[ A quick note — the 2017 spring has been even more insane than last spring. In order to give yourself the best chance to purchase a home AND close on time, a team approach is required. Below we talk about the reasons why agents make recommendations for team members and why it matters. ]
Imagine this …
You are buying a home and it’s the day before closing. Everything is ready to go. Your stuff is totally packed, your movers are scheduled to be at your home first thing in the morning and the cleaning crew is coming soon afterwards. Your in-laws are (thankfully) lined up to take the kids (and the dog) so that you can direct traffic. The utilities are set to switch over and the cable company will be at the new home between noon and 3 (ok, noon and the following Tuesday) … everything is lined up.
And then the phone rings.
‘WHAT DO YOU MEAN the loan is still in underwriting and we may not close on Friday?!?!’
‘WHAT DO YOU MEAN there is a unreleased deed of trust from 2006 that was missed?!?’
‘WHAT DO YOU MEAN the closing statement is off by $29,000?!?’
In a panic, you call your agent who informs you that the internet lender you chose for your loan and your closing attorney (an old college roommate who specializes in divorce) cannot be reached — and there is nothing that can be done.
Are Agents in Cahoots with the People They Recommend?
So why would a client not use lenders and attorneys that the agent recommends?
Sometimes, the reasons are perfectly understandable. Corporate relocation packages might mandate the use of a specific lender or attorney. Other times, office politics or family relationships play a role.
But in most cases, the main reason that clients do not take the Realtor recommendation is simply a lack of trust — ‘What is the agent getting for making this referral?’ is the prevailing thought. The public quite often feels that the relationship between agent and lender (or attorney or inspector) is designed to benefit the agent at the expense of the client.
The perception that agents somehow make recommendations based on a kickback is as unfortunate as it is untrue.
RESPA is Your Friend
The public is largely unaware that the practice of Realtors being directly compensated for referring a customer to a lender (or other service provider) is a big no-no. The practice is known as a ‘kickback.’
Legally, Realtors, lenders, attorneys, title companies and home inspectors are all strictly prohibited from being directly compensated for referring business to another service provider. Stated differently, if every time I referred a loan to a lender, they sent me $100, we could both be fined, lose our license or even go to jail.
The Real Estate Settlement Protection Act (RESPA) spells this out in great detail and no agent, lender or attorney wants to be caught in the net of a RESPA violation.
So despite the public’s opinion to the contrary, the practice of ‘quid pro quo’ referrals is largely non-existent.
So What is Allowed?
Real estate service providers are allowed to enter into formal business relationships with other real estate service providers as long as they are legitimate business arrangements.
A common arrangement is for a lender (or title company) to lease space from a brokerage or an attorney in order to facilitate workflow. Putting the multiple necessary services to complete a transaction physically under the same roof both enhances communication and makes it easier for clients to obtain services in one location. Additionally, service providers can share expenses relating to marketing or technology in order to drive business opportunity or create efficiencies.
As long as the business reason is legitimate AND the referring of service is not compensated on a deal-by-deal basis AND the client is not being injured by the relationship, then it generally is deemed to be within REPSA compliance.
So Why Use Our Team?
When we say ‘you should call this lender’ or ‘ we recommend this attorney,’ we are saying it with the confidence that the recommendation will positively impact the transaction.
Here are the primary reasons why:
- As a commissioned salesperson, my compensation is tied to the SUCCESSFUL transaction. Any and all of the work I do comes BEFORE I get paid. No closing = no payday. Why on earth would any agent risk a $10,000 commission check for $100 and the threat of legal action? I just don’t think anyone is that stupid.
- Similarly, the client is spending money on the transaction before it closes, too. Deposits, inspections and appraisals (and sometimes rate locks and title searches) are all expenses that occur prior to closing. If closing does not occur, then the some (or all) of the money spent by the client is lost.
So when we make our recommendations we are protecting our own work and money in the same way we are protecting yours — our interest are aligned.
(A quick sidebar — I once had a client tell me that the only reason that I was recommending a specific lender was that ‘You just want the deal to close.’ I was actually too stunned to respond.)
