Just Whom Do Affinity Relationships Benefit?

By Warren Berger

Perhaps no subject is more hotly debated in the industry right now than affinity relationships. In the past two years, some national franchises and many independent brokers have been riding the affinity wave--forming alliances with trade groups and associations, airlines, retail chains, banks, home improvement companies, and various other partners.

But as affinity partnerships have become more prevalent, they've also raised questions now reverberating throughout the industry: When brokers and salespeople push affiliated services and products, does it distract them from their core business? Do affinity relationships really generate revenue and profit, or are they more apt to further squeeze profits by cutting into commissions?

And what's the fallout when one of these heaven-made matches comes unglued? That happened in January when Amre Inc., a home improvement company that had formed a much-heralded affinity relationship with Century 21, shut its doors and left some customers without promised services. (See " Amre Goes Bust: HFS to Relicense Home Improvements Company, Keep Affinity Relationships," Today's REALTOR®, March 1997, page 14; or read the story on Today's REALTOR® Online, accessed through One Realtor Place® at NAR's home page, http://www. REALTOR.COM.)

Many of the questions swirling around the affinity marketing trend have yet to be answered because the movement is still in its infancy. "We're just beginning to see the ways this is impacting our business," says Jim Hamilton, manager, RE/MAX–Execs, Redondo Beach, Calif. Hamilton and others have already observed that affinity relationships have the potential to affect companies' bottom line--in positive and negative ways. "Clearly, affinity relationships could end up generating a lot of activity. But for brokers and salespeople, affinity programs may decrease profitability."

Different Programs, Different Effects
How do affinity relationships affect profitability? It depends on the type of program. Most can be divided into two categories: those in which a vendor who's not a settlement service provider pays fees or provides discounted services to brokers, and those in which fees are extracted from the real estate company. In the first scenario, brokers are generally rewarded for directing customers to an outside vendor; in the second, brokers receive referrals from the vendor and are expected to share their commission when those leads turn into sales.

Both types of arrangements have their pros and cons, practitioners say. Bob Arme, general manager, Century 21--Dabbs, Chicago, says his company and salespeople have benefited in some cases from Century 21's relationships with outside vendors. "We referred some customers to Amre, and we received referral fees for it," he says. "It happened in only a few instances, however, so it didn't have a huge impact on our bottom line."

But when Amre Inc. went out of business, Arme discovered that it can be problematic to be linked to an outside vendor. "We started getting calls from people complaining because their home improvement job didn't get done, and they expected us to do something about it," says Arme. "It's one thing to recommend a vendor, but once you do, you're tied to that company, for better or worse, long after the home sale."

Amre's failure may be an isolated incident--most observers think it doesn't reflect on affinity relationships in general--but some brokers are still skeptical as to whether it makes sense to promote outside vendors. "The home sale is our priority," says Arme, "and we don't want to get distracted by other things."
In addition, Arme says his salespeople "just aren't that enthusiastic about" affinity programs because "the referral fees they may get are so small compared with the commission on a home sale."

Pulling Money From Salespeoples' Pockets?
If salespeople are lukewarm about collecting referral fees, they're even less enthusiastic about paying fees to an outside vendor. According to Adam Cockey, managing director at Baltimore's W.H.C. Wilson & Co., when a major affinity program was announced recently by one of Baltimore's leading companies, the local board was besieged by salespeople voicing their concerns about losing commission money to affinity partners.

In some affinity relationships, brokers report paying 30 percent or more of their commission to an outside party. The affinity partner may be an association, an airline, a retail club, or a third-party company such as PHH Real Estate Services, which administers affinity programs linking airline miles and other promotions to home sales.

A third-party partnership typically works as follows: American Airlines awards frequent flier miles to members of its Aadvantage program when they buy or sell a home through PHH; PHH, in turn, refers those leads to local brokers, who pay PHH a referral fee, some of which goes back to the airline.

In the best circumstances, these arrangements aren't just win-win situations but win-win-win deals: consumers may get a bonus, vendors collect a fee, and brokers make a sale they might not have otherwise made. "They provide a source of leads we wouldn't ordinarily get," says John Woodward Jr., owner, RE/MAX–Four Star, Mount Airy, Md., whose company has begun to take advantage of RE/MAX's relationships with United Airlines and Sam's Club.

So far, Woodward says, he's got a handful of leads from the programs, but he believes the relationships have tremendous potential. "The draw of being able to offer airline miles is dynamite," he says. "It reaches out to all kinds of potential clients, and it's an opportunity that's hard for people to resist."

And, in some cases, prospects who come by way of affinity programs may be more apt to make a deal, says Howard Hanna, president, Howard Hanna Real Estate Services, Pittsburgh, whose company has formed affinity relationships with a local medical society and a home improvement company. Hanna has found that leads from affinity partners have a 50 percent conversion rate. "These are bona fide buyers who have an added reason to do business with you," he says.

Neither Hanna's company nor Woodward's spends much to promote affinity programs. Woodward finds that it simply isn't necessary. "The airline promotion brings the leads to us," he says.

'Back-Door Referrals'
Critics of these programs say that practitioners may end up paying referral fees without getting added business. Ron Maas, general counsel at Weichert, REALTORS®, says his company has shied away from several affinity partnerships because of "back-door referrals." "If customers are members of an affinity group, salespeople may have to pay a referral fee even though they may already have established a relationship with those customers," he says.

Maria Bunting, copresident of Winder-mere Real Estate, Seattle, shares that concern. "Instead of bringing in new customers, one effect of these programs is that preexisting customers come to salespeople and say, 'I'm entitled to a discount or airline miles.'"

Maas adds, "A good company encourages salespeople to farm and maintain relationships with clients, but this trend runs counter to that. It's all about trying to attract customers with discounts and deals rather than personal service."

Some practitioners say they wouldn't mind paying for incentives as long as consumers were the beneficiaries. But in some cases, the value passed along to consumers--airline miles or discounts on brokerage fees--is far less than the fee the practitioner has paid; the affinity partner absorbs the difference.

"There seems to be a big difference between the amount of the referral fee and the actual benefit," says Hal Kahn, president, Kahn Inc., REALTORS®--Better Homes and Gardens, Newburgh, N.Y. Kahn says his company has participated in airline promotions because of the franchise's relationship with American and Northwest airlines. "But it hasn't really caused people to do business with us," he says, and that may be because not enough of the value is going to consumers."

Even practitioners with concerns about affinity programs agree they shouldn't be ignored. "I do have concerns that affinity programs may be costly to brokers and salespeople," says Kahn, "but they're an important competitive tool. They're going to redistribute buyers and sellers in the marketplace. They're already having an impact--and that impact will keep growing."

For a related article on relocation referral fees, see "Hold On to Your Wallet: Referral Fees Are Growing," Today's REALTOR®, October 1996, page 42; or read the article on Today's REALTOR® Online, accessed through One Realtor Place® at NAR's Web site, http://www.REALTOR.COM. Also at Today's REALTOR® Online, see an online exclusive on managing the pitfalls of affinity relationships, "Affinity Programs: Evaluate Partnerships Carefully."

Is it Legal?
Be aware of laws and local regulations that may dictate affinity relationships, says Michael Thiel, associate counsel, NATIONAL ASSOCIATION OF REALTORS®.

For example, when a program involves the payment of a fee or commission to an outside partner, some state real estate commissions require that the recipient be a licensed real estate agent. Another guideline is the Real Estate Settlement Procedures Act, which generally prohibits the payment of referral fees from one settlement service provider to another, though RESPA does allow licensed real estate brokers to exchange fees.

RESPA doesn't prohibit a broker from offering a direct benefit to consumers in the form of airline miles or commission rebates. But some states--Kansas, Kentucky, Maryland, Missouri, Nebraska, New Jersey, Ohio, Oklahoma, and West Virginia--consider such perks "illegal inducements" to consumers.