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Editor’s note: This three-part series focuses on changing forces and their impact on the relocation industry. Inman News targets three main aspects of change: rising fees and their effect on real estate professionals; the housing slowdown; and how an increasingly global economy is ramping up the relocation industry. (Read Part 2: Real estate slowdown shakes up relo benefits and Part 3: Real estate firms cash in on globalization.)

While business has boomed in the relocation industry, a quiet revolt has started among real estate brokers and agents who are upset over relocation company fees and policies they say make it difficult to conduct business.

Relocation business is no longer worth the cost for some real estate professionals who say that rising fees may impact the quality of service consumers receive. Also, the relocation industry is adjusting to a slowing housing market that can increase demand for comprehensive services, and in meeting the needs of corporations in an increasingly global economy.

Fees charged to real estate professionals have gradually increased over time, leading some brokers and agents to refuse business from relocation companies. They say the high price of fees compromises their value and restricts the level of service they offer to relocating consumers.

Some agents have complained, too, about rigid relocation policies and heavy-handed tactics to claim fees mid-transaction.

Even as these problems come to light there are always agents who are hungry for new business and who are willing to pay for business referrals from relocation companies, industry insiders say, and that may be enough to prevent meaningful change.

Rising relocation fees

Besides giving up more than one-third of their commission in some cases for working with clients of relocation companies in a real estate transaction, agents also typically must divide what’s left of that commission income with their brokers, and there can be an additional fee paid to their brokerage company’s relocation division.

Relocation fees have risen over time from 15 percent to 20 percent of a real estate agent’s share of a home-sale commission to 35 percent or more — several real estate professionals told Inman News that relocation company fees can exceed 40 percent. Because the percentage-based fees charged by relocation companies are based on the selling price of homes, the dollar amount of the fees has also risen proportionately with home-price appreciation.

Based on National Association of Realtors statistics for the U.S. median home price and a 3 percent commission to an agent working in a relocation transaction, a 35 percent relocation fee would amount to $2,331 in 2006 — a 95.4 percent increase compared to the same fee for a median-priced home in 1996 and a 53.1 percent increase compared to the same fee for a median-priced home in 2001.

“My impression is that the average fee to Realtors to accept a relocation client is around 35 percent of the gross commission. I, personally, won’t do that unless it is an existing client of mine,” said Dave Rosenmarkle, broker-owner for Highland Realty, a 12-agent brokerage in Arlington, Va. “What I’m seeing more and more over the last seven to 10 years is that many of the senior agents are saying, ‘No thank you.'”

“You’re seeing a lot of newer agents do the relocations who are less experienced,” Rosenmarkle said. Many relocating individuals and families end up working with new agents or agents with lower production who just need the money, he said. “There are people who are not generating their own business who will take it because it will pay the rent — it’ll put groceries on the table. Either way it’s not good for the client or the industry.”

Relocating individuals need the experience of a seasoned agent to help them compare and contrast values, Rosenmarkle said. “‘Newbies’ and unproductive agents are of little help in meeting that need.”

Relocation business tends to be time-intensive, he said. “When you work with relocation (employees) it’s like getting married, because when they come to town you have to drop everything.” A relocating employee will typically spend about four or five days with a real estate professional to view all of the homes for sale in the area where the employee is moving, he said, while the agent’s other clients “will have to sit and wait.”

Because there are enough agents who are willing to accept relocation company fees, Rosenmarkle said he does not expect the fee structure to change much.

Accepting fees an individual choice

Jeff Arouh, a partner with the Holland & Knight LLP law firm in New York who has worked with relocation service providers for about 35 years, said the choice to work with relocation companies is a very individual decision. “Some brokerage firms are going to object vehemently and others will accept referrals almost at any cost. This is very much a function of what the individual broker and brokerage firm believes is in its best interest.”

Years ago, relocation companies didn’t collect a fee for referring business to real estate professionals, Arouh noted, as the companies earned money from the services they provided for employers. “As they became more aware of this as a potential source of income they began to demand more,” he said. “It started at 20 percent, (then) 35 percent. Forty percent — that, to me, is off the chart. Many of (the real estate brokers) will say that 25 percent or 30 percent is a good number to pay for what would be a hot lead.

“When you’re looking at 40 percent on one side … those are tough numbers. And when you’ve got some really good agents, really productive ones, depending on what their split is with the (brokerage firm) — they don’t want to do the work that’s involved if they’re only going to take out a small portion of the commission,” Arouh said.

“Everybody has a sense of what their value is. On some level, at some point, I think agents would say that they’re worth more than they’re able to achieve if they’re giving away 35 percent of their side of the commission.” But, he said, if those same agents are asked to participate in the sale of a $2 million home and to give up 35 percent of their commission, “there aren’t a lot who would turn that down. It’s very difficult to say that there is an across-the-board feeling. They make a value judgment on each particular deal.”

