Buyer beware: Hefty broker referral expenses may limit home, mortgage choices

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | December 19, 2022

Article originally posted in Orange County Register on December 13, 2022.

Realtor associations are in a real pickle, tasked with being more transparent amid a federal antitrust probe over industry shenanigans about which agent gets paid what.

For the California Association of Realtors, that means creating more forms and likely more confusion, and perhaps worst of all, putting more financial strain on the buyer in an overheated marketplace.

Last week, I wrote about CAR’s new Residential Purchase Agreement form slated for debut this month. It allows a home seller to opt out of paying a buyer’s agent commission, leaving the buyer on the hook instead.

This week, we’ll dive into yet another new form CAR is readying, the Anticipated Broker Compensation Disclosure, which the association says is aimed at helping buyers better understand and compare how much commission a buyer’s agent is being offered.

“Buyers must ask for the list,” said June Barlow, general counsel at CAR. “It’s a kaleidoscope.”

Barlow is referring to the ABCD form, which includes a section allowing a buyer’s agent to list all of the properties their client has toured and what that broker’s compensation will be at each address. Another section of the form has two lines designated for the compensation to be paid at escrow to the agent, either from the seller or “fill in the blank.”

As I’ve written before, there is a real possibility that low-wealth home seekers and protected borrower classes (Black and Hispanic) will be boxed out from buying certain properties because the buyer’s-side agent will not be compensated by the seller or the seller’s listing agent.

Then what?

CAR said it is working with certain mortgage organizations to finance a buyer’s side commission into the mortgage.

“It’s on our target,” said Barlow. “We are passionate about first-time buyers.” She declined to identify the mortgage organizations.

Nothing is free in the world of home buying.

If CAR convinces the powers-that-be to finance Realtor commissions, the consumers’ mortgage interest rate will undoubtedly increase, or a larger down payment will be required.

Before hitting up the mortgage folks for help, what about the other “fee” elephant in the Realtor room?

While CAR is moving on certain fronts to be more transparent, agent referral fees are getting a blind eye. Let me explain …

Say a buyer’s agent commission is 2.5% or $17,500 of a $700,000 purchase price. If a buyer’s agent must pay, say, 25% of his or her commission (in this case it’s $4,375) to another agent across town or across the state for the buyer referral, that could lead agents to steer buyers only toward certain listings offering higher commissions.

And it can factor into the buyer’s agent’s willingness to contribute toward the buyer’s closing costs and mortgage rate buydown costs, for example.

In my experience, there are plenty of instances where a buyer’s agent has kicked in money or credited a portion of the buyer’s agent commission at closing to help. For example, Fannie Mae allows up to 3% of the sales price for “Interested Party Contributions” when the buyer is putting less than 10% as a down payment.

Broker-to-broker referral charges in exchange for what’s called a “buyer lead” are commonplace. This can be for a home-seller referral as well.

It’s a pay-to-play game.

The Referral Fee Agreement is another pre-existing CAR form spelling out how much must be paid by the buyer’s agent to a referring agent. Nowhere on the form is there a place for the principal’s acknowledgment of said fees. (The principal is the agent’s client, either a homebuyer or home seller.)

Do the sellers and buyers ever see this fee arrangement? In my experience: never.

The California Business and Professions Code (Section 10176(g)) requires disclosure of “compensation, commission or profit under any agreement authorizing the licensee to do any acts for which a license is required, according to Rick Lopes, assistant commissioner at the California Department of Real Estate.

According to the winter 2016 Real Estate Bulletin written by the Department of Real Estate, all compensation, including any lawful referral fees, paid to or claimed by a licensee, must be fully disclosed to his or her principal in writing. Otherwise, the licensee may be in receipt of secret or undisclosed compensation, commission payments or profit and thus in violation of the Real Estate Law. Moreover, a lack of disclosure might lead to other charges, such as fraud, intentional misrepresentation, conspiracy to defraud, negligence and/or dishonest dealings.

So, why doesn’t CAR require the sellers and buyers to sign the Referral Fee Agreement? Does CAR keep any records or stats on the volume of referral fees? The association declined to respond to these questions.

CAR points to more transparency in its new ABCD buyer form. Yet, the commonly used Referral Fee Agreement is only between agents. California law requires disclosure to “principals.” At the same time, the association is asking the mortgage industry for help financing Realtor commissions. Here we have hypocrisy at its finest.

My advice: If you are referred to a Realtor, be it person-to-person or from an online referral system, ask the Realtor if he or she is paying a referral fee for the introduction and recommendation. If so, how much?

You may be far better off seeking an agent that is not financially indebted to a third party. Because these arrangements tend to be opaque.

I also suggest buyers require their agent (in writing) to provide them with a master copy of the commission payouts from the escrow officer at the close of escrow.

Broker referral checks are often cut directly from escrow. This, in effect, is the referral truth serum. If your agent asks why, show them this column.

Freddie Mac rate news: The 30-year fixed rate averaged 6.31%, two basis points lower than last week. The 15-year fixed rate averaged 5.54%, thirteen basis points lower than last week.

The Mortgage Bankers Association reported a 3.2% mortgage application increase from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $1,391 less than this week’s payment of $4,500.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.375%, a 15-year conventional at 5.125%, a 30-year conventional at 5.69%, a 15-year conventional high balance at 5.625% ($726,201 to $1,089,300), a 30-year high balance conventional at 6.325% and a jumbo 30-year fixed at 6.625%.

Note: The 30-year FHA conforming loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year jumbo, locked in for the first five years at 5.375% with .75 point cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.