Joint Venture Agreements Between Brokerages and Wells Fargo

Recently - the founder of Long & Foster, the Washington DC area's largest residential real estate brokerage, urged his thousands of agents to recommend the company's in-house mortgage lender more often - and stop working with outside lenders such as Bank of America.

In an e-mail to all Long & Foster agents and managers, Wesley Foster Jr. chastised his workers for funding mortgages through other lenders - instead of using Long & Foster's affiliate, "Prosperity Mortgage."


The e-mail sparked criticism, with some Long & Foster agents, consumer activists and others raising concerns about whether Long & Foster is trying to profit at the expense of their clients' interests.

Foster said he wrote the memo to make agents understand that each time they use Prosperity, they're helping Long & Foster.

HUD/RESPA rules state it is illegal "if the agents or office managers receive kickbacks or fees for doing nothing more than referring services."

However - this is not the first such joint venture revenue or profit sharing agreement that I have heard of between Wells Fargo and a brokerage - so apparently - such corporate agreements give a loophole - so that such revenue or profit sharing is legal.

RESPA may want to tighten up on their rules a bit...

This is another piece of evidence that many Real Estate companies pressure their home-buying customers to use an in-house lender or lender that is co-located at the company's office.

Stephen Brobeck, executive director of the Consumer Federation of Americas stated: "It will not serve the interests of their customer and may even erode the credibility of their agents."

One Long & Foster agent said that they found the e-mail "troubling" because it implies that agents should strive to make the company more prosperous, even if it means undermining a client's interests.

I noted previously in a blog post - that a large local Real Estate brokerage here in Chicago has penned the same type of joint venture agreement with the same company - Wells Fargo. So - Wells Fargo appears to be penning such agreements with major Real Estate companies across the USA - to help pad the brokerage's bottom line - in exchange for their agents pushing business to Wells Fargo.

Is sending your clients to a specific lender such as Wells Fargo - looking out for their best interests in a fidicuary manner?

A fidicuary means that you are looking out for someone's best interests. If you are looking out for their financial best interests - wouldn't you help them shop for the best loan rates and fees - and not steer them towards a lender because it will make your broker's company more profitable?

The brokerage company's financial interests are being placed ahead of the client's interests. That is not being a true fiduciary. The Wells Fargo loan may or may not be the best for the client. How would you know unless you compared? You wouldn't!

Real estate firms promote these arrangements as one-stop shopping - telling their buyer client "it is convenient" "just use Joe here in our office" (who either pays the office rent or their company has one of these joint venture agreements with the brokerage - which exploits a loophole in existing RESPA rules - to put money in the brokerage's pocket.

I wonder how many brokerages have retaliated against agents who didn't make referrals to the in-house or joint venture lender?

Do agents get an extra year end spiff - which isn't formally tied to the in-house referrals - but still based on the number of in-house referrals? I don't know.... I'm just asking the question...

My Reply to 60 Minutes - On Their Segment Last Night

Unfortunately- your episode on Real Estate seemed like a free TV commercial for Redfin. The introduction suggested that an agent themselves pockets 6%. You didn't mention the fact that Real Estate commissions are totally negotiable - and range from 4% to 7% - plus or minus - in various markets - or that such a commission is usually split 4 ways (not two later – as you stated) - so that at 6% - a typical agent take may only be 1.5% before expenses (gas, health insurance, signs, ads etc.)

With the discounters - unfortunately - the general public gets what it pays for. Unfortunately – the consumer thinks they are saving money – but they are really losing out. The "commission savings" is not a savings at all when one factors in the fact that a good negotiator would have netted a client much more money than any "discount" or “rebate.”

As a discounter - it is difficult to argue that you did everything possible to advance your client’s interests when you didn’t even interview your client in-depth to know what their interests actually are. Since the net commission to the practitioner is so low, it seems reasonable to suppose that only the least-talented licensees will work for these outfits. With added volume as the only path to income, you get a rushed and incompetent agent.

But absolutely – there has been some discrimination against different types of brokerage models – that deviate from the norm. It is great that consumers have choices. They just need to be educated about the implications of those choices. But no one is educating them about the implications of the different forms of representation.