He said that while relocation company fees have been rising, real estate brokers have also been making more money on each real estate transaction as a result of home-price appreciation.

“Many brokerage firms now have relocation departments and the agents within the brokerage firm decide for themselves whether to work on relocation deals or not. They know that relocation deals will end up probably generating a lower percentage of commission (but they may make this up on volume). I don’t think a big service effect is created by this,” Arouh said.

Corporations get ‘zero-fee’ service

Competition has led relocation companies to lower the cost that they charge to employers to win more business, he noted. Relocation companies bidding for corporate business have gradually reduced costs to corporations while increasingly relying on the fees they receive for referrals related to the move — so referral fees have risen while the cost to corporations for relocation services has shrunk.

“Many (relocation) companies have gone to what I would call a zero-fee service that they provide to their corporate clients. Basically what they say is, ‘We will provide these relocation services for you and we will not charge a fee for doing so. We will charge our revenue on the mortgage side, real estate purchase side or sale side, household goods movers or title side. The client is effectively getting this service with no fees that they are paying for the relocation company’s efforts.”

Judy Pogue, president of Real Living Relocation, which is a relocation division for a large brokerage company, said competition is fierce for relocation business. “What has happened over time is a lot of the relocation providers have really discounted and in some cases done away with fees entirely back to the corporation.”

Meanwhile, she said, relocation fees charged to the real estate industry are on the rise. “It’s trending upward. They are always trying to find someone who will pay more — a lot more for the business. How that correlates to the service delivered to the end users will have to be evaluated over time. You can find someone to pay any price for business.”

The question remains, said Pogue, “‘What type of service results as the fees escalate?’ I think companies are just going to have to re-evaluate the service level that they are expecting to have delivered to their transferees.”

While the relocation fee as a percentage of the commission has generally increased over time, the total percentage commission charged for services in a typical real estate transaction — according to survey data from information company RealTrends — has lowered from a historic average of about 6 percent of the sale price to about 5 percent by 2004 and has since reportedly hovered around that 5 percent level.

How fees can impact service

A Houston Realtor, who asked not to be named in this article because she works with relocation companies when existing clients are transferred, said that the going rate for relocation company fees was 15 percent to 20 percent when she began her career in the real estate business 20 years ago.

“At that time most corporations did their relocation in-house. It was much simpler and less expensive for all concerned that way,” she said. In the past few years several large relocation companies moved up the relocation fee to 35 percent, and she said one company recently raised the fee to 43 percent for “preferred brokers.”

“With a 43 percent referral fee they are not going to get agents like myself to do the work. I cannot afford to do what I do to market a property or represent a buyer for 43 percent. You won’t have agents willing to work hard to market the properties, or they will cut corners and have assistants do the work, with expected results. Ultimately someone is going to lose.”

Because relocation-related transactions can result in less income for real estate agents than with standard real estate deals, economic realities may lead the agents to cut marketing costs and seek a quick sale — which may not be in the best interests of the consumer, said Erik Wecks, a Realtor for Windermere Real Estate in Vancouver, Wash.

“From a business standpoint you’re very likely to lowball that house because you can’t afford to market it,” Wecks said. “(The agent) needs to unload it without having significant marketing cost.” He said he views relocation-related business as a “loss leader” for possible future business with those clients — it isn’t sustainable on its own but could lead to future business that is more lucrative.

Agents working with relocation deals tend to charge a higher commission than they might otherwise for their services, he said, because of the fees involved. “You’re going to charge the highest commission that the (relocation company) will allow you to charge, period, because you are already losing so much money.”

In such cases, relocation business could essentially drive up the overall real estate commission rate for a transaction while diminishing service for the relocating consumer.

He added, “I think the whole thing works on silence. You’re not allowed to tell (a relocating employee) that the relocation company is taking a portion of your commission.” While Wecks said that consumers can receive “a great benefit from the relocation company and a lot of peace of mind when the corporation is moving them,” he also said that consumers may not be getting the best value for their property in every instance.

Last month, Wecks posted a commentary at the ActiveRain.com real estate networking site, titled, “Hey! Hey! Ho! Ho! Relo Companies have got to go!” with proposed changes to the relocation process, and he received dozens of responses within a couple of days. In the article, which includes a photo of a fist with the letters “O-B-E-Y” written on the fingers, Wecks cites an example of a relocation transaction in which he was asked to pay about 67.5 percent of his commission — before splitting the commission with his broker — to a relocation company and his brokerage company’s relocation division.

After-the-fact fees

Rising relocation fees are not the only concern to real estate agents and brokers — there is also an ongoing problem with so-called “after-the-fact” requests for relocation-related fees.

“One of my huge gripes, (shared by) lots of my fellow Realtors as well, is a relocation company that sort of ‘parachutes’ into a transaction after you already have a buyer or seller under contract, often just before (and sometimes even after) a closing and demands a referral fee for the privilege of working with ‘their’ client,” said Jim Lee, a real estate agent for Realty Executives Associates in Knoxville, Tenn.

