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January 26th, 2009 by Temple City Tribune
As a buyer/seller advocate, I have written numerous times that it is not always a good idea to accept all services from any particular real estate agent or agency. Every real estate office/brokerage is looking for ways to increase their bottom line, and that some may be doing so without full understanding with their clients.
California Law requires that a seller provide a buyer with a Natural Hazard Disclosure. These disclosures can cost as little as $39.00 or as much as $125.00 with the more expensive report including some, but not much, additional information. Some real estate offices have an agreement, or may even have a partial ownership in the company that provides this disclosure. The report is ordered, and the seller is required to pay for that report (normally when the property is sold) through escrow. The seller pays the $125.00 and the real estate agency could be receiving a commission. Receiving this commission without disclosing that information to either the buyer or seller is not only a violation of ethics, but it is also illegal to accept the commission without the disclosure.
As recently reported (Inman News), “During the first week of August three real estate brokerages and a company that produces natural hazard disclosure reports agreed to pay $39.3 million to settle allegations that they created sham businesses in order to split profits on the sale of the reports.” The monies from the settlement will, in time, be returned to the various buyers and sellers. It is about time that a Department of Insurance has taken this step, and I am certain that this is just the beginning of such actions.
The Real Estate Settlement Procedures Act (RESPA) does allow companies to form affiliate business, and to share profits that is based on the amount of participation or ownership that the real estate agency may have with those affiliated companies. But there are conditions, such as the companies having their own employees, have a separate office and phones, and the shared funds received (monies) can’t be based on a referral basis.
Some real estate offices require that their agents only use a Title Company affiliated with the real estate office, which means that the office would be receiving a form of compensation. California law limits title insurance companies from obtaining fifty-percent of their business from such an agreement. The problem is, that the Department of Insurance has stated that the existing laws do not give them sufficient power of enforcement. There are important terms that are undefined and there is a question as to the type of records that must be retained or for how long. (as reported by Inman News)
Most, if not all, of the real estate agencies that have affiliations with the various services do have an “Addendum” that states, in one form or another, that some form of compensation will be paid to the real estate agency, and require both buyer and seller to sign this “Addendum”.
Some of the affiliated services that a real estate agency may have could be with a Title Insurance Company, Lender, Escrow Company, Home Warranty Company, Pest Inspection Company, Hazard Disclosure Report firm and now some agencies even have their own Professional Inspection Company. In other words, just about every service that you would need in order to complete the transfer of ownership. That does not mean that the services provided by these in house firms are not equal to any other company, but if the agency is receiving a commission, it is possible that the same services may be acquired at a lesser cost. Or, if you wish to continue to use those services, you can possibly negotiate a lower cost. Remember, whatever service discount you receive as a seller, must also be offered to the buyer and visa versa.
These agencies do not just proceed to order these services without disclosing this information to both the buyer and seller, and do so in writing. It is important that you read and understand everything before signing. If you do not want any of these services to be provided by the agency that is representing you in either the sale or purchase of the property, then delete that portion from the disclosure form that you are requested to sign.
It is also important to understand that the agent associated with the agency may not be the one receiving any of the commissions received from these various services.