Ethical Homes

Every September, the National Association of Realtors makes an effort to remind Realtors of their responsibilities under RESPA, so there’s a certain irony in that month also being when a Coldwell Banker affiliate in Atlanta was hit with a quarter-million-dollar settlement for illegally encouraging their agents to steer clients to a particular settlement company.

Under RESPA, home buyers have the right to choose all of the vendors (such as lenders, inspectors, and settlement companies) who provide services to them during a real estate transaction. Since most home buyers don’t have a lot of experience with those vendors, however, they often trust the advice and recommendations of their agent about which vendors to use; in order to make sure that agents don’t abuse that trust, then, RESPA also says that those vendors can’t provide incentives to agents in return for recommending the vendors’ services, and real estate brokerages (many of which often share ownership with those same vendors) similarly can’t provide incentives to their agents for recommending their affiliated vendors.

Most brokerages with affiliated vendors still put pressure on their agents to use those vendors, however, both directly and indirectly. Many real estate offices make annual contributions to charities, for example; one lender that I know of recently offered to make a sizable donation to the chosen charity of a particular office for each month that that office met its “quota” for transactions referred to the lender. That probably isn’t a direct violation of RESPA (unlike the Atlanta Coldwell Banker case, where the brokerage was allegedly giving higher commission splits to agents who used an affiliated settlement company), but it’s still exerting pressure on agents to recommend vendors to their clients for reasons other than their clients’ best interests.

The lesson for buyers is simple: always make sure that your agent explains to you all of the vendors that are affiliated with their brokerage (failure to do so is itself a violation of RESPA), and if the agent does suggest that you use one of the affiliated companies, have them suggest some other alternatives, and give you a description of the pros and cons of each. If their comparisons are always weighted heavily in favor of the affiliated companies, or if they can’t give you any alternatives, you may want to consider finding a new agent: many agents are lazy, and often just choose a vendor because the vendor’s contact info is conveniently posted on a wall in front of them while they are talking to you; while it might not even be that your current agent is choosing that vendor because of pressure from their brokerage, if they can’t suggest alternatives, then they may well simply not have enough experience with that type of vendor to know a good one from a bad one.

(Of course, that doesn’t mean that you should never use a vendor who is affiliated with your agent’s brokerage. When I need a home inspection on very short notice at a particular time on a particular day, for example, I often recommend that my buyers use a fairly large national chain that happens to be an affiliated company with my brokerage, because that chain is large enough to usually have at least one inspector free at that time, and I know that their standards for selecting inspectors are high enough that even the inspectors of theirs whom I have never used before are going to do a fairly thorough job. But I also have other inspectors that I trust and recommend just as frequently, and when scheduling isn’t an issue, I always prefer to give my clients the names of three vendors and let them choose the one that they would prefer to use.)