split with, like you do, so let's say he gets 65% of that. Now he is at $2925. Now, he has to pay taxes, so let's say he is now down to $2200 or so. Now you want your kickback. How much will you ask for? $1000 per deal? Half of the deal?
Now he is down to $1100 or so. But you still made somewhere between $7000-9000 in all likelihood before your split.
What the lender will do next and I have seen this happen too many times is he will increase his gross commission to pay you. How does he do this? By raising the rate or fees of the borrower.
Now instead of a 6.500% rate, your client should have gotten, he now gets a 7.000% rate. But what happens now if the payment is too high for the borrower? What if his closing costs are too high for him now? Are you willing to lose this client and lose this deal for $1000?
If the lender is only making $1000, he may be willing to let your client walk, but are you?
My very first real estate coach told me that, if you do a great job, every person you deal with is good for three total transactions over his lifetime. He will either refer you to friends and family or come back himself. I can tell you from experience, he is right.
Are you willing to trade these three transactions for $1000 today? As soon as this borrower closes, and he tells anyone about the high rate he got, or increased fees, and they tell him he got ripped off, you will never get another referral from him again.
I believe the performance of your referral partners is a reflection of you.
Of those 20 agents who asked me for referral fees, I would say half of them ended up using me anyway and most still do.
Just as I will do on Wednesday, I explained to each that the most important thing when picking a lender is to pick one who will inevitably pay you handsomely by providing your clients amazing customer service, communication and, most importantly, by closing your deals.
When you have a strong lending referral partner, your referrals increase as well and your clients will come back to you both time and again.
Don't ask your lender for a kickback or a "referral fee." Its offensive to an experienced lender, its ethically wrong for your client, you can lose your license, and its ILLEGAL!!!