The “discounts” and “rebates” they receive – actually hurt them – because 99 times out of 100 – they would have netted much more money - had they had true fiduciary-level representation. (For a buyer – traditional “buyer agents” don’t provide that in many cases. Levels of representation have been so watered down for the consumer – in order to protect the brokerages from increased liability. Unfortunately – this produces poor results for the consumer.)

The industry doesn't educate the consumer about the difference between a "buyer agent" who by definition - works for a company that lists property for sale (and can get into "dual agency" conflict of interest situations with their buyer client or not show FSBO properties or have biased home showing – showing more of their own company’s listings for example) and an Exclusive Buyer Agent (they and their company never represent sellers to offer buyers a better form of representation - without the conflicts of interest – offering unbiased home showing - and showing of all FSBO properties – and telling their client about the negatives of a property – not just the positives.)

Unfortunately - in the drive to decrease liability - brokerages are not offering true fiduciary level services to their clients - and are instead - giving them inferior forms of representation for discount prices – touting it as a “savings.”

Unfortunately - the consumer remains in the dark about the implications of the discounting - seeing instead "rebates" while getting shafted on the purchase price - for example - perhaps when they could have paid $25,000 less - had they used an Exclusive Buyer Agent.

In the traditional brokerage model - so-called traditional buyer agents make more money when their buyer’s price goes up. They can paint the picture any way they want to their buyer client – with the client none-the-wiser – and the tendency can be for the agent to get their buyer to come up in price to get the deal done and get their commission check – rather than doing the hard work (sometimes taking days longer) of getting the seller to come down in price. Most Exclusive Buyer Agents align their compensation to be in the buyer client’s interests – so they make less when their buyer client's price goes up.

The only exposure that Exclusive Buyer Agents typically get might be recommendations in Consumer Reports Magazine, Kiplingers, CNN Money, the Wall Street Journal or other publications.

But in the world of State Real Estate Associations who’s boards consists of traditional Real Estate mega-brokers -- only two states - Ohio and California note the existence of Exclusive Buyer Agents in their consumer disclosure brochures - unfortunately for the consumer. The consumer is left in the dark.

One can only assume that the traditional brokerage powers that be - have made sure that consumers are in the dark about the existence of Exclusive Buyer Agents – to fuel their legalized "double dipping" (conflict of interest) business model.

If people knew about Exclusive Buyer Agents - it would be a no-brainer to use one – as why wouldn’t someone want someone to be on their side 100% of the time – with no conflicts. Unfortunately for consumers - there is less than a 20% disclosure rate by buyer agents (who represent sellers and their company does) that they can get into major conflict of interest situations. Such disclosure is supposed to be upon first meeting – but many times, isn’t until the situation happens – when a buyer wants to write an offer on that agent’s own listing.

Unlike gas and airline flights – Real Estate is not a commodity – and it takes a skilled negotiator, using sophisticated negotiation tactics to get better deals for their clients. For example – it is extremely unlikely that a Redfin agent would float multiple offers – pitting one seller against another – since it would be too time consuming. Their business model is “churn and burn.”

In fact – the Redfin client – has to see houses by themselves – not having someone advising them that it is a real dog for it’s location or other features that can only be observed by a personal tour – (the Redfin agent is also in the dark) – and the buyer may get raped for information by the listing agent who may be present when the buyer is touring – with the buyer inadvertently compromising their negotiation position – as information is power in Real Estate. The listing agent might have found out from the buyer for example – that the buyer only has one day left to look before they are forced to make a decision because “our out-of-town visit is up - and we can’t come back if an offer doesn’t work out”, and that “this house is the only one we like” “we just love it” “we’d be willing to go almost full price for this.”

With Redfin - the listing agent may also lay claim to the commission – stating that they were the “procuring cause” that the buyer bought – leaving the buyer with no rebate whatsoever from Redfin -- if the listing agent wins the long drawn out commission dispute.

