Jeffrey Arouh, a partner with McLaughlin & Stern LLP, told the audience at the Real Estate Services Providers Council's (RESPRO) 2012 Annual Conference that there are several different ways for a real estate broker to gain additional income from a residential transaction.
"Typically, a strategic relationship with another party, the ability to capture a participant in a transaction for various other services in the transaction is an opportunity for a broker to obtain additional income," Arouh said.
Brokers can form relationships with other settlement service providers, such as title insurance companies, mortgage lenders, home warranty companies, flood companies, credit reporting services, tax services and appraisal services.
"What we're dealing with is a very complex set of relationships within which the various pieces have to fit," Arouh explained. "How do you determine what kind of relationship is going to work and whether it's going to be something that satisfies your needs?
"I come from a very old school," Arouh continued. "I don't think it's as complex a process as some people have made it out to be. Largely because I think almost all of these decisions are based on two maybe three broad sets of parameters."
Arouh told the group that the first set of factors to be considered are the economic issues. He explained that certain of the relationships do not make sense unless you achieve a certain volume level. If you don't have enough transactions in a month. you aren't ready for an affiliated business arrangement (AfBA), he said.
"On the other hand, you may have a great opportunity to do a marketing agreement or a work share agreement or a sale of leads agreement because. depending on your volume, your expectations are going to be considerably different."
Next Arouh said if you are doing an AfBA, you need to know your partner and be comfortable working together.
"You are entering into a real partnership, a financial partnership. a meaningful partnership," Arouh said. "One that is going to require you to have some really patient times when you are dealing with your partner because there are good times in the context of your joint venture, and there are going to be bad times. When I say good times and bad times, what I'm really saying is think about what you have to do to make a joint venture acceptable under the Department of Housing and Urban Development (HUD) tests for a joint venture and then take a step back and say, 'Am I'm really prepared to do this with this person or this entity.'"
Arouh said there is no question that an AfBA can still work, even with HUD's crackdown. An example is HUD's 10-factor test, which determines if an AfBA is bona fide by asking the following questions:
- Does the entity have sufficient initial capital and net worth?
- Is the entity staffed with its own employees?
- Does the entity manage its own business affairs?
- Does the entity have its own office?
- Is the entity providing substantial services?
- Does it perform all the substantial services itself?
- If it contracts out some of its essential functions, does it contract with a third-party or with its parent company?
- If the entity contracts out with to another party, is that party performing any contracted services receiving a payment for its services?
- Is the new entity competing in the market place for business?
- Is the new entity sending business exclusively to one of the settlement services providers that created it?
If you look at HUD's 10-factor test and decide that isn't the type of relationship you want to form, there are alternatives.
"A real AfBA requires attention to set up, is expensive to set up and is reasonably expensive to run. Unless you have real business, why bother? You don't want to be there."
Arouh indicated there are alternatives to AfBAs. He said marketing agreements are an alternative but that marketing agreements aren't simply an agreement to pay a certain amount of money per transaction or per month. He said HUD has complicated marketing agreements with its interpretations.
Work share agreements are also possible. A work share agreement is a situation in which you are paying your partner to perform services you might otherwise either do yourself or pay a third party to perform," Arouh said.
Under RESPA Section 8(c)(2), "which is the exception in RESPA that permits marketing agreements, same kinds of assessments have to be made," Arouh said. "Am I providing real services? Are they non-duplicated? Are they needed by the party for whom they are being performed? Am I being compensated reasonably? All of the same questions that exist with respect to marketing agreements will be asked with respect to work share. Typically marketing agreements give you greater flexibility in determining the amounts you can pay than work share agreements do, because work share agreements tend to be more refined. By refined I mean, they spell out in greater detail what the activities are that you expect to be performed and that makes it easier to determine a value that can be attributed to those activities."
Technology arrangements are also an alternative, Arouh said.
"My judgment is that technology arraignments are absolutely permissible," he said. "Any arrangement in which you license technology, as tong as it's an open platform available to anybody and as long as the compensation for the access to the technology is reasonable is entirely consistent with the requirements of RESPA."
Lastly, Arouh said broker to broker commission fees are allowed and have been around for a long time.
Arouh indicated that the most important principle he wanted the group to remember is transparency and disclosure. He said that if you can disclose something to the consumer then you should. Arouh also said that AfBAs are the safest if you have the necessary volume and set them up correctly.