Counter Intelligence: The Real Estate Cafe Weblog

WBUR/NPR debate: Do buyer agents really help consumers save money?

Having already posted one comment to WBUR's heated discussion about "what caused the housing crisis and how to fix it," I was content to watch the debate unfold yesterday until several posts began spreading misinformation about the role of buyer agents and whether they help clients save money.

First, there is some truth that the current two-sided real estate commission does not align buyer agent compensation with performance. That's why some in the industry offer rebates and others are calling for commissions to be divorced. If that single reform comes out of this crisis, conflicts of interest would be reduced, competitive options would increase, and consumers would save billions of dollars as argued in these blog posts written two to three years ago:

$60 Billion question: How do consumers uncouple real estate commissions?

10 Mega-tends push real estate commissions to a tipping point

Contrary to assertions on WBUR's blog, some REAL buyer agents, not counterfeit buyer agents or "designated agents," actually do save their clients money by (1) rebating some or all of the buyer agency fee built into sales prices, and (2) by helping their clients shop wisely, time the market, and negotiating aggressively on their behalf. For tangible evidence, see Wall Street Journal article on the 100% commission rebate offered by The Real Estate Cafe, our menu of fees & rebates, and map of client savings totaling over $1 million during a twelve month period.

At least one other buyer agent in Chicago has helped clients save more than $1 million during a twelve month period and there are probably others. More importantly, new referral sites like http://www.ProOffer.com and conversations like this could bring performance based compensation into the real estate industry.  My guess is that millions of real estate consumers, both home buyers and sellers, would agree that reform is long overdue! 

What's your opinion?  Do buyer agents really help consumers save money?

What regulatory reforms are needed to protect real estate consumers?

Flames of "irrational exuberance" burning Realtors, too

I've spend the morning deconstructing Realtors are not immune to foreclosure, an amazingly transparent blog post on a leading real estate web site. The author's concluding question -- Why did so many people, including Realtors, buy homes in 2005? -- has been and will continue to be the spring board for innumerable blog posts, talk show interviews, research by economists and parodies on YouTube. But now imagine what the authors of Freakonomics or Saturday Night Live could do with this admission that some real estate agents "helped people buy homes that they could not afford," and then repeated the same mistake themselves.

Personally, I'd love to see investigative reporters dig into the conflicts of interest in the real estate industry and expose how deceptive and manipulative business practices, like dual agency and blind bidding wars, fanned the flames of "irrational exuberance" and, as this highly respected blogger admits, ultimately burned Realtors themselves.

Perhaps industry regulators will create new disclosures to protect consumers and prevent another trillion dollar collapse of the housing market in the future. Were you aware that a Washington think tank estimated a "loss of almost $6 trillion in real housing wealth over the course of the year, an average of $85,000 per homeowner"? Historically, potential home buyers have been advised to ask agents about their sales volume, but now it's wiser to ask prospective buyer agents if any past clients are upside down on their mortgages or involved in foreclosure. What if a such a negative equity or "foreclosure disclosure" were required by law?

Outrageous some might scream, unrealistic others would argue but blogs have already created a decision-making tool for web-savvy home buyers to decide who will best protect their financial interest. Try this experiment, visit two real estate blogs and see what their authors have written about the housing bubble. Look at their posts during 2005 -- was your prospective buyer agent echoing NAR's "anti-bubble" spin or warning homebuyers about the coming meltdown?

In retrospect, this Real Estate Cafe blog post from April 2005 sounds prophetic: Will mobloggers pop the real estate bubble?

My hope is this blogger's admission that Realtors are not immune to foreclosure will expand discussion about systemic flaws and conflicts of interest in the residential brokerage practices, and their cost not just to individual buyers and Realtors but to society. Who could imagine a better time and place for some "straight talk" about the need for real estate reforms than John McCain's speech tonight at the Republican Convention in this blogger's backyard?

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

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.' "

 

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.

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.

