#5: Agents who
accept referral fees, kickbacks, or gifts from the service providers
Some kickbacks are also illegal. The federal Real Estate Settlement Procedures Act (RESPA) prohibits agents from getting kickbacks from certain providers, like title companies, lenders, inspectors, and appraisers. When RESPA became law, many big brokerages quickly solved the no-kickbacks problem by acquiring their own title companies and mortgage companies. This was challenged in the courts, and brokerages are no longer allowed to control title companies. They can, however, control—and refer clients to—their own mortgage lenders. There's also evidence that many agents skirt RESPA rules by collecting illegal kickbacks.
Here's what to watch for:
If you’re a buyer who intends to finance your purchase, you’ll likely need a pre-approval letter from a lender before you can make an offer. Your agent will likely recommend one or more mortgage brokers who are willing to write such a letter.
So far, so good—you may need a pre-approval letter on short notice, and it’s nice to have a reliable mortgage broker in your corner. The problem is that many buyers remain loyal to the brokers who wrote their pre-approval letters—and they often pay dearly for this loyalty in the form of higher rates or loan fees.
Note that many banks are now requiring buyers who wish to make offers on foreclosed properties to get preapproved by their own loan officers. As a nod to RESPA, the banks almost always say that this is for preapproval only and that buyers are free to get loans elsewhere. But many banks give their winning bidders a very short time period in which to release their loan contingencies, which doesn't give them much time to start fresh with a new lender.
Many sellers stick with their agents when they buy their replacement homes. But if they plan to move to a different area, they'll often need a new agent. When that happens, their agents will sometimes offer to help them find a good buyers’ agent. Agents are often richly rewarded for these referrals.
The typical reward for sending a client to a buyers’ agent is 25% of any commission that agent receives. That would come to $3,125 if you bought a $500,000 home offering a 2.5% commission. Some agents finagle for more—I routinely get cold calls from agents in other states who are trying to sell their clients to me in exchange for generous referral fees. These agents know nothing about me and the quality of my services.
One problem with a referral fee is that it can prevent you from negotiating a better buyer rebate for yourself. As I explain in my website CapturetheCommission.com, buyers’ agents will often give rebates to buyers who ask for them. If your listing agent is getting a referral fee, it will likely come directly out of your potential rebate.
RESPA, as we’ve seen, won’t allow title and escrow companies to give agents kickbacks for using them. Undeterred, these companies have tried to disguise kickbacks by offering agents things like free classes, free virtual tours, and below-market rents on offices.
©Lori Alden, 2010. All rights reserved.