Two months ago, I visited several homes on a weekend open house tour in an attempt to gauge how prices had risen in a specific area.
While passing through a couple of homes, I commented to the veteran real estate agents hosting “the open” that the amount and quality of food for visiting potential buyers was impressive. One agent said:
“Isn’t it great? Thank goodness I don’t have to pay the bill…I’ll take what’s left home to my grandkids.”
Clearly, the real estate agent is the key to the success of third-party providers–appraisal, credit report, title report, escrow, mortgage, etc. Agents can help steer home buyers and sellers to particular industry operators and most professionals choose competent individuals who will get the deal done. But the enticements for sending business to only one person and place are not always in the best interest of the consumer.
The Real Estate Settlement and Procedures Act (RESPA) limits the amount third-party providers can spend on individual agents to $25 a year. I thought about that guideline recently when I read that California-based Southland Title Corp. and its subsidiaries, Southland Title of Orange County and Southland Title of San Diego, were alleged to have spent at least $174,000 on food, beverages and entertainment plus $62,000 on gifts and gifts certificates, and $218,000 more on “business support services.”
The curious discovery was that the same company was fined $1.5 million two short years ago for similar practices. That’s a lot of free lunches, and it gives you an idea of what one company felt it had to do to stay in the game.
“I don’t think RESPA is going to throw people in jail for entertaining people at baseball games or buying them a Christmas present at the end of the year,” said Joe DiPaola, real estate attorney, broker and former in-house litigation counsel for Coldwell Banker. “I think when you cross the line and start getting into trouble as a service provider is when you are actually performing income-related services for other people and that turn into real dollars for them.”
John Garamendi, California state insurance commissioner, said when illegal rebates are offered to entice brokers to steer business, there’s little hope that the consumer’s best interest are served.
Dwight Bickel, senior vice president and regional underwriting counsel for LandAmerica Financial Group Inc., which supports the title insurance and escrow operations of Transnation Title Insurance Co., Commonwealth Land Title Insurance Co. and Lawyers Title Insurance Corp., said his title companies are under “intense pressure” to provide real estate agents with advertising support and other promotions.
It’s a tough, competitive and highly lucrative business that continues to snowball. Real estate brokers say third-party providers are constantly showering them with goodies, while the providers contend that they will quickly be dropped if they don’t push the envelope.
Great stories are common. A few years ago a title insurance company offered to furnish a real estate broker’s office if all of the agents in that office wrote in the title insurance company’s name in the appropriate spot in earnest-money agreements. Another company offered a broker the use of billboards in public places for carrying the company’s name atop preprinted earnest-money agreements. A third company offered all-expenses-paid fishing trips.
“The RESPA violations that I find to be very troubling are the huge trips to exotic locations for real estate agents,” DiPaola said. “The service providers will then list the trip as ‘continuing education.'”
“The other main problem is encouraging agents to use in-house providers–appraisal, loan, title–without indicating outside services are available as well. That’s not serving the consumer. And, some in-house agents say it’s not serving their needs, either, because they don’t like the in-house choices.”
What services can third-party providers give to real estate agents free of charge?
“Title companies can give out copies of recorded documents, including the last deed of trust,” Bickel said, “but more comprehensive packages require the agent or broker to be billed.”
It’s the billing practices that are sometimes questioned. Does the third-party provider really care if a top-producing agent pays the tab as long as the agent keeps sending business?
In addition, how do you separate kickbacks from company advertising? For example, let’s say the impressive luncheon buffet, paid for by a title company, is brought to a Sunday open house by a real estate agent. Is that buffet a gift to the agent for past and future business, or an advertisement to induce potential buyers to use the title company when buying their next home?
Either way, there’s no free lunch.
Tom Kelly’s new book “How a Second Home Can Be Your Best Investment” (McGraw-Hill, $16.95) was co-written with John Tuccillo, former chief economist for the National Association of Realtors and is now available in local bookstores. He can be reached at news@tomkelly.com.
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