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.

Kiplinger's Personal Finance - Recommends Using an Exclusive Buyer Agent

Kiplinger's Personal Finance - Recommends Using an Exclusive Buyer Agent in this March, 2007 article. (They have written many along the same lines in previous years..) Consumer Reports, Money Magazine, CNN Money, the Wall Street Journal, Medical Economics Magazine, the Consumer Federation of America, and many others have all done the same..

An Exclusive Buyer Agent is an agent that never lists company for sale - nor does their company. They never represent sellers - ever. On the other hand a "buyer's agent" works for a company that lists property for sale - and they themselves usually list property for sale. Whether they are practicing designated agency or dual agency - those are not good things for the buyer...

I like the fact that the article points out that "Agents are paid a cut of the selling price, so the higher the price, the better for them -- but not for their clients." As Exclusive Buyer Agents - we ensure that "the higher the price - the worse for us" - which puts us in alignment with out buyer client's interests.

The definition of insanity is hiring someone with financial interests that are in opposition with yours. When you purchase a used car - the used car saleman's interests are just that.

Like a dog - we "work hard for our scraps" - and we believe that everyone does in this world... So when consumers hire a so-called buyer agent that makes more when their price goes up - they are really doing themselves a dis-service....

When I bought a home when coming in for a position at Motorola in the 90's - the "company referred agent" (read relo company) I had - kept trying to work me over to come up in price - and it really teed me off. She was acting like she was representing the seller and not me. She also referred an awful home inspector - who glossed over many things that should have been found. Many agents refer inspectors that "won't blow the deal" which is really a disservice to the buyer.

I realized then that home buyers needed much better protection than what they were getting - which is why I started this company.... to provide the best possible protection and representation to home buyers... I feel great about what I do for a living - becuase it has the most integrity to buyers in the Real Estate industry....

What is an "As Is" Sale?

With more foreclosure and as-is property coming on the market everyday - it is important for consumers / clients to know what "as is" really means. It means that the seller must disclose all known defects - but that they aren't expecting to pay for any repairs. (However - never rule out that you can STILL negotiate to get credits from a home inspection -- it never hurts to ask. And if there is "no reimbursement" and that would be a deal killer for the buyer - just have them walk away from the transaction.)

With "as is" - the seller isn't making any warranty or representation about the condition of the property.

As-is listings have their positives and negatives for a seller. The negatives are - many buyers wonder "what is hidden... what aren't they telling me about?" -- and they get cold feet. Some sellers do indeed thing that they can get away with selling a home which has a hidden defect that the buyer or a professional inspector won't discover.

They also may sell "as is" because....

They don't have the money to repair the disclosed defects.

They may not have lived in the property (perhaps it was an investment property) and they aren't aware of it's problems.

The seller doesn't want the inconvenience and hassle of making repairs.

Buyers can protect themselves when purchasing as-is properties by hiring a very very good home inspector - that is at a minimum ASHI and/or NAHI certified. You might want to review sample reports from various inspectors - to compare the differences. A good agent will refer you to an agressive inspector -- not one who sugar coats things - so as to not "blow the deal" for the agent.

Though a home warrantee can be helpful - they won't cover pre-existing conditions.

Home Buyers Aren't Properly Educated or Informed About The Different Forms of Representation in Real Estate and Their Implications

Did you Know That 77% of Buyers Pick the Listing Agent of a Home They are Interested in (many times, on the Internet) to represent them for their purchase?
This is one of the WORST things a buyer could do! The buyer is typically raked over the coals by the listing agent. The agent gathers all the information they can about the buyer and their situation to give their seller the upper hand.

Listing agents are represent THE SELLER - not the buyer. Unfortunately - "agency disclosure" (letting the buyer know how they are really being represented (or not)) is being provided less than 12% of the time by agents across the USA.

The Consumer Federation of America states that the public needs to be more informed. I couldn't agree more..

And worse yet - only a couple states - Ohio and California - let buyers know that there is another option for them -- Exclusive Buyer Agency representation. A distinctly different form of representation than "buyer agency" (where the agent and their company list property for sale.) Here is the definition of an Exclusive Buyer Agent.

Joel Stern of Silver Spring, Maryland, filed a lawsuit against Weichert Realtors, reportedly one of the largest independent brokerage firms in the country, for failing to properly disclose that they represented the seller in connection with his recent aborted home purchase. Stern believes he was induced to sign a contract to buy the house at an excessive price because the agent that Stern thought represented him as a buyer's agent was in fact functioning as an agent for the seller.

Recent data released by the National Association of Realtors indicates that real estate agents are failing to disclose whom they represent in transactions at an alarming rate, even where state laws (such as Illinois' agency disclosure law) require them to do so in writing at their first substantive meeting with a potential client.

According to the author of this article, Kenneth Harney of the Washington Post, "You as a buyer or seller need to be alert. Demand a formal disclosure of representation before beginning any substantive discussions with an agent. Do not assume that you are working with a buyer's agent whose sole loyalty is to you."

Harney further cautions, "If it's not in writing, it doesn't exist. In the absence of a signed buyer-agent agreement or other disclosure to the contrary, your agent is almost certainly working for the seller and will squeeze the highest price possible out of you on the seller's behalf."