When I started, things were simple: agents charged 6 � 7% commission and the public searched out real estate agents rather than looking for or selling homes on their own. Title insurance companies provided title insurance and attorneys practiced law. It was a good time.
Back then, the Chicago Bar Association had a published schedule of suggested fees. If memory serves me correctly, they suggested that attorneys charge 1% of the sales price to represent the Seller and �% of the sales price to represent the Buyer. Today, fees have come down, way down.
Real Estate History
Many years ago, the real estate industry created Buyers Agents to avoid a conflict of interest because the Seller paid the commission. I am not sure how this has changed anything since the Seller is still expected to pay this fee for the Buyer. The outcome was that one group of agents was pitted against another, and that many of the newly created Buyers Agents began getting into the unauthorized practice of law.
In my opinion, the addition of Buyers Agents is one of the causes of discount real estate services. Revenues and profits are down for real estate firms and competition is making the situation worse.
The advent of the computer has enabled people to seek and sell their own homes and has further eroded real estate revenues. Now, even the MLS is available to the public and people perceive that they either do not need a real estate agent or that the cheapest one is �just as good.�
When the Bar Associations were forced to stop �setting prices,� fees eventually came down. Attorneys began to seek additional sources of revenue to support their practices. Title insurance was the answer. Attorneys were made agents of various title insurance companies and earned a fee for �providing various services� in the title transaction.
Depending upon the sale price of the property, lender requirements and what services are being provided by the attorney, fees to the attorney can easily range from $1,200 to $1,500 per transaction. This is a significant amount of money, especially when you consider that the typical professional fee is $350 to $450.
Several years ago, the real estate industry identified title insurance as a source of additional revenue and several of the big firms developed their own title agencies. Today, there are also a number of independent offices with title agencies. This has resulted in direct competition between realtors and attorneys over this revenue.
Things are getting ugly: the Illinois Real Estate Lawyers Association and its members have resorted to filing complaints or instituting legal proceedings against real estate agents and firms to protect their control over the title insurance business. What the lawyers have not been willing to do, to date, is compete for the business.
The battle is on for the title business and it may be a battle royal. In spite of what many attorneys will tell you, RESPA provides that the Customer has the right to select the provider for services such as title, not the real estate agent or the attorney. Competition is the American way to resolve this situation, not complaints and legal proceedings. Whoever best serves the public interest should get the business!
Word has it that HUD is about to issue subpoenas to one of the major attorney-controlled title operations in the Chicago area. If speculation is true, HUD will challenge the program on the basis that it doesn�t comply with RESPA. I do not intend to go into all the nuances of this matter legally, but the major points are the attorneys in the program challenged are not providing:
Required insurability of title and title clearance functions
The seller with a choice and that they are not entitled to the amount of compensation they are receiving for the services they are providing.
Compliance has been mandated by the Illinois Department of Financial and Professional Regulation by September 15, 2005 or licenses will be revoked. Believe me, this is serious business and all of these regulations apply equally to Realtor Title Operations. One possible outcome is that neither attorneys nor real estate agents will be able to receive compensation from the title services. I am not predicting this, but it is possible.
Additional problems for the Attorneys lie in the amount of compensation they are receiving. A case can be made that the amount of compensation does not have any relationship to the services provided. RESPA requires that all fees must be reasonable for the service provided. (Has anyone looked at lender fees lately? Lender beware!)
Even if the Attorneys are able to resolve the insurability of title issue they still have the hurdle of the amount of their compensation. The national underwriters behind these programs cannot violate RESPA. They will cast the attorneys and anyone else to the wind if they need to, to remain in business. These are multi-billion dollar insurance companies that don�t want to lose their ability to do business.
Attorneys have one more problem, and it is a big one: conflict of interest! The legal fee paid by clients for representation already requires that the attorney make sure title is clear. Why are they entitled to additional compensation to provide this service? Moreover, the attorney has a fiduciary duty to the client to look out for and protect their interests. If the attorney is an agent for the title insurance company, to whom do they owe their loyalty?
In my experience, too many attorneys are primarily concerned with the amount of money they can make and their own convenience. I have personally seen attorneys advise their clients in ways that cost the clients more money so the attorney can maintain the title revenue. I see this as a big problem for the attorneys and one that could result in loss of legal licenses in instances of abuse. Real estate agents can be in trouble if they have a conflict of interest as well.
