The word transparency is at the forefront of real estate again. At NAR NXT in Houston, the Delegate Body rejected a proposal voted on by the NAR Board of Directors to address disclosure of referral fees in a real estate transaction. After all our industry has been through, is continuing to hide behind the veil a good idea?
The California Association of Realtors came out in support of transparency, and eXp Realty announced enhanced disclosure standards and a new “Consumer Choice” framework to address issues relating to referral fees and choosing ancillary service providers.
Lack of disclosure of referral fees isn’t the only issue. It’s one symptom of a bigger problem. Let’s take a deeper dive into various aspects of the real estate industry that are lacking transparency.
Where transparency needs to improve in real estate
1. NAR structure and governance
Since NAR has been busy pumping out consumer explainers about representation and various aspects associated with a real estate transaction post-Sitzer | Burnett, perhaps it should start helping the agents in the trenches understand more about their structure, who is involved in making these decisions and where the money is really going under a new management and leadership team.
2. Referral fees
This is the elephant in the room that our industry doesn’t discuss. There are referral fees associated with leads generated by various portals, platforms, relocation companies as well as from one broker to another.
Broker-to-broker referrals can be facilitated directly between brokerages or funneled through a relocation/referral department of a brokerage.
In some cases, an agent will contact another agent to discuss the potential referral, and in other cases, an agent may rely on their relocation department to find an agent for them.
Outside of one agent personally introducing a consumer to another agent, the buyer or seller typically has no idea how the agent was assigned to them, nor the financial implications involved for both the referring brokerage and the receiving one.
It gets more complicated with buyer representation agreements and explaining how agents can be compensated.
Referral fees need to be a part of that discussion if a fee is involved.
I also believe referral fee disclosure should require those referring a consumer to another agent to take time to fully understand their needs and explain their role when referring them, as well as compensation they could potentially receive as a result.
When referrals come through a brokerage relocation department, it has been typical practice that referral fees could not be discussed with the consumer.
This was considered taboo and could result in an agent no longer receiving referrals. This needs to change, especially in our post-Sitzer | Burnett world where the buyer needs to sign a representation agreement where compensation is discussed, and the buyer may need to pay some or all the agent’s compensation depending on what happens in a transaction.
Another form of referrals are where the consumer receives cash back after closing or a discounted interest rate and/or closing cost credit with use of a preferred lender. Referral fees paid by the brokerage receiving the lead go to cover some of these costs. More transparency is needed here for all involved.
While it’s frowned upon to discuss these incentives, unknown issues may arise in a transaction that require acknowledging them. Agents should be empowered to do so with clarity and confidence rather than feeling ashamed or acting like they don’t know.
3. Builders
Builders are their own animal when it comes to how they operate. Many things need better disclosure to understand all the incentive and discount gibberish that’s thrown at buyers when they walk in the door.
Builders need to be more transparent about the fine print associated with incentives. Right now, new construction is a highly attractive option that many buyers are going for because of interest rate buydowns and all closing costs paid with use of their preferred lender.
There are a lot of attractive inducements to subtly “push” buyers in this direction. But incentives often change and can be confusing. The same builder may not apply the same incentives to all inventory homes or all their communities.
Builders should be clear about what they stand to gain by the consumer using their preferred lender. Does the builder receive a cut from the lending fees charged? What about all of those closing costs being paid for on the buyer’s behalf? How much markup is in those fees? Buyers rarely question these things, but they need to know.
What about the minimum loan amount needed to get incentives? A buyer who wants to take out a small loan may not benefit the same way a buyer with a larger loan does.
Since the buyer and site agent know about our compensation, shouldn’t the buyer and their agent know what the site agent stands to make on the sale?
And for that matter, the buyer should understand how much the builder’s lender is getting paid.
Speaking of compensation, more transparency is needed with builders disclosing upfront how agents will be paid — is it based on the sales price or base price?
There have been transparency issues with property tax disclosure, and there is a class action lawsuit against builder DR Horton for deceptive lending practices, where property taxes were not accounted for based on the value of a completed home that buyers purchased.
Many buyers have payment shock when their home’s value is reassessed after they close on it, which leads to an increase in their mortgage payment and a shortfall in tax escrows.
4. Home warranties
Agents are being pumped and primed to use X, Y or Z home warranty company by representatives of those companies that have an affiliation with their real estate brokerage.
Brokerages that have a preferred relationship with a particular company must also push this narrative to agents. They aren’t doing it “just because”; they are doing this because there is a financial gain.
I’m not knocking the idea of a home warranty, as it can be a helpful risk mitigation tool, but how much does a brokerage receive from a home warranty company every time a transaction closes where a warranty was ordered by their agent? All involved in the transaction should know.
5. Affiliated mortgage, title and escrow
This is another one that brokerages like to “encourage” the use of these services. While they cannot mandate it, they need to remind agents of the importance of using them to meet internal performance metrics, which could affect bonus or other compensation for a broker/manager and monies that could be used for the office.
Affiliated mortgage, title and escrow typically have some ownership interest by the brokerage or parent company of the brokerage.
While there are affiliate business arrangement disclosures, those involved in a transaction where these providers are used should disclose the financial gain others stand to receive from it.
Consumers should know that affiliate lender pricing on interest rates and closing costs may be higher than that of other lenders, so they should shop around for what suits them best.
This issue is at the center of the class action lawsuit involving Zillow, which alleges that Zillow Flex agents are pushed to recommend Zillow Home Loans.
6. Portal leads
The Zillow lawsuit has exposed the confusion that ensues when a consumer is interested in a property, clicks the “Schedule a Tour” or “Contact Agent” buttons, and their inquiry gets routed to numerous people who are not the listing agent.
This leaves them confused as to who they are dealing with when they were expecting to reach the listing agent.
Our industry has more work to do. Transparency shouldn’t fade in other aspects of real estate just because we have buyer representation agreements.
Consumers have started to understand that our services are not free. Real estate is an interdependent industry that feeds many ancillary businesses. That will not change, but education and disclosure can, so that consumers are empowered to make the best decisions for themselves.
