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January 25, 2008

Misleading home buyers: Conflict of Interest? What conflict of interest?

Sameoffice1 Thankfully, a recent NYTimes article, Feeling Misled on Home Price, Buyers Sue Agent and an interview hours ago on Today on MSNBC, are beginning to shed light on deceptive real estate practices.  However, the article doesn't expose widespread conflicts of interest that contributed to the real estate bubble and their growing cost to society. 

1.  For starters, look more closely at this misleading statement:

"As prices spiked, buyer's agents and brokers became popular as sounding boards, advisers and negotiators. The National Association of Realtors estimates they are now involved in two-thirds of all residential purchases."

That makes this the first housing collapse in which large numbers of buyers had a real estate professional explicitly looking after their interests."

My guess is that one in five * transactions or about a million sales of existing homes during 2006 involved "designated agents" or some other name that papers over the conflict of interest that occurs when buyer and seller are represented by the same brokerage firm. (* In some markets, the ratio could be considerably higher.)

2.  The means that home buyers do not receive proper advice and protection, or as a partner in a real estate agency told the NYTimes:

"We have seen so much misrepresentation over the last five years," he said. "So I appreciate where these buyers might be coming from: 'I'm a lowly consumer, you're certified by the state of California, you didn't do X, you didn't do Y, and I got hurt.' "

3. The NYTimes speculates that consumers, angry that their counterfeit buyer agents did not provide adequate advice and protection, will increasingly take legal action. Will their collection actions rise, at some point in some overvalued market, to a class action lawsuit? 

"The Ummels may be on the leading edge of the law, but they are unlikely to be alone for long. With the market falling, many homeowners owe more on their mortgages than their houses are worth. And many of those deals involved brokers who are required to carry professional liability insurance, presenting a tempting target for angry buyers.

'If you put someone into a property at the top of the market, you look really bad if it goes down,' said K. P. Dean Harper, a real estate lawyer in Walnut Creek, Calif. 'There are a lot of letters going out from lawyers to real estate agents saying, 'My client would never have purchased if you had properly evaluated the market conditions and the value of the property.' "
 

Represent_3 4.  A series of "Dual Agency Detective" blog posts dating back three years predicted "a new era of heart break for real estate consumers."  Although it's easy to poked fun at designated agency with political cartoons, the cost to individual home buyers and society, as this prophetic case attests, is no laughing matter:

My so-called buyer's agent (who promptly switched roles at contract signing without explanation), initially advised me to bid $750,000 for my house of choice, which was listed at $699,900. When I told her that such an offer was beyond my price range, she was quite adamant that I not offer anything under the list price. When I finally backed out the deal because of her bait and switch scam, I later heard that the house in question sold shortly afterwards for $682,000--in other words, nearly $70,000 less than the bid suggested by my so-called buyer agent.

This type of price inflation (caused by seller's agents masquerading as buyer's representatives) must have a very distorting impact on housing costs.  The economic fallout is enormous: ordinary citizens are forced to move out farther in search of decent, affordable places to live, which  leads to a host of problems connected with traffic congrestion, suburban sprawl, etc.

As I perceive it, the real estate cartel's use of dual agency [a.k.a. "designated agency"], which works to the detriment of the average consumer while enriching dishonest agents through the practice of double-dipping, contributes significantly to the manifold problems we see in the residential housing market and therefore should be fully exposed.

Yourfanniemaybenext_2 5.  Who will end up paying the cost?  Commenting on the mortgage package included in the tax rebate agreement announced by Congress and the President, a link on BostonBubble reads: "Profits privatized, risks socialized - Economic stimulus a wealth transfer from the middle class to the rich and the reckless." See Paper Money's blog post for call to action.

Conflict of interest, what conflict of interest?

PS.  The NYTimes may not have gone far enough, but the story (once, the most forwarded story in the NYTimes) is echoing around the blogosphere.  Some in the industry are worried this may be "the tip of the iceberg," and the buyers told MSNBC's Today show they want to change the industry.  Sounds like the Consumer Revolution we've sought over the past 15 years.

Bill Wendel | 04:23 PM in Defensive Homebuying, Dual Agency Detective, In the News, Real Estate Bubble, Real Estate Consumer Bill of Rights, RECALL: Real Estate Consumer Alliance | Permalink

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Very interesting and helpful post. Maybe not to us in the real estate industry(initial reaction, of course) but this a challenge for us. Definitely.

Though I have a dilemma about this topic.

I have had buyers who come to me with their minds already made up on what they want to do.

