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Hidden Referral Fees Could Cost You

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | October 2nd, 2020

Most professions restrict the payment of referral fees. But they run rampant, and are somewhat controversial, in real estate.

According to the latest report on the inner workings of the industry from the Consumer Federation of America, these fees can go as high as 50% of the sales commission -- when the referring agent is a relocation company -- to as low as 10% when a homebuyer’s exclusive agent refers him or her to another so-called “buyer’s broker.”

Typically, referral fees are hidden from buyers and sellers. The accounting and investment professions require disclosure, and most businesses in which referral fees are common do the same. But the National Association of Realtors’ code of ethics does not require their disclosure, and most agents don’t feel the need to do so. A handful of states require disclosure, but not always in writing or in a timely manner, and the CFA could find no evidence those laws are enforced.

In most other businesses, referral fees are in the 5% to 10% range. But the CFA found that 25% was the average for realty referral fees.

So, if you bought a $250,000 house using an agent referred to you by another agent, your agent would pay part of her share of the commission to the referring agent. If the commission was 6% and the referral fee was 25% of the agent’s half of the commission, she would send the referring agent a check for $1,875.

Earning referral fees can add up, too. According to a 2008 study cited in the report, nearly nine out of 10 agents received income from referrals, with more than half taking six paid referrals within the previous 12 months. Nearly half said they earned at least $10,000 in income from them.

Moreover, 8% said they made $50,000 from referrals over that period! Some agents go so far as to “sell” their referrals to the highest bidder, said Steven Brobeck, the report’s author. Pedaling referrals is “not a practice most agents would engage in,” he told me. “Nevertheless, it appears to exist.”

Still, it’s not likely that referral fees will cost either the buyer or seller any more money. Even though commissions are supposed to be negotiable, they are all but set in stone in real estate. Agents aren’t likely to raise their rates to recoup the fee, but they are not likely to agree to a smaller cut, either.

However, as the CFA report points out, these fees can cost you in other, more insidious ways -- like in the quality of service you receive. While it’s possible a referral fee could ensure that the agent being referred does excellent work, it also could encourage the agent to recommend someone willing to pay a fee above the going rate.

Or, since the referred agent will have to fork over a big chunk of his earnings, maybe he won’t provide the level of service he should. Or perhaps referred agents are willing to pay a fee because they are inexperienced or have a tough time finding clients.

Any of those are strong possibilities, said Stephen Brobeck, the CFA’s former executive director, who has been researching realty brokerage issues for nearly 30 years.

Here’s an example, from one of Brobeck’s footnotes to the report: “Many real estate professionals see referral agents as simply parasites.” Another: “Secret referral fees (result in agents) stealing billions of dollars from consumers.”

But the worst offenders aren’t realty agents themselves, but companies like relocation and referral agencies. The former are often hired by businesses to help relocate employees; the latter, by outfits like HomeLight, Rocket Homes, Clever, Yelp and Thumbtack.

To see how well 15 referral companies performed, CFA put them to a test. They didn’t perform well.

When asked to refer an agent, most of the companies provided names (via email) either immediately or fairly quickly. But two didn’t respond at all, and some did not offer their service in all four of the test cities. Overall, the names of 100 agents were received. But 18 were agents in other geographical areas, and two were agents not engaged in residential real estate.

Of the other 80 referred agents, 18 had one sale, at most, in the previous year, and 15 had at most one customer review. And every agency that supplied names included one out-of-town agent with five or fewer sales.

Put another way, 38% of the referred agents were either based outside the designated search area or had at most one sale.

“Consumers cannot rely on agencies for referrals to experienced agents located in the geographic area of the home search,” Brobeck said. People “should be extremely wary of many of them. I can’t say all offer no value, but you are taking a risk” by using them.

It should be noted, too, that agents who are listed on referral sites pay to be there as a way to secure leads. And in some cases, an agent told me, those listed have voluntarily placed their licenses into “inactive” status.

So what are sellers and buyers to do? First of all, realize that the existence of a referral fee will make it difficult to negotiate a lower commission: Selling agents aren’t likely to give away any more of their stake in the deal than they already have.

Think twice about using the services of a referral agency. You’re unlikely to get what you pay for. Besides, you have the ability to search efficiently and effectively on your own for an agent at sites providing extensive information about a large number of active agents.