Not only did the buyer not get $35,000 off the price (had they used an Exclusive Buyer Agent – who might have found out that the seller had double mortgages and had to sell soon due to a pending divorce – and used other negotiation techniques) – but perhaps they buyer also got referred to a home inspector that “didn’t blow the deal” (as the model is “churn and burn”) -- or get added home inspection credits. In addition – no one is helping them shop for the best loan – perhaps saving them an additional $30,000. (Many traditional agents don’t help their client shop for the best loan – perhaps referring them to the “in-house lender” for convenience. Even worse for the buyer - many agents (again –“for the sake of convenience Mr and Ms. Buyer) act as a lender as well – which is a HUGE conflict of interest for their buyer client. Had they had help getting the best rate and fees from other lenders – the may have saved an additional $60,000 or more over the life of the loan.

Worse yet – the traditional agent’s brokerage many times has profit sharing or rent agreements with the in-house lender – with the agents recommending the in-house lender to their client for “convenience sake” – which is hardly being a true fiduciary for their client – (meaning putting the client’s interests before their own.)

The same can be said of listing agents using the seller’s money to run ads that they know are less than 2% effective in selling the home – but such ads - gives them free advertising to bring them “buyer leads” using the seller’s money. Is that putting the seller’s interests ahead of their own interests? No. So most traditional agents – even in an industry historically slanted in the seller’s favor – still aren’t doing their sellers any favors by not being a true fiduciary for them.

The REAL problem is – the industry is being run very inefficiently because the consumer is left in the dark about how they are really being represented – and the implications of that representation. Both buyers and sellers aren’t getting the true fiduciary-level representation that they deserve – because of brokerages watered down levels of representation – to reduce their legal liability, and discounters touting “rebate” savings when offering little to no representation or negotiation expertise to the buyer or seller.

Rick Hauser ABR GRI

Broker/Owner

Relocation Advisors Group Inc.

An Exclusive Buyer Brokerage in the Chicago Area.

As a Buyer - Why Take the Risk of Hiring a "Buyer Agent" (Dual Agency Possibility) When You Can Have an Exclusive Buyer Agent (No Dual Agency)?

The answer is - you shouldn't take the risk... It's a no-brainer. When you use an Exclusive Buyer Agent (they and their company never list property for sale) - and you are assured of 100% representation - 100% of the time.

Unfortunately - Dual Agency is legal in Illinois because traditional firms lobbied for it - in order to preserve the ability for their agents to obtain "double dip" commission. Never mind that it isn't good for the consumer...

How can a Realtor, in all honesty, work for two Clients on opposing sides of a transaction? How can you place your Client's interest first, when there are two of them, one trying to get the highest price possible and the other trying to get the lowest price possible? You can't.

Unfortunately when consumers meet with a so-called "Buyer Agent" the first time - and there is no contract - over 80% of consumers in Illinois aren't told by their agent that they can get into a "Dual Agency" situation until it happens.... when their buyer client wants to write a contract on their own listing (that they happened to "sell" to their client.) The law says they were supposed to disclose that they could - upon first contact - but it rarely happens. Thus - the home buyer is left in the dark - and doesn't realize the conflicts that can crop up. (Would have never happened - had they used an Exclusive Buyer Agent.)

An Agency relationship creates a fiduciary between the Agent and Principal. Take away the fiduciary and there is no Agency. When entering into Dual Agency relationship, this fiduciary must be modified, to the point of no longer existing, in order to assist both clients equally. A fiduciary is NOT equal. Here lies the problem. Dual Agency, by it's very nature, is not an Agency relationship. Below are some excellent links that delve into the problems with Dual Agency a little further.

http://www.realestatelawyers.com/Dual-agency.cfm

http://www.realestatejournal.com/columnists/housetalk/20031010-barta.html

http://realtytimes.com/rtapages/20050208_dualagency.htm

This is why I've chosen to sacrifice half of my potential income - to only be one "one side of the fence" - that of the buyer. If it was about the money - I'd be like every other agent - working both sides. It is about the ethics to me..

The Difference Between an Exclusive Buyer Agent and a "Buyer Agent"

Unfortunately - most of the general public isn't aware of the distinction...

