It's always been tough to be a real estate regulator, and the Internet has not made matters easier. Regulation and enforcement have become vastly more complex as advertising, referrals, and money flow across both state borders and national boundaries with electronic speed.

Many regulators now post licensure data, exam materials, and realty forms online. The result is much better service for both consumers and licensees.

But regulators are not the only folks using the Web and therein lies a potent problem: Can you have state regulation with a medium that has no boundaries? Do we need specific regulations unique to the Internet, or can we just apply off-line standards to online conduct?

Licensure Status

In the pre-internet days, you generally needed a license in the jurisdiction where you represented others for a fee and engaged in other regulated activities. With the Internet, however, a site for a broker in Ohio might incidentally attract buyers in California.

While incidental contact is not an issue, what if the Ohio broker purposely seeks California clients? Suppose the Ohio broker uses web page "meta tags" which cause consumers looking for California real estate to find the Ohio site through online search engines? Or, suppose the Ohio broker simply uses traditional media in California to actively seek business in Los Angeles and San Francisco?

California, for one, has addressed this issue: Its real estate regulations state in part that:

Persons who advertise or disseminate information about services over the Internet, the World Wide Web, or similar electronic common carrier systems, will not be deemed to be engaged in the business, act in the capacity of, advertise or assume to act as a real estate broker within this state if any of the following apply:

(1). The advertisement or information involves a service but (A) is not directed to any particular person or customer located within the State of California, (B) is limited to general information about the services offered to customers or the public in general, and (C) includes the legend "The services referred to herein are not available to persons located within the State of California."

(2). The advertisement or information does not involve a service provided in connection with activity for which a real estate license is required.

(3). The advertisement or information is not being published, circulated or transmitted on behalf of another or others.

No doubt other states have or will quickly adopt the California standard, or an equivalent, to establish what is minimally necessary to protect the public interest. In effect, online offerings and associated ads will be required to name the state where a firm is licensed so that consumers will know which regulators to contact in the event of a dispute or guarantee-fund claim.

Disclosure

Who is licensed and who isn't? The public surely needs to know, otherwise someone enrolled in a corporate relocation program could also sign up for an online referral service -- and not realizing that both the relocation firm and the online site might seek duplicate referral fees for the same service.

The Best Practices Guidelines developed by ARELLO -- the Association of Real Estate License Law Officials -- suggest that brokers have an obligation to "make full disclosure in some written form that is understandable and easily available to the recipient prior to providing, or offering to provide, licensable services. The burden of proof of such prior full disclosures falls on the licensed entity when addressing a consumer complaint."

Disclosure seems like a reasonable and fundamental requirement, especially when a referral fee is being sought. Many states already have clear licensure disclosure requirements for signs and print ads, so why not for Internet sites and their related advertising? Why shouldn't referral sites and services plainly announce they are licensed brokerages in a given state and are compensated by brokers for their recommendations?

Liability

In real estate it's possible to earn a referral fee by sending business to other licensees. For instance, broker Smith in Oregon meets someone moving to Tampa and brings together the buyer and broker Jones in Florida. If the Oregon buyer uses broker Jones, and if a compensation arrangement is in place, the Oregon broker may be entitled to a referral fee.

Referrals can make sense because broker Smith in Oregon is not familiar with the Florida market and cannot provide professional services as a result. But Smith may be able to provide a referral to the buyers, a recommendation based on the idea that broker Jones can negotiate the best possible price and terms on their behalf.

But what if the Florida broker turns out to be incompetent or acts in a discriminatory manner? Should not a referral from someone who seeks, expects, or accepts compensation create some level of liability? After all, it was the Oregon broker's referral that sent the buyer to broker Jones in the first place, and it was the allure and possibility of compensation that caused Smith in Oregon to recommend one Florida broker and not another -- a recommendation on which the buyers relied.

Marketing

One of the most tangled concepts of our time is the term "free."

Some loans, as an example, are supposedly available at "no cost" to consumers. The problem is so substantial that California has adopted regulations to prohibit this practice.

"Phrases and words used in advertising can be misleading in themselves," says the California Department Real Estate.

"No Cost" loans and "No Fee" loans are such words. All real property secured loans have certain inherent costs, such as title insurance, escrow, appraisal, recording fees, etc. These services are bought and paid for by the borrower in all loan transactions. In the cases where a broker arranges a premium priced loan where a lender rebate is used to pay for these services, the services are still performed and the costs incurred. The borrower pays the costs of the services via a higher interest rate than would be available if the borrower paid for the services out-of-pocket. In effect, the borrower finances the closing costs over the entire life of the loan. Although there may be no out-of-pocket costs to the borrower, clearly there are fees and costs involved, contrary to the claims in these ads.

