Right-to-list agreements have been popping up quickly across the country, and vulnerable homeowners are being targeted. Title professionals, like Nancy Gusman, are concerned as real estate brokerages offer to pay upfront money in exchange for a 40-year encumbrance on the property. Many homeowners are taking advantage of this “fast cash opportunity” but later discover the issues this will cause with closings.
We sat down with Nancy Gusman of Gusman Legal to discuss the drawbacks to these agreements she identified as harmful to the title industry.
Missed the Title Talks podcast? Listen to it here.
A little bit about Nancy:
Nancy Gusman has been a Maryland-based real estate attorney for 35+ years. She’s part of the ALTA-created workgroup and has worked in her state to find ways to prohibit Right-to-List Agreements. When she heard about Right-to-List Agreements on the ALTA Open Forum, she wanted to get involved with prohibiting these agreements and has shared her insight with us. Here are a few of the highlights from our conversation with Nancy:
What is a Right-to-List Agreement?
Also referred to as a “Home Benefit Program,” A Right-to-List Agreement is an offer for consumers to receive quick cash, typically between $300-$5,000, for signing an agreement requiring homeowners to use a specific real estate agent as their exclusive real estate listing broker for a period of 40 years.
When the owner signs the agreement, it is recorded in the land record and creates a lien on the property. This practice is commonly advertised as a “loan alternative” but without requiring consumers to take out a loan and typically targets unsophisticated homeowners with home equity. The real estate brokerage benefits from the guaranteed commission once the owner decides to sell the property.
While the practice has been around for a few years, its popularity has grown this past year significantly. These agreements are popping up in multiple jurisdictions across the country and have been used in at least 33 states.
What’s the Catch?
Sounds like free money, but is it too good to be true? Many homeowners who have executed such agreements are not fully informed and are surprised to learn what was in the fine print later. If homeowners don’t intend to sell until further down the line, they may not fully consider the commitment they are signing up for.
Impact on Future Sellers
Unless the agreement is formally released and terminated, the agreement remains an encumbrance on the title binding any subsequent owner for the remainder of the 40-year term. That means that this obligation is tied to both the current and future homeowner.
The same applies to other circumstances that are not commonly understood as a sale, like foreclosure situations and transferring property to heirs selling the home. For example, if a homeowner transfers ownership to their daughter, she will now be obligated to the same agreement.
If the bank forecloses, the bank is obligated under this covenant. People who want to unlock the equity in their homes through refinancing can’t, so they have to pay off the real estate company to go away so they can refinance since the bank will not agree to the term.
Expensive to Break
There are significant termination fees if a homeowner wishes to cancel this agreement that often far exceeds the payment received. If they have a change of heart or later want to list their property for sale with a new contact, brokerages will seek to be paid 3% of the property’s value to break the agreement. Oftentimes when someone is selling their property, it’s not worth losing the sale over, so they go ahead and pay the fee.
When transferring ownership, there is a requirement for this to be paid because the buyer will not want to take this obligation on. According to Nancy, if it isn’t paid, there will be an exception in the owner’s policy, so now the buyer is getting stuck with the obligation, and they are not covered by it in their title insurance.
Brokerage Has the Right to Make Changes
Brokerages can transfer their rights without permission via sellout or go out of business without the homeowner’s knowledge. If the original real estate agent leaves the brokerage, they are assigned to someone they don’t know and may not want to work with. As Nancy pointed out, real estate is a very one-on-one thing. People develop relationships with their agents, not the company.
Efforts Being Made
The American Land and Title Association has created a workgroup focused on this issue and has started a petition paper, so they have a clear position on the agreements. They are currently creating a standard legislative bill that legislators can modify and introduce in 2023 to prohibit the activity of unfair real estate fee agreements from state to state. They hope to have this available by the end of this year, so it’s ready to go in January.
Thanks to individuals like Nancy, who have reached out to their Attorney General’s office, states like Florida are already taking action to protect homeowners against these arrangements and other states aren’t far behind. She has also gone to her area’s REC and Department of Finance in hopes they will act without having to go through the legislative process.
Nancy and other title professionals hope state real estate commissions and customer financial protection bureaus crack down on these companies doing this for unfair trade practices.
What Can Title Professionals Do?
Diligently Examining Documents
Title professionals have to sift through a lot of information and may not realize that this obligation exists. A title report will show the agreement, but if title agents don’t know to look for it, they may not notice it. Nancy advises title professionals to make sure they look into every document because the title searcher may not let them know.
Title agents and other real estate professionals should familiarize themselves with this program so they can help advise clients who may question whether the program makes sense for them. Most homeowners who enter this agreement don’t fully read and understand what they are signing and rely on professionals to help guide them through the decision-making process.
Getting Involved in the Conversation
Title professionals can get involved by educating the real estate community as a whole so that it can be spread to homeowners and sellers. Nancy recommends Public Service Announcements in places where people are paying attention, like government agencies.
It’s a painstaking process that takes a village, but ultimately one that ALTA and title professionals believe will protect vulnerable consumers.