An Affiliated Business Arrangement (ABA) exists when two or more entities, usually a real estate company and a settlement service agency, in the position to refer sales participate in a business relationship with each other. A general ABA typically uses the joint venture structure, in which the real estate company refers business to settlement service agency, such as title and closing. It’s an arrangement in which two or more entities are in a position to refer business, like closing services, have an affiliate relationship with each other. Either party refers business to the service provider or influences the selection of that provider.
Some real estate companies have formed joint ventures or ABAs in which the owners or RE company have created a new business entity with the owners of a title company and/or a lender. This “one-stop-shop” of services is used to make the closing transaction more streamlined and cost-effective for the client. The Federal law governing the Real Estate Settlement Procedures Act (RESPA) allows for affiliated business arrangements.
The law requires that through an Affiliated Business Arrangement Disclosure, it is stated that:
- The client be given written notice of the ABA
- The client is not required to use the affiliated title services.
The real estate company and the affiliated title company base payments on the real return on the ownership investment or profits of the entity.
- It is strictly prohibited for a realtor to receive any fee or kickback in exchange for the referral of business to the agency.
- Payments made by the settlement company that vary based on the number of referrals are illegal. All things being equal, owners who refer to more settlements should not earn more profit.
Read more in our blog post about the do’s and don'ts of Affiliate Business Arrangement Disclosures.
Strategically creating affiliate relationships and attaching new services to real estate brokerages can contribute greatly to the company and broker. Businesses that adhere to the RESPA regulations can leverage the knowledge of their affiliates and generate new revenue streams that they otherwise would not have had access to and offers more control, while providing a better overall experience for their clients.