In some cases, a relocating employee may have initiated a relationship with a real estate agent and later learns that the relocation company has a specific list of agents that the relocating employee is supposed to work with in a transaction or risk forfeiting all relocation benefits. Relocation companies may allow the employee to work with another agent provided that agent agrees to pay a referral fee, though some policies are strict about the need to work with specific agents.

A referral fee that a relocation company attempts to charge to an agent who is already providing services to a relocating employee when the agent did not agree to pay this relocation fee is considered an after-the-fact referral fee. The existence of a service contract between an agent and relocating consumer can in some cases protect agents from paying after-the-fact fees.

The Tennessee Association of Realtors sponsored a law in the state that is one the strongest in targeting these “after-the-fact” referral fees, Lee said. Other states, too, have created similar laws that address problems with claims for referral fees in real estate transactions.

Lee said he credits the efforts of relocation industry association Worldwide ERC and real estate regulatory group ARELLO for efforts to combat after-the-fact fees.

Worldwide ERC, a membership association for about 13,000 relocation professionals, has created guidelines for the collection of real estate referral fees in an effort to address problems relating to relocation fees.

A September 2006 policy statement by ERC states, “The referral fee request should occur prior to the execution of a valid listing agreement, buyer-broker employment agreement, or purchase agreement,” for example, and the statement recommends that consumers should be made aware that they “may experience a loss of or reduction in benefits and/or cost savings associated with (a) program” if they “opt to use real estate licensees outside an identified referral fee program network.”

According to the statement, “research has shown that when real estate referral complaints arise, they are most often the result of a lack of awareness of the referral fee requirement at the beginning of the transaction by real estate licensees, consumers or both.” Worldwide ERC Coalition, the statement also notes, maintains a confidential online referral fee complaint resolution mechanism called The Interchange, at http://www.erc.org/coalition/tax_legal/interchange.shtml, though this service is not an arbitrator of disputes.

Real estate firms that participate in referral programs “are responsible for disclosing the existence of business relationships which may obligate licensees to pay referral fees,” the statement notes, and blanket agreements for referral fees “should not be used as means to avoid or circumvent disclosure responsibilities.”

Debbie E. Campagnola, CEO for the Association of Real Estate License Law Officials, a group of real estate regulators, said ARELLO formed a task force that worked with ERC representatives to update the ERC policy on referral fees. ARELLO hasn’t formally adopted the statement on referral fees, as regulators typically don’t get involved in issues related to fees between brokerage firms, she said. ARELLO’s board of directors considered the updated ERC policy statement in early January and voted to post the statement for members to view in ARELLO’s online resource library.

Fighting the problems

Cris Collie, executive vice president at Worldwide ERC, said, “We’ve been very successful in minimizing that (after-the-fact referral fee) practice. We have pledges from all of the relocation companies that are a part of the organization that that the practice won’t be followed. A contract is a contract.”

And Sandy Taraszki, executive director for the Worldwide ERC Coalition, said, “If there is a referral fee that is going to be paid … that agent has the right to know that before the (agent) enters into a contractual relationship.”

Arouh, a lawyer for relocation service providers, said the ERC’s efforts appear to be working. “As far as I’m aware there are many fewer problems now than there were several years ago. There is better communication to the employer and the employee about the needs of the relocation process. There are fewer situations where there are multiple claims for the same referral fee. A lot of this has to do with educating and communicating with the employee to understand the limitations of his or her own freedom.”

Corporations, Arouh said, will hear about it from employees if the employees are unhappy with relocation services. And relocation companies, he said, are helping corporations meet their goals — “to get the employee moved quickly, efficiently, at minimum pain with minimum cost.”

While Wecks, an agent at Windermere Real Estate, said the relocation industry is not as consumer-friendly as he believes it could be, real estate professionals “have to face the fact that large corporations are getting a very needed service from relocation companies. I don’t believe you’re ever going to replace relocation companies or drive them out of business,” he said. But he said real estate professionals may be able to provide more relocation-related services to clients on their own. “It does seem to me that we can do many of these services as real estate agents,” he said.

Real estate broker Rosenmarkle, too, said that individual real estate agents can provide many relocation services but relocation companies can offer more extensive benefits such as guaranteed buy-back programs that ensure a home sale even in a tough real estate market.

Just as the Internet has changed other aspects of the real estate industry, Rosenmarkle said he expects that trend to extend to relocation practices. “I think that even the relocation industry is going to have to come around a little bit to modernize their communication skills and abilities with the consuming public. I think consumers are going to become a little more sophisticated about what they are getting or not getting. Relocation companies are going to have to start sharpening their pencils a little bit about what they’re giving to consumers,” he said.

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