In the 1990's NAR defined the difference in one of their brochures - but that is the last we've heard from them in terms of the definition. Only two states proactively let the public know that Exclusive Buyer Agency is a choice that they can have when they are purchasing Real Estate -- Ohio and California.



An Exclusive Buyer Agency is a real estate agency employing only agents working with buyers - and never engaging in agency for sellers. They have a fiduciary obligation and service to buyers, independent of all obligations and inducements to adverse interests (example - sellers, other agents, service providers).

An Exclusive Buyer Broker would be the managing broker of such an agency.

An Exclusive Buyer Agent is an agent who represents only buyers and neither accepts listings nor works in an agency which represents sellers or accepts listings. They work for the broker of the Exclusive Buyer Agency. They can never get in a dual-agency conflict of interest situation with their client.

A "Buyer Agent" works for a company who lists property for sale - and they list property for sale themselves. They can get into dual-agency conflict of interest situations with their buyer client - and unfortunately for the consumer - typically disclose that they can when the contract is written - rather than up-front with the consumer - as is typically required by most state laws.

An Exclusive Right to Represent Agreement does not give the right for a Buyer Agent to call themselves an Exclusive Buyer Agent. It only means that their buyer is working exclusively with them - and no other agent. They can still get in dual agency situations for example.

Real Estate Brokerages and Their Agents "Steer" People to Their Affliated Entities - and They Are Now Getting Sued For it...

Was the Realtor you used to purchase you home truly acting as a true fiduciary in protecting your home buying and financial interests?

Click on this link to read about one lawsuit about this.

A lender cannot give a kickback to real estate licensees for referring customer and clients - just as licensee's cannot pay an unlicensed person for a referral.

But apparently - there is a loophole in the (lender (in my personal observation noted below) or title company "affiliates" (in the case of the article)) and Real Estate company relationship - whereby - corporate structures or LLC joint ventures can get around that - by funneling money through the corporate ownership structure.

The article goes on to say... "When real-estate brokers or sales associates knowingly steer clients to higher-cost services that benefit the broker financially, they might violate the fiduciary responsibilities owed to those consumers."

The article states: "Real-estate brokerages increasingly rely on income from their affiliates and often seek to maximize their "capture rates" — the percentage of all home-sale transactions that use the affiliates’ services. They also argue that even if the affiliates’ fees or mortgage rates are not the lowest available, the quality and dependability of the affiliates’ services more than compensate for any price differences."

I've usually heard agents tell their buyers - "Hey - use Joe in our office - it will be more convenient for you." Well - that convenience could cost you thousands! Rather than help you "shop" for the best loan when you buy - most agents steer you to a "preferred lender" - perhaps one in their office.

Relocation Advisors Group helps you "shop" lenders. We analyze their Good Faith Estimates for you - so that you can have a lender that has low rates and fees. We have no hidden ties to any of them.

I was at a traditional Realtor meeting a few months ago - and ran into a "Large Lender" person at lunch who stated that Company X (I won't name them for their sake - but they are large) locally – had done a joint venture with them – creating an LLC – where there will be revenue sharing between Company X and "Large Lender" through the LLC -- with the revenue to Company X going up - if their agents pushed their clients to "Large Lender."

I was shocked. Apparently – that must be legal --- as Company X and "Large Lender" wouldn’t do something that is illegal - would they?

Such an arrangement though - to me - does not seem to be in the consumer's best interest. It puts the Company X's financial interests above that of their client 's financial interests. (Perhaps "Large Lender" would be the best loan in some cases - and in others - perhaps not.)

The article that is linked to above - goes on to say... "In the case of a broker-client relationship, fiduciary duty means that a real estate broker is bound to put a client’s best interests ahead of the broker’s and must not profit from the fiduciary relationship unless the client consents."

The relationship I learned about between mega-broker Company X and "Large Lender" does not appear to do that. I would assume that they have some form of disclosure to each client about the Company X and lender LLC profit sharing relationship - but I wonder about the font size..


Rick Hauser, ABR, GRI, Broker-Owner, Relocation Advisors Group Inc.