Money is a Commodity, but a Financial Product is Not
‘There are horses for courses’ goes the old saying.
Banks not only offer different loan products, but they also differ in what they do well — and a Realtor’s recommendation should change based on the asset type, credit profile or income level. Each mortgage company typically offers the same Fannie Mae, Freddie Mac and/or FHA products (and rates), but the other niche products (non-warrantable condo, construction/perms, HELOCs, Grant Programs, Doctor Loans) can vary widely from lender to lender. Furthermore, lenders often times underwrite to different standards (‘straight agency’ or ‘credit overlay’ are the terms used to describe this practice) and thus, some banks may be more aggressive for different types of buyer profiles.
It is also important to note that the way banks handle underwriting, closing and funding is also of great importance and having a lender headquartered in your time zone matters more than you know.
It is the agent’s job to know and make the correct introduction.
Missing is Expensive
I cannot stress this enough — a missed closing date is hugely expensive.
Do you know what happens when a closing date is missed — especially with little to no notice?
- Rate locks expire
- Contracts sometimes can be voided
- Deposits sacrificed
- Movers cancel or worse, begin to go into full extortion mode (and if you don’t believe me, read your agreement with your movers about ‘storing’ your stuff)
- Hotel rooms might be required
- And other financial penalties can be levied
And do you know who pays the penalty? Well, it isn’t the lender and it isn’t the agent, that’s for sure.
The party with the most to lose in the case of a missed closing date is the buyer. Look, if the house is vacant and the deal is cash, then a missed closing date is not a huge deal. But when the buyer and seller are all set to close in a sequence, and the first closing allows several more to happen down the line, the ability for a lender (and attorney, and title company) to deliver on time is of critical importance — because the one with the most to lose is almost always the buyer.
So How Do You Know Who to Recommend?
So how did we find the best service providers in the marketplace? Trial, error, experience, vetting, familiarity … all gained over 20+ years.
Since becoming licensed in the early 1990’s, we have largely used the same lender(s) and followed them through the numerous mergers and acquisitions that they endured in the volatile world of mortgage banking. Why? They are good at what they do. They don’t miss dates. They don’t tell a client that they can deliver a product or rate when they can’t. And they don’t employ bait and switch tactics. Having done this for as long as we have, we know who shoots straight (and who doesn’t) and we know who consistently delivers.
And furthermore, when we recommend a service provider, we are not only recommending the individual, but the organization. Our knowledge of the companies we recommend extends well above and below our primary contacts. We know the owners, the managers, the administrators and the processors so that when the inevitable hiccup occurs, we can often times go direct to the individual who can solve the problem.
Volume = Preference
All of the above notwithstanding — imagine the scenario at the beginning of the post.
A day before closing and a problem comes up, whose files are going to be worked on first? Is the lender or attorney going to work on the file of the agent who sent them one deal this year or the one who sent them 50? The answer is obvious. When last minute issues arise (and they ALWAYS do) service providers fully understand where their bread is buttered.
The volume we generate for our preferred partners creates an implied concierge service for our clients.
But Remember, You Are Free to Choose
Please understand that you are free to use whoever you choose to use. This post is in no way a mandate that you have to use who we recommend.
If your brother is an attorney and your father is a lender and they do hundreds of transactions in any given year, then yes, by all means, use them. But if you are unsure of their volume or if their real estate specialty is in the specific type of transaction you are conducting, beware.
When we make a recommendation, the only kickback we receive is great service for you. When our clients have a pleasant and efficient experience, everyone wins. So when a client takes our recommendation, it means they have the highest chance for their transaction that closes on time and on the money.
Without a doubt, the most troublesome deals are the ones where the buyer selected an online lender (or other inexperienced or incompetent service provider) and the deal went sideways at both a critical and expensive point. I wish I had a nickel for every time I’ve heard a client in a self-made pickle say, ‘I guess I should have used your guy.’
Seriously consider taking our recommendations — we are looking out for you more than you realize.