Affinity programs and the real estate brokerage industry

Journal of Real Estate Research, The, Nov/Dec 2001 by Sirmans, G Stacy, Macpherson, David A

Abstract

This study surveys active real estate brokers on their involvement in affinity programs and referral/relocation networks. Some survey results regarding affinity involvement are: (1) 13% of respondents reported affinity affiliations, 75% reported no affiliations and 12% indicated plans to become involved within the next year; (2) affinity relationships were most often with membership organizations, corporations and professional organizations; and (3) the primary affinity benefits were commission reductions, special mortgage packages and discounted closing services. An empirical income model shows that affinity affiliation has a positive effect on broker income. Probit models show that: (1) participation in affinity arrangements is more likely for larger firms and national franchises; and (2) large firms are more likely to participate in a larger number of affinity relationships.

Introduction

Real estate firms have evolved to meet changing economic conditions. For example, some years ago brokers began paying and receiving referral fees to receive and send prospective home buyers and sellers. In the early days of referral fees, the transferred employee typically received little or no support from the employer for selling or buying a home. However, a depressed real estate market in the early 1980s forced employers to revise their policies on relocation benefits. At the same time, franchise firms began creating relocation networks between their subsidiaries and relocation networks began to evolve between independent or non-franchise firms.

The economics of the real estate business changed again in the 1990s. As relocation costs increased, corporations and relocation management companies began charging referral fees as a way to reduce these costs. Evolving from this process is the affinity group. Affinity relationships give commission discounts, rebates or other goods and services to individuals who belong to or are employed by professional or trade associations, unions or companies that have an agreement with a real estate firm. Examples of affinity groups include USAA, the AFL-CIO and the Institute of Electrical and Electronics Engineers (IEEE). United Airlines, Sears, United Parcel Service and Prudential Insurance Company are examples of companies that have provided some form of affinity program for their employees.1

Affinity groups have various ways of distributing benefits to their members and to affinity group partners. For example, American Airlines has an affinity partnership with PHH Real Estate Services. The airline awards frequent flier miles to members of its Aadvantage Program when they buy or sell a home through brokers at PHH. The participating brokers pay a referral fee to PHH. Also, real estate firms have entered into arrangements with local and national retailers to provide discounts or coupons to consumers who utilize their brokerage services.

This study uses an ordinary least squares model to examine the effect of affinity participation on real estate broker income. The article uses probit modeling to examine the likelihood of brokerage firms participating in affinity programs and referral/relocation networks.

Affinity Programs

There are numerous examples of affinity programs. For example, an organization may license its name and /or logo to be used on vending machines and receive a percentage of the gross sales. An organization, such as the Sierra Club, may contract with a financial institution to issue cards to members or supporters of the organization. Each time a sale is made with the card, the organization receives a percentage of the charge. Likewise, an organization may contract with a telecommunications company to market rechargeable phone cards to the organization's members. The organization receives a percentage of all recharges to the phone cards used by its members. The organizations may be tax-exempt organizations seeking to increase their income by endorsing products of a forprofit company. A properly structured deal will classify this income as royalty income and will not be taxable as unrelated business income. The income must be passive in nature and cannot include compensation for services rendered by the exempt organization. Other examples of programs include car rental discounts, equipment discounts, communication packages, shipping discounts, life insurance discounts and disability insurance discounts.

Real estate affinity programs are typically available to members of associations such as credit unions, banks and airlines. Through their "affinity" with these organizations, consumers can receive a savings on their commissions through either a cash rebate or other benefits such as frequent flier miles. A typical program will rebate from hundreds to thousands of dollars back to the consumer for using a specific real estate broker or mortgage lender. In a typical affinity program, a member of an organization will be urged to use an approved agent when selling a home. The consumer is assured a discount on the real estate commission.