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Affiliated Business Arrangements

Independent real estate companies can magnify their competitive strength by setting up joint ventures with an ancillary service provider, such as a mortgage broker or title company. When you structure such a partnership, though, be careful to keep an eye on federal referral law restrictions.

Although it’s been around more than 30 years, the federal Real Estate Settlement Procedures Act (RESPA)—which governs what is and isn’t allowable when referring business between companies in a real estate transaction—has enough complexities that understanding it remains a challenge.

RESPA prohibits brokerages and sales associates from receiving any payment (or other thing of value, such as golf tournament tickets) for referring a consumer to a lender or other settlement service provider. It also prohibits paying someone other than another broker for receiving a referral. Special provisions govern referrals in relationships such as affiliated business arrangements.

Under these provisions, real estate practitioners who have set up companies in partnership with lenders or other settlement service providers may receive a return equal to their investment in those companies. (Thus, if you own 10 percent of an affiliated company, you may receive 10 percent of its profits.) However, you still can’t receive a fee for referring a customer to that affiliated business.

Other rules require you to demonstrate that the affiliate is more than just a vehicle for creating hidden referral fees. HUD considers several factors in deciding if the business meets its test. For example, HUD looks at whether the joint venture has its own office space. Also, the partners’ profits can’t be tied in any way to the number of customers they refer to the business.

In addition, all consumers that your sales associates refer to the joint venture must be told of your company’s ownership interest, given an estimate of how much they’ll be charged for services, and told that they aren’t required to use the company’s services.

Reprinted from REALTOR® Magazine (www.realtor.org/realtormag), July 2006 with permission of the National Association of Realtors®. Copyright 2006. All rights reserved.