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Some Agents Will Front Repair Costs

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 25th, 2020

Sellers who need to bring their kitchens up to date, repair foundation cracks or make other fixes before putting their places on the market might not have to reach into their own pockets to do so. Over the last year, several options have emerged that allow sellers to pay for the work out of the proceeds from the sale.

Better yet, perhaps, these outfits promise to sell your place faster, and for more money, once it goes on the market all nice and pretty. One even vows to do the work cheaper -- and better -- than if you had hired your own contractor.

A number of real estate franchises now offer to foot the costs of renovations and repairs, agreeing to be paid when the sale closes. Some don’t charge an extra fee for the service, and some don’t even charge interest. Some will even pay for staging: a service to make your house as appealing as possible to as many buyers as possible.

Real estate professionals have always offered advice about boosting a property’s appeal so that would-be buyers can visualize themselves living there. They’re also quick to point out improvements and repairs that need be done in order to sell quickly and at the highest price. But when it comes to actually taking action on their recommendations, about the best most can do is offer the names of prized contractors and professional stagers.

But late this summer, the Coldwell Banker chain expanded its RealVitalize program to its entire network of some 94,000 agents in 3,000 offices. The move came after what the company maintains were “remarkable results” from the program’s pilot, in which participating houses sold as much as 25% faster than their competitors and 4 percentage points closer to list price.

With RealVitalize, listing agents connect their sellers with a dedicated project consultant from HomeAdvisor, which matches homeowners with local service professionals. The consultant manages the work from start to finish, including finding experienced, pre-screened contractors.

The brokerage will cover the upfront costs of the repairs, which will be repaid by the seller when the sale closes or the listing expires. There are no additional fees and no minimum listing price. Available projects include staging, appliance purchasing and installation, simple repairs, painting, and kitchen and bathroom upgrades.

Under the Concierge program from Compass, another realty franchise, the agent works with the seller to decide which projects can most increase the home’s value and sets an estimated budget for the work. Among the more than 100 covered services are pest control, moving and storage, landscaping, fencing, custom closets and deep cleaning.

When a seller is ready to start the work, Compass says your agent will help find a reputable contractor and “be by your side” during the work. Once the job is complete, the house will be listed for sale. You’ll pay for the services either when the house sells or when you terminate your listing with Compass.

But if the place doesn’t sell within 12 months from the Concierge start date, you’ll have to reimburse the company out of your own pocket.

Redfin also offers a presale renovation service. But the chain, which charges only a 1.5% listing fee (as opposed to the typical one-half of the entire commission), charges 2.5% to cover the design and project management of the work. Moreover, sellers are responsible for funding their own renovations, but the program includes preferred pricing from a list of trusted vendors.

Real estate franchise Keller Williams has been testing a concierge program in Texas, Georgia and California, with the goal of making it available nationally. Like Coldwell Banker and Compass, the Keller Williams concierge program will front the cost of improvements and modifications. During the pilot period, the company is compiling data to determine what projects give sellers the best return on their investments.

Meanwhile, Curbio, an independent presale renovation company based in Maryland, works through real estate agents -- regardless of their affiliation. As a licensed contractor, Curbio handles the entire project: everything from selecting materials and hiring subcontractors to supervising the job and backing the work with a one-year warranty. It currently operates in and around 22 major markets, but projects must cost at least $15,000.

Under Curbio’s system, the company will provide a ballpark estimate during a telephone conversation. Then a technician will arrive to take a 3D video that allows the company to prepare a fixed-price proposal. Once a deal is agreed to, an on-site project manager will handle everything, from pulling permits to completing any punch-list items. Clients receive regular text, photo and video updates.

Curbio claims it completes projects 60% faster than the average general contractor, allowing sellers to sell quicker and at higher prices. The company is paid at closing and never charges interest or fees, but sellers must agree to lower their listing price by 2% every 30 days until the property is sold.

No sale? Just pay the cost of the project, nothing more, and move on.

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More Realty Pitchmen Face Scrutiny

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 18th, 2020

Add a former get-rich-quick-with-real-estate pitchman on the A&E cable network to the laundry list of realty gurus who have found themselves in the crosshairs of the country’s top consumer watchdog agency.

Scott Yancey has been added as a defendant -- along with Dean Graziosi, a self-proclaimed bestselling author and promoter of real estate investing -- to the case brought by the Federal Trade Commission and the Utah Division of Consumer Protection against Nudge LLC. Authorities allege the company used false promises to convince consumers to buy real estate training packages that often cost tens of thousands of dollars.