In the context of online sites which offer "free" broker recommendations to consumers and also charge referral fees to brokers, are not such referral fees ultimately a cost to consumers because the broker paying such expenses expects to pass them through to buyers and sellers? Can such recommendations be "free" when, in fact, the site is obtaining or hopes to obtain compensation from those it endorses -- compensation ultimately paid by consumers?

If one brokerage says that it offers "free" services, is not the implication that other brokers charge for the same service? But if the first broker is receiving referral fees for its recommendations, is there not a cost to consumers for such testimonials? And, if there is a cost, how can a service be "free?"

Consumers face other expenses with allegedly "free" sites and services, the most important of which are "opportunity" costs. If a "free" site or service only recommends those brokers and lenders willing to pay referral fees, then by definition not all brokers are included -- including perhaps brokers with objectively greater skills or lower costs than those being endorsed.

If a site or service claims to provide "free" broker referrals, that's fine -- as long as there are no fees related to such recommendations. But claims of "free" services which involve actual or prospective referral fees should be seen as contrary to common sense and -- like "no cost" loan claims in California -- prohibited. Or, if not prohibited, referral sites and services should at least be required to clearly and prominently state that they are being compensated by the brokers they recommend.

Equal Access

When brokers participate in a referral site they no doubt have an expection of full access to all business directed toward their community, ZIP code or specialization. In turn, referral sites should be obligated to distribute business opportunities on an equal basis.

This means that if Seller Green is looking for a broker in a given ZIP code, and the referral site has 41 member brokers who could possibly serve Green, then either all 41 brokers should get access to Green or there should be a system in place which rotates chances among qualified brokers -- maybe the first 10 to register will be notified about Green, the second ten will be notified about the next prospect, and so on.

What cannot be acceptable is a situation where brokers lend their credentials and credibility to a site, but then the site plays favorites -- rewarding some brokers with more referrals than others. To assure that a site is playing fair, it should explain how many licnesees are accepted for each marketplace unit (say an individual ZIP code) and how brokers and prospects are matched.

Follow-up

I recently wrote about domain names and how they can be valued, bought and sold (See: Realty Sites & Services Up For Bid). Now comes word from GreatDomains.com, a company which auctions site names, that it has sold loans.com for $3 million, a price described as "setting the record for a domain name sold at auction."

GreatDomains.com says it now has more than 250,000 listings and has sold such names as Drugs.com, Capital.com, ForSaleByOwner.com, and Perfect.com. The company says it has sold some names for prices in excess of $1 million as well as many names for $100,000 or more.

The Common-Sense Mortgage

The latest edition of The Common-Sense Mortgage -- in its second printing since September -- is now available in bookstores online and off. In print for nearly 15 years and widely recognized as the standard consumer guide to real estate financing, it's described by syndicated columnist Robert Bruss as "an encyclopedic, detailed summary of just about everything real-estate investors, agents, lenders and borrowers want and need to know about mortgages."

"On my scale of one to 10," says Bruss, "this superb book rates a 10."

"This continues to be the most, lucid, comprehensive treatment of the subject on the market," says The Real Estate Professional. "If you want solid, reliable information about residential real estate financing, written in a thoughtful, convincing style, this is your source."

For additional information, press here.

Question Of The Week

Q I'm getting my home appraised to see if I have enough equity so that PMI payments are no longer required. How much equity do I need for this purpose?

A This matter comes up often, in some measure because there is less protection for borrowers then one might think.

If you have a loan originated before July 29, 1999 it is not clear that any lender can be forced under federal rules to allow an end to PMI coverage, regardless of your equity in the property. While lenders may have policies allowing borrowers to cancel PMI once they have 20 percent equity, such policies are not required.

If your loan was originated after July 29, 1999, you may be better off. Under the so-called "Homeowners Protection Act of 1998" you can ask a lender to cancel PMI once your original loan balance has been reduced by 20 percent. After your mortgage balance falls 22 percent, the lender must cancel PMI unless you have a "high risk" loan (in which case PMI can continue for 15 years). "Equity" is not an issue under the new rules, only the original loan balance and where it stands today.

Since the federal government makes the rules, it has conveniently omitted any requirement for its own FHA loan program to discontinue mortgage insurance payments (MIP). The result is that FHA insurance payments continue for the life of the loan, regardless of equity or amortization.

Weekly Resource

The federal government, through the General Services Administration, auctions property nationwide. The GSA's Property Disposal Site lists buildings and land for sale, and also explains the bidding process.

Published: February 1, 2000

Use of this article without permission is a violation of federal copyright laws.

Editor's Note: This article reflects the opinions of Peter G. Miller only and not necessarily the views of this or any other publication, organization or Website owner.

Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .