When a buyer or seller is presented with a standard contract of sale that contract can now far exceed more than 40 pages. Among those pages is often found a page titled "Affiliated Business Arrangement Disclosure Statement"
It is not at all uncommon for the Realtor to present the contract of sale to the buyer/seller and to simply point and say "sign here, here, here and initial here, here, here." More often than not buyer/sellers will do just that without bothering to read any part of the contract, or alternatively, simply reading what they feel to be important to them, such as the sales price, the cost to be paid by each party etc.
Many of the provisions of the contract of sale are "boilerplate" and every contract of sale has basically the same language in it. It is always a good idea to have the contract reviewed by your attorney if you don't understand any of it's provisions. But, what I want to particularly address here is one of the addendums that is often attached to the standard contract of sale. Today we are going to look at the Affiliated Business Arrangement Addendum. (AfBA)
The Affiliated Business Arrangement Addendum is often added to the contract of sale when there is an alliance between perhaps a Realtor, a Lender and a Title Company. These three (or more) parties participate in an arrangement wherein ALL of them will benefit from having the consumer utilize the services of all of the entities involved in the arrangement.
So, just what is an AfBA?
An Affiliated Business Arrangement (AfBA) is an arrangement in which a person who is in a position to refer business in connection with a real estate transaction has an ownership or other beneficial interest in a provider of settlement services and such person refers or influences the selection of that provider. You may also see terminology such as: One Stop Shopping, Ancillary Services, Bundled Services and Core Enterprise Services. The terms all mean the same thing - the participants are steering real estate consumers into overpriced ancillary services for secret profits.
So what does the Affiliated Business Arrangement Disclosure tell you?
The AfBA Disclosure will tell you that the Realtor is a member of an AfBA, that they recommend that you use the services of a certain title company or lender or both, but that you are not REQUIRED to use the services of those entities. It will also outline a sampling of the fees that these entities customarily charge for services such as the settlement fee. This is simply an overview of the fees IT IS NOT A TOTAL LISTING OF ALL THE FEES THAT WILL BE CHARGED TO YOU BY THE AFFILIATES. It will also state that you may SHOP for these services on your own. NOWHERE IN THE DOCUMENT DOES IT TELL YOU THE SPLIT OF REVENUE THAT IS GIVEN TO EACH REFERRING PARTY!! IT IS ALWAYS IN YOUR BEST INTEREST TO SHOP THESE SERVICES!
How Does an AfBA save the consumer money?
Simply stated; IT DOESN'T. As was stated by Douglas R. Miller of the Consumer Advocates in American Real Estate
The title and real estate industry know that most consumers don't actively comparison shop for a title company based upon price and service. In fact, the controlled business models acknowledge that their success is based upon the consumer's ignorance and their reliance upon real estate professionals to make a recommendation to them."
A recent investingation done by MONEY Magazine (March 2006 'Snow Job") concluded that the widespread existance of controlled business relationships (study conducted in Minneapolis/St. Paul) was the main reason that closing costs in that area were among the highest in the nation.
Beside the higher costs of participating in closings with AfBA's what are the other risks?
Cost alone is not the only factor that needs to be considered when you use the services of companies who are participating in an AfBA.
The equally important risks of the removal of "checks and balances"" should always be considered when deciding to use the services of AfBA affiliates.
In a real estate transaction there are basically three "arms". Each of these arms should be working in a ficicuary capacity on behalf of the agent YOU ARE THE AGENT OF THE FIDUCIARY. A fidicuary is- someone who acts in constraint of his own self interest to act at all times for the SOLE BENEFIT and INTERESTS of another.
- The Realtor
- The Lender
- The Title Agent
Each arm should always be acting independently of the other for YOUR PROTECTION! In the case of an AfBA, the entities are acting IN CONCERT with one another to assure that the closing goes through, whether or not the circumstances surrounding the transaction are in your best interest. It is not unheard of to have the title agent say to the Realtor and lender that the closing has to be delayed to enable the title agent an opportunity to clear a title issue or to acquire a critical document. In the case of an AfBA both realtor and lender could then put the "squeeze" on the title agent affiliate who is requesting the delay, reminding the title agent that all of them will suffer from the delay and ask him/her to overlook at title issue in order to get the loan to closing. This is not serving your best interest but is in fact serving the best interest of the AfBA and the individuals associated with the AfBA.
How do I protect myself from AfBA transactions?
Most (if not all) states require that a real estate contract contain a seperate disclosure addendum relating to AfBA's if applicable. If you see such a disclosure that is your FIRST SIGN that you need to do your own research and make your own decision. Don't rely on the realtor of lender to "steer" you into the services of an affiliate.
Don't get roped into thinking that members of the AfBA are doing you any favors by leading you like a lamb into the arms of their affiliates.
Be proactive, make a few phone calls, visit the web-sites of The Preferred Title Group, Inc. (http://preferredtitlegroup.com) or other INDEPENDENT TITLE AGENTS and lenders and become an informed consumer. That is the best way to protect yourself from being overcharged for title and settlement services or even worse for being "sold" a bill of goods (the bundled services) that is simply not IN YOUR BEST INTEREST.
Many of the Realtors that we work with here at The Preferred Title Group, Inc. are independent Realtors. They are not members of an AfBA, they are simply trying to their very best to assure that the closing process is conducted in a fair, professional and transparent way. When an independent Realtor makes a referral to an independent title agent like The Preferred Title Group, Inc. they are making that referral because they trust us to do what is right for the consumer. Neither we nor the Realtor benefit by cutting corners, shading the truth or overcharging for services rendered.
This article is for informational purposes only and does not constitute legal advice. Readers should not rely on it as such. No one should attempt to interpret or apply any law without the aid of an attorney.