If the proverb “a fool and his money are soon parted” remains true, Yancey and Grazioski won’t be the last to feel the government’s wrath. As soon as Uncle Sam shuts down one scam artist, one or two seem to pop up, playing on people’s desire to make their fortunes while barely lifting a finger.

The Nudge case is similar to one filed by the FTC and Utah against Zurixx, which promised people who attended its free seminars that they could generate substantial income by flipping houses. It often used celebrities from popular home renovation shows to lure its marks to the meet-ups, where the outfit showed supposed “success stories” of customers who claimed they had made thousands using the system.

Both cases are still before the courts, and the defendants are under stipulated preliminary injunctions. Both also have been amended, but only well-known pitchmen Yancey and Graziosi have been singled out -- so far -- for their roles in a massive Nudge swindle that the FTC says bilked consumers out of more than $400 million.

“We believe these two TV personalities each made millions of dollars by assisting and facilitating this real estate investment rip-off,” says Andrew Smith, director of the FTC’s Bureau of Consumer Protection. “They were instrumental to the scheme and took a cut of the profits, and that’s why we’re seeking to add them to our case against the program’s operators.”

The pair were the primary celebs used to draw folks into attending seminars that falsely promised to teach a proven formula for real estate investing, according to the complaint. They allegedly were paid a percentage of the money people spent on training programs after attending a seminar they promoted.

They also are said to have been aware of numerous complaints from misled consumers, but continued to work with Nudge to place positive reviews on third-party websites.

Stop me if any of this sounds familiar. As long as charlatans have tried to separate people from their money, there have been scams claiming that buying houses on the cheap and reselling them will generate big profits with little risk, time or effort. Like most such promises, it just isn’t so. The only ones making big money are those who peddle their “systems.”

Some years ago, investor-publisher John Reed told me that promoters of realty investment programs were essentially legit when they began. Some were better than others, but all were sincere, he said. But now, the guru network is populated mostly by con men who offer free seminars, then push paid classes and mentoring services. “They are criminal enterprises,” he said.

Take Wade Cook, the taxi driver-turned-supposed real estate genius, who was convicted of seven counts of tax fraud and sentenced to 88 months in a federal penitentiary. Not only did he falsify his tax returns from 1998 through 2000 on royalty payments of $9.5 million, he obstructed federal investigations into his actions, a U.S. District Court jury in Seattle found.

Cook filed for bankruptcy three times and was brought up on charges by the FTC twice: once for misrepresenting the earnings potential of his advice and once for failing to comply with the FTC’s order to set up a redress program and alter advertising claims. Even after he and his wife, Laura, were charged with tax evasion in 2005, he started a new company and still claimed 20% monthly returns by using his so-called “secret weapon.”

Then there were Russ Dalbey and Don Lapre. Dalbey hawked promissory notes backed by real estate; Lapre pitched a 36-page booklet explaining how to recover a Federal Housing Administration insurance refund after paying off a mortgage.

Dalbey’s “Winning in the Cash Flow Business” featured success stories of people claiming to have earned $1.2 million in 30 days, $79,000 in a few hours and $262,216 part-time.

But over the 15 years or so he was on the air, according to the FTC, only 296 of the 949,000-some people who purchased Dalbey’s stuff actually made money, and just 129 made more than they’d spent on the courses.

Dalbey was fined $330 million and forever prohibited from telemarketing, selling business opportunities and producing and distributing infomercials. But he escaped jail time.

Lapre didn’t fare nearly as well. Charged with 41 counts of conspiracy, mail fraud, wire fraud and money laundering, he killed himself in jail in 2011 while awaiting trial for bilking more than 220,000 victims out of nearly $52 million.

Meanwhile, former A&E host Armando Montelongo is still fighting with more than 400 of his former students over their belief that he engaged in a “pattern of racketeering.” A federal court dismissed their original suit because his accusers failed to meet the standards required by the RICO Act. So they refiled in Texas, where the defendant resides. At last report, a Texas appeals court had rejected Montelongo’s petition to reverse a trial court’s decision to allow the case to proceed.

If all this doesn’t sound the alarm to anyone considering buying into one of these get-rich-quick schemes, I have a nice bridge that connects Brooklyn to Manhattan I’d like to show you. You can even make payments.

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