What Should Real Estate Agents Do?
Title Insurance: Storm clouds are coming and we can not be sure who will be left in the title business. There is nothing intrinsically wrong with real estate agents ordering title on behalf of their clients. This is how it is done in 95% of the country. The question to be determined is who can receive compensation and under what circumstances? The standard I recommend is to always keep the interests of the ultimate consumer in mind in these matters. It is always desirable and it is your duty to well serve your clients by making sure they are receiving the best prices and service.
Mortgage Brokers are just like Title Insurance Agents and, in my opinion, the public is not being well served in many instances. I see many instances where the customer is not in the best loan program for their needs or the fees they are paying are clearly excessive. This may come back to bite the real estate agent if they made the referral, especially if there is a �relationship� with the office!
Attorney Fees: Attorneys provide a vital and necessary service within the real estate transaction and their fees do not nearly reflect the time involved to properly represent a client. It is very expensive to have the staff, equipment and office needed for a professional real estate legal practice.
Attorneys rely on real estate agents to provide their names to potential clients. Real estate agents need to support increased legal fees by educating their clients on the value of legal services. The problem at hand is not the title money, but that attorneys have been unable to charge what they are worth. Frankly, attorneys have been too shy about promoting the value of their services. The public will be best served by the cooperation of attorneys and real estate agents where each performs their services for appropriate compensation.
Conflict of Interest
There is nothing wrong with a conflict of interest if it is properly disclosed, especially if the conflict results in benefiting your client. You need to be cautious, however, when you fail to act on your duty to your client because of your conflict of interest.
As a practicing attorney I zealously represent my clients and their interests. I have had agents chide me for trying to get the best deal for my clients. They would rather their clients remain in a bad situation than have to find them another home. This is a classic conflict of interest. What is your position?
There is nothing wrong with having referral relationships with persons or entities that you believe will save your clients money or will provide them with superior service. However, you should not give referrals to lenders, attorneys or others who will not best serve your clients� interests.
You should factor in charges your clients will incur and services they will receive. You should not direct business solely because of referral relationships in the office. Before making referrals to any entity or person, you should interview them to determine the appropriateness of their charges, the quality of their services and convenience to clients.
Questions to ask attorney agents regarding title insurance
Duty to Clients
- Are your title charges high or low within the market place?
- Who is the company that underwrites your title policies?
- What is the financial rating of the company that underwrites your title agency?
- Are all closings required to be at the attorney�s office or will they be located at offices near the property for the convenience of the parties?
- Does the attorney personally examine the title or is there an office employee with that responsibility? If so, what are the qualifications of that person?
It is your duty to look out for the interests of your clients. Realtors are professionals who provide an important service to society. You have national and local standards that are designed to maintain your professional status and protect the public. These are your standards, and what you must do. Are you doing it?
In my own legal practice I have determined that I can best represent my clients by adhering to the following standards:
- I make a full disclosure to my clients.
- I provide my clients the right to place their own title insurance if they wish.
- I do not challenge the Realtor title operations if my client has made that choice.
- I do not increase my fee if I am not receiving title revenue.
- I charge less for title services than most of the major title providers, especially the attorney controlled providers.
- I do not close in my office, but I do select the title office most convenient to all parties.
- I chose to become an agent for Stewart Title Insurance because they have been the highest rated national title insurance company and they maintain offices all over the Chicago metropolitan area that are most convenient for my clients.
- I now request a copy of the lender�s good faith estimate from my clients upon receipt to review their charges and loan product. (Review at closing is too late and nothing can be done without the Buyer defaulting).
- I zealously represent my clients� interests over the interests of others.
All professionals involved in the real estate transaction need to review the requirements of RESPA and make sure that their practices comply with the letter and the spirit of this important law.
Note to Attorneys: It is with heavy heart that I write this article. I say to my fellow real estate practitioners, are we looking out for our clients, or ourselves? Each attorney needs to answer this question. I have, and I have had to make changes in my practice to better serve my clients. I invite the Illinois Real Estate Lawyers Association to join with me to preserve our proud heritage as attorneys and to ask the hard questions at this time that we may truly prosper in the future. I believe our success will flow from best serving our clients!