Editor’s Note: This is the first in a new monthly series on affiliated companies. Our goal is to feature companies which have had history and experience with affiliated business to learn about their success and share the RESPA compliance lessons they have gained in these affiliations over time.

Twenty-six years ago, the Real Estate Services Providers Council (RESPRO) was launched by a small group of residential real estate companies that were focused on getting a unified voice to make sure the one-stop-shopping business model could prosper. But the family behind Michigan-based Real Estate One (formerly Elsea Realty) started experimenting with affiliated businesses long before they became mainstream.

Besides steadily growing its network of brokerages, Real Estate One (REO) has been cultivating a one-stop-shop real estate experience for 45 years.

The company’s combined businesses sold more than $5 billion in real estate last year, making it the largest brokerage in Michigan and No. 8 in the country.

“Affiliates are a big part of our business,” REO co-owner Stuart Elsea told RESPA News. “Our first affiliate was a partnership with a property and casualty insurance agency in 1971. Shortly after that, we got into the mortgage business as well. Then my father partnered with an existing title company in 1975. So we had a lot of affiliated activity well before it was commonplace in our industry.”

The company since has added property management, relocation management and an investment business to its roster of affiliates, and is experimenting with an iBuyer program in one county.

A family of innovators

“Both my father and grandfather were very innovative,” Stuart said. “They were definitely pioneers. They tried things that didn’t always work.”

For instance, they began buying brokerage companies in other states – Florida, Missouri and North Carolina – in the mid-1970s.

“We had some success with those markets but our affiliates were not as developed as they are today, and it was difficult to manage those from that far away,” Stuart said. “We eventually sold those companies and are just focused on Michigan for right now.”

It all started in 1929 when Stuart’s grandfather, Staunton Elsea, opened Elsea Realty in Detroit.

REO was one of the first brokerages to hire women in the 1930s. REO is also the first business to have multiple offices, to create homes books, to host open houses and initiate a computerized multiple listing system (MLS), according to the company’s website.

Staunton’s son, Dick, negotiated a deal merging three well-established firms with Elsea Realty to create the Real Estate One brand, and Dick’s sons, Stuart and co-owner Dan Elsea, continue to grow the business after learning from the ground up.

“Now we have a fourth generation,” Stuart said. “I have two sons in the business, and my brother has a daughter in the business.”

RESPA compliance tips

REO was in the affiliated game before RESPA became the law of the land in 1975. And in the beginning years of RESPA, there was much less education and resources to understand the complicated law.

“You just did the best you could,” Stuart said. “But if you don’t understand the law today, shame on you. The resources are there.”

Stuart said the company was in RESPA compliance on referral fees even before there was RESPA compliance for it.

“Even before RESPA, we never compensated Realtors for referrals or anything like that. We were very compliant even before there was such a thing as RESPA,” he said. “We’ve never been a company that mandated the use of our affiliates. That’s never been our approach. It’s just good business. Agents are independent contractors who are very proud of the fact that they are able to make their own choices on service providers.”

Stuart advises companies hoping to get into affiliated partnerships to first start with educating mortgage loan officers, title employees, real estate agents and the management team on RESPA compliance – through ongoing written memos, emails, manager meetings and sales meetings – and to have staff attend industry trade association conferences such as RESPRO (Stuart is a former group chairman).

“You also definitely want to get the proper legal advice from your own hired counsel,” Stuart said. “Don’t just rely on your partner. RESPA is a very specialized area of the law. We have had in-house counsel for a long time. We hired our first attorney in the early 1980s.  Our mortgage company and title company each have a compliance officer, plus we have general counsel for the company.

“On occasion, we’ll also utilize attorneys like Phil Schulman – the real experts – if there’s a particular situation or marketing program we want to rule out that could have some RESPA implications. It’s worth the expense. Someone might say they hired their divorce attorney to give their opinion. Well, they don’t understand RESPA.”

Diversify your risk

Stuart said having affiliated companies has been a good business model for Real Estate One for several reasons.

“If we can, as a company, control more aspects of the transaction – not just the real estate brokers’ piece of it, but the mortgage, the title, the insurance – we feel like we can have a better outcome for our consumer in terms of service,” he said. “The convenience for our agents has been great, too. The companies all communicate very well together. If there is an issue, we can solve problems much quicker if it’s within our company vs. outside service providers.”

Strategic alliances also helped REO weather tough times in the industry.

“While the companies are all real estate and housing related, there are differences,” Stuart said. “There is some counter-cyclicalness to the revenues. When we had the recession, 40 percent of the market went away. That was particularly challenging for brokerage. However, interest rates dropped. So what did that mean? A lot of refis. So our mortgage business did much better than the brokerage, as well as the title insurance.

“So we didn’t have to make the same deep cuts in staffing and buildings as our competitors, who did not have affiliated businesses. It tends to diversify your risk when you’re in multiple businesses.”

Stuart noted that smaller real estate companies could have difficulty meeting the capital requirements to own a mortgage business.

“However, there are things you can do like marketing agreements, desk rentals and joint ventures,” he said. “And today, large agent teams out there are getting into affiliated businesses, but I think you need to be really cautious there. I think a lot of those arrangements are not RESPA compliant. But there is a way to structure those in a legal matter.”

Stuart predicts a continued strong market throughout 2020 for mortgage and title. REO’s goals for the near future include adding a few offices in southeast Michigan and possibly expanding into other markets in the state with either a company-owned office or franchise.

“Our iBuyer program is going well – we’ve purchased maybe 10 houses under that model and are working out the kinks,” Stuart added. “It’s a low-margin business. The properties are in good condition. You want to flip them quickly at market value. We’re working out the pricing of it and the model we’re using for valuing properties.”