And sometimes, i know deep inside that they are not making the best decision but they are not sincerely asking for an advice from me either- Example: they would ask on where's the best location but won't ask for in depth explanation on where the market is.

That leaves me with no options but to do what they aim to do. What should I do about this?

-Joe Salcedo
http://renohomeblog.com

Posted by: Reno Real Estate | Jan 28, 2008 5:00:21 PM

Sounds like an exclusive buyer agent at an exclusive buyer brokerage is the way to go.

Posted by: Rich Rosa | Jan 28, 2008 10:53:33 PM

Joe,

Once or twice I faced fimilar situations, and asked the buyers to sign a letter documenting that I had warned them that the price they wanted to offer was out of line with comps and not supported by my analysis.

More recently, I repeatedly advised buyers that prices are still falling, and if they buy now, they should think through worst case scenarios first.

Bill

Posted by: RealEstateCafe | Jan 28, 2008 11:04:02 PM

Rich,

You sound like a fellow buyer agent. The Real Estate Cafe offers a menu of fees and services, but over the past 13 years, we have acted primarily as exclusive buyer agents and are outspoken critics of dual agency. Call it "designated agency" as the state of Massachusetts does, or "dual representation" as Redfin does, it's all the same: counterfeit buyer agency.

A few years ago, we experimented briefly with "listing entry only services," and menu of services for FSBOs (for-sale-by-owner properties). Before we worked for FSBOs, we previewed their homes to our buyers; and still offer a ZERO TOLERANCE, conflict of interest policy to buyer clients with a money-back guarantee.

Compare that to Redfin's Dual Representation policy published on their web site:

"In some states, it is legal for the buyer and the seller for one property to be represented by one agent. In such states, the seller’s agent may volunteer to represent the buyer. Regardless of state law, many brokerages do not allow this practice, because it is impossible in a negotiation to represent simultaneously the interests of both the buyer and the seller. At Redfin, the same agent cannot represent both sides of a transaction."

Won't you agree that the "Conflict of interest? What conflict of interest?" cartoon above fits the final sentence in Redfin's dual representation policy? With all the media attention they get for being consumer advocates, it amazes me that this conflict of interest hasn't gotten more exposure.

Posted by: RealEstateCafe | Jan 28, 2008 11:37:39 PM

Just a personal perspective here: My mother-in-law died last week and turned out to be upside down on two properties (a 3rd had already foreclosed). Total debt approaching 600K. I can tell you I have a great deal of bitterness toward an agent who would let a 78 year old woman with a pacemaker reposition herself from a financially secure position in a completely paid off house to an utter disaster. I am sure that the stress from all of this shortened her life.

Posted by: idyll | Jan 29, 2008 3:49:47 PM

The that's allows deals to be more effective because the agent works on behalf of both parties as long as they dont abuse their customers confidentiality

Posted by: Chris Heath | Feb 9, 2008 5:28:31 AM

The that's allows deals to be more effective because the agent works on behalf of both parties as long as they dont abuse their customers confidentiality

Posted by: Chris Heath | Feb 9, 2008 5:28:53 AM

Thanks for the tips!

Posted by: Atlanta New Home | Feb 11, 2008 1:42:49 PM

Nice post. The point at no 4 is of considerable attention. it appears on all places in world. Befor buying/renting some property it is better the visit the place and check neighbour properties prices.

Posted by: morocco property | Feb 28, 2008 6:15:32 AM

Great article with great information. I really think that the cartoon hits home and tells the reader a lot about what is going on.

Posted by: San Diego Real Estate | Mar 9, 2008 9:10:05 PM

Love the post! Conflicts of interest and self-interests all are troublesome factors in the real estate business. For the respondent asking what to divulge to his client and what not to, I say this: Have some integrity and give them all the facts, regardless of what they do or do not ask for. Your job is to protect their interests, not yours. That my friend is what you get paid for!
For everyone else out there, buying a home or an investment property requires an extreme amount of due diligence on your part. Do not rely on others to do this for you. Learn how and protect your own interests. Go to the following website for an educational product that is invaluable.
www.nationwidepropertyinvestments.com/education

Posted by: Will Barnard | Mar 11, 2008 8:55:08 PM

Good post... The thing I don't understand i why homebuyers and sellers just stop putting up with this type of behavior? I know I would never, ever, ever in my life use a buyers agent and sellers agent from the same brokers office. I don't even know how this passes the NAR code of ethics... just because you disclose something doesn't make it ethical does it?

Rogan McGillis
www.reversemortgagecity.com

Posted by: Rogan McGillis | Mar 28, 2008 4:39:44 PM

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