Debunking the real estate cartel
REThink Real Estate
By Tara-Nicholle Nelson, Thursday, August 20, 2009.
Flickr photo by KellyB.The real estate nonfiction book genre should be broken down into two subsets: (a) how-to and (b) who-caused-it bubble-burst re-enactments. Books in the latter category aren't pure nonfiction, though, in my experience.
Sprinkled throughout you'll usually find some of the more persistent, pervasive and, in my opinion, fictional (at worst) or exaggerated (at best) tales of real estate industry conspiracies.
I realize that there have been individual instances of agents and mortgage brokers, inspectors and appraisers joining forces in an evil marriage to take advantage of the little guy. But I've read more than one book recently that flat-out accuses real estate professionals who have a preferred list of service providers of forming a profit-fluffing, consumer-exploiting real estate cartel.
And that is simply not an accurate representative of why the average real estate agent prefers that their clients work with mortgage, escrow, inspection and even appraisal professionals the agent knows and has worked with before.
I'm not perfect -- no real estate broker or agent is. But I am riotously passionate, borderline excessively zealous in my devotion to serving my clients' best interests, and I know many other real estate pros who are, too. I take seriously the loyalty element of my fiduciary duties to my clients, and I personally define "loyalty" as putting my clients' interests above those of everyone else in the transaction, myself included. I have -- and will -- throw my own interests and earnings, under the bus before I will allow my clients' interests to be injured on my watch.
As part of my efforts to protect my clients' interests, I advocate that my clients work with lenders and other service providers that I know and trust. With every year that goes by, I feel more strongly that my clients should work with the providers I recommend. I know that this is usually a Q-and-A column, but many of the questions I've been receiving lately involve:
- how to select service providers during a transaction;
- whether a real estate agent's recommended service providers are inherently biased and untrustworthy; and
- the broker-appraiser disconnect created by the recent Home Valuation Code of Conduct (HVCC).
Since I feel so strongly about these matters, I thought I'd take a few weeks away from the Q-and-A format to help you rethink this issue.
There are dozens of legitimate, pro-client reasons a real estate professional would want their buyer clients to work with the agent's preferred service providers. From mortgage brokers to inspectors and escrow officers, there are valid reasons why a collegial, repeat working relationship between an agent and a service provider serves the client's best interests.
Please note: I am not talking about any sort of paid referral arrangement. In fact, I constantly take care to let my buyers know that, while it's not illegal for a real estate broker to take a referral fee from a mortgage broker with the proper disclosures, I have no such paid affiliations.
My preferred mortgage broker is world-class. She's as honest as the day is long. Actually, she does loans for a district attorney who investigates real estate and mortgage fraud -- that's how I met her! She's also rabid about getting the best rates, lowest closing costs and best terms for our mutual clients. Her business is built on referrals, not just from me and other Realtors, but on the repeat and referral refinance transactions generated by her clientele.
She's a tenacious troubleshooter, closes every deal she says she can close, closes them on time, works with legitimate lenders (vs. the fly-by-night banks who would pay her more) and takes seriously the fact that our clients rely on her word to remove their loan and appraisal contingencies, rendering their deposit money nonrefundable. Her processing team rocks, too.
And the rocking they do is in stark contrast to many, many of the other mortgage brokers I've run into. The mortgage business is very similar to the real estate business in that there is a vast range of competence, ethics and interpersonal skill level possessed by practitioners. You can get vast brilliance or vast dimness, depending on who you work with.
Every once in awhile, I work with buyers who already have their own mortgage professional and choose not to work with mine. Almost every time, the neglect, incompetence or crookedness of the outside mortgage professional has been some sort of major, deal-threatening glitch that me and mine have to work hard to unravel, often by bringing in my mortgage buddy, who could have handled the deal in the first place. From these experiences with other mortgage professionals, I've gleaned this list:
Legitimate Reasons My Buyers Should Work with My Preferred Mortgage Broker
- Empowers me to mediate and advocate more effectively on your behalf. If you work with my mortgage broker, I can better communicate your wants, needs and priorities for you -- even when you're not there. Another mortgage broker doesn't care what I say and may make choices for you without consulting me. ...CONTINUED
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Submitted by Jillayne Schlicke on August 20, 2009 - 12:56pm.
Hey Tara, I totally see where you're coming from.
Outside your own experience, consider the experience of thousands of other homeowners who "trusted" their real estate agent to refer them to a competent mortgage broker, only to receive you name it: poor service, predatory lending, state and federal law violations on the lending documents, bait-and-switch, and so forth.
In return, the real estate agent received kickbacks, referrals, cash, maybe even a kickback from the real estate broker because the broker also owned that same mortgage company.
Maybe the mortgage broker was somehow related to the real estate agent....life partner, cousin, sister, etc.
Reading at how strongly you feel about your broker (wow, there's a lot of emotion in your words) as a consumer, I would be highly suspect that you have something going on with that person like some sort of side arrangement. But I'm more paranoid than your average consumer, LOL.
Consumer trust will have to be rebuilt and this will take time.
Submitted by Robert T. Boyer, Ph.D. on August 20, 2009 - 1:52pm.
Tara, well said. And although I think you mentioned it briefly, the affiliate relationship goes way beyond just the mortgage industry focus.
One of the great values that an agent brings is that they have developed relationship that last beyond a single transaction. My wife has been a broker for 17 years and over time she has weeded out the poor providers. Additionally, she has developed strong relationships (read: discounts for all her clients) with local carpet companies, and so on. And like you, all for no fee, no kickback.
The only "payment" received is that happy clients refer her more business. And quite frankly, she would do it regardless because taking care of her clients is the right thing to do. My wife even often goes out of her way (at personal expense to us) to protect her clients from themselves.
I believe that there are many agents and brokers out there with much the same viewpoint. You can probably identify them by their longevity in the business.
I would offer that "trust" is something that should always have existed at a personal level. Rebuilding trust should not be pinned on an industry.
Robert T. Boyer, Ph.D.
CMO FinestExpert.com - The Cashflow Search Engine
VP America's Finest Real Estate
Submitted by Paul Francis, CRS on August 20, 2009 - 2:38pm.
Tara,
Nice article...
"Please note: I am not talking about any sort of paid referral arrangement. In fact, I constantly take care to let my buyers know that, while it's not illegal for a real estate broker to take a referral fee from a mortgage broker with the proper disclosures, I have no such paid affiliations."
Very well said. I just finished answering a request from a buyer looking for a lender that can handle his circumstances and I referred a couple of lenders that I've used for years with the following statement:
No... I do not receive referral fees, gifts, etc..etc.. for referring them. I refer them because over the years they have made my clients happy and do what they say they are going to do.
I think we make enough money for a transaction and should avoid the slippery slope of adding pocket change. Going after this is just a sign of greed in my opinion.
Paul Francis, CRS
Prudential Americana Group
www.LasVegasRealEstateHome.com
702.592.3058
Submitted by Bob Wilson on August 20, 2009 - 4:35pm.
I used to work for what used to be the largest broker in SoCal. In house, company owned escrow and mortgage companies, affiliated title, and a behind the scenes arrangement with Property ID (which got them sued).
Agents in this company were constantly 'encouraged' to push the 'one stop shop; even though there was no cost savings at all to the consumer. When I countered out company affiliates, I could count the minutes until the manager would call. Their pay was tied to the use of affiliates.
While the average agent likely made these recommendations without knowing the company would profit, there were sweet heart deal made with many of the top producers, especially on the mortgage side.
This did happen. It doesn't as much now, but the stories have merit.
Submitted by Jon Astaris on August 20, 2009 - 7:47pm.
First: start with books about who caused the real estate bubble. Some say it's the real estate cartel.
Second: there is no such thing as a real estate cartel. Look, look at me: I am honest and ethical and able as the day is long.
And so is my mortgage broker. Some agents are less so. A lot less.
Conclusion: real estate people have absolutely no connection to real estate bubbles or/and the explosions that always follow.
At least not the ethical able honest ones.
Oh wait, wait! There are no such things as bubbles. That'll be the next article.
Submitted by Ines Eiras on August 21, 2009 - 6:48am.
Dear Tara,
This is a very nice article and your point was well made. As a real estate practitioner for the past 21 years in the East Bay Area as my sole career, I have been there and done that in terms of experiencing the lender's performance, that is recommended by me that plays at 100% on my team and has a very high batting average for results versus the lender that the client brings with them that will be batting for the first time for this client, the latter, who for the most part but not every single time, based on my past experience has a greater risk of striking out and erring during the escrow process. The latter situation, generally causes higher costs to the buyer in the transaction and long term financial ramifications. As a real estate professional, I take my fiduciary relationship with my clients to a very high level and put my strict ethics and values to uphold before all else, and this means that I put the clients interests first, foregoing my own. Having said this, I believe one of my fiduciary responsibilities is to thoroughly screen out a mortgage professional or two that shares my values of putting the clients interests first and that works their mortgage business with the same professional standards, competence and integrity that I uphold. For all of the reasons that you stated Tara for using your preferred mortgage lender to serve your clients at the highest level, I thoroughly agree with you and put this into my practice for the same reasons that you mention. Not only is it not legal but I also have never take a kickback from a lender or anyone of my real estate vendor partners in the industry. As strongly as I feel about this, I also feel strongly that it is illegal to pay commission kickbacks to consumers and I would caution consumers that are being bought by commission kickbacks. The Consumer may want to ask himself, what service or competence am I not receiving from this real estate professional? After all, you you ask your medical practitioner if he or she would share part of his salary with you if they performed services for you? I don't think so, right?
As a consumer, and having seen some lack of transparency in past years, I can understand the fear and the need to find transparency and more of it is coming as I write this. In my opinion, one of the worst conflicts of interest in the real estate industry in past years and at the present time still exists, is the Mortgage Broker acting as both the
lender and the real estate agent/broker. With all the real estate and consumer advocates out there lamenting the collapse of the real estate market, I am still shocked that more of this advocacy has not been done by consumers and the industry itself to stop this practice altogether. This practice is clearly a conflict of interest and has contributed greatly to the initial wave of foreclosures. In properties where I represented the seller in past years, I observed this behavior and witnessed the mortgage broker/agent charge the buyer exorbitant fees, and I am sad to say that some of these transactions, but not exclusively, involved minority agents/and brokers representing other minority buyers and I am sure many times they were relatives, cousins, or "compadres" where the familial relationship based on trust was abused. Another great analogy to why this practice is so wrong would be to have you heart surgeon both operating on your heart and on your brain. Why would one compromise and forego the needed specialty, competence and diligence of each professional's duties only because they already know the person. Fortunately the majority of these folks are no longer in business as they were in it for the short term but there are still a few out there floating around and that practice is not in the best interest of the consumer.
The bottom line, ask your real estate professional, why they use the loan mortgage partner that they use and make sure that the reasons will benefit you the consumer. Thank you Tara for your great comments and suggestions to the consumer.
Best,
Ines Eiras
Buyer and Seller Real Estate Consultant, Distress Property Certified
Turnaround Real Estate Team
Prudential California Realty
Alameda County East Bay Area Specialist
www.prurealty.com/ineseiras
ines.eiras@prurealty.com
510-305-8128