Double Bubble: How counterfeit buyer agents inflated the housing bubble

Yesterday we blogged about the "Mortgage Meltdown" and record number of foreclosures, challenging the media and regulators to investigate how counterfeit buyer agents (a.k.a. double agents) helped inflate the housing bubble.  If they do, here's the kind of "glaring" case study they may find:

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.

The homebuyer above concluded, "Isn't there any investigative team or media personage with the courage and tenacity to shed light on this problem?"  We'd like to ask how homebuyer and sellers who have been victims of dual agency, designated agency, or faulty agency disclosure can use social networking tools, like blogs, wikis, and interactive mapping, to expose the problem and prevent other consumers from being harmed?  Does anyone know if such an organizing effort is already underway, or have ideas about how to get one started?

Ides of March: Beware mortgage meltdown & counterfeit buyer agents

Tuesday's announcement that "lenders began foreclosure against more than one of every 200 U.S. mortgage borrowers in the fourth quarter," has the media tracking the "Mortgage Meltdown" and record number of foreclosures, and industry pundits predicting widespread ripple effects from the "Subprime Panic."

Steven Pearlstein of the Washington Post estimates that "...1.5 million Americans may lose their homes to foreclosure and ...hundreds of thousands of homes could be dumped on an already glutted market."  Pearlstein concludes, "What we have here is a failure of common sense. ...It's not a whole lot more complicated than that." 

But some real estate consumer advocates say the story is more complex. They're calling for the media and regulators to investigate the role dual agents (a.k.a. designated agents) played in creating the real estate bubble and the growing foreclosure problem.  During the housing boom, little attention was paid to the conflicts of interest which occur when large real estate agencies try to represent both home buyers and sellers in the same transaction. But one leading consumer advocate predicts homebuyers will take legal action when they realize they have been betrayed by counterfeit buyer agents:

As some home owners get "upside down" on their equity, or lose their homes by foreclosure, you may start to see a rash of litigation against the real estate "agents" who sold them their homes.  Probably the vast majority of real estate agents acted as "buyer's agents" in the transactions, so there is likely the possibility some of these "buyer's agents" didn't really perform up to their expectation of "protecting" the interests of their "buyer clients." 

In coming days, we'll expose the conflicts of interest designated agents would prefer to paper over and the heartbreaking failure of the real estate regulatory system to protect ordinary homebuyers and sellers.  If you've been a victim of dual agency, designated agency, or other deceptive real estate practice, or know someone who is writing about the same subjects, please let us know.  If you are in the housing market now, BEWARE designated agents; and demand a real buyer agent, like The Real Estate Cafe, who can help you save tens of thousands of dollars.

Wanted: New generation of "fee-for-service" real estate consultants to help "An Army of Davids" save $30 billion annually

Raving about the book, An Army of Davids, Web 2.0 real estate blogger Mike Price, founder of MLPodcast, quotes author and Instapundit guru Glenn Reynolds as saying:

"It's not just that fewer people can do the same work, it's that they don't need a big company to provide the infrastructure to do the work, in fact, they may be far more efficient without the big company and all the inefficiencies and stumbling blocks that its bureaucracy and techno-structure seem to produce."

Price concludes with this warning to traditional real estate agents "who don't get it:"

"This new paradigm of singularity powered by technology and changes in social structures can not be denied, so you'll have to ask yourself if you're prepared to sell to a client that is all too familiar with the concepts."

At The Real Estate Cafe, there is no such thing as a client who is "all too familiar with" Web 2.0 or the real estate market ;-)  In fact, we assume our clients know more than us about the local housing markets some of them have been monitoring for more than a decade using the internet and good old-fashioned word of mouth.  That was the case this morning with our latest buyer client. 

Unfortunately, what some of tech-savvy house hunters don't realize is that the rules of the current real estate industry sometimes penalize self-reliant, do-it-yourself'ers who wait too long to ask a buyer agency willing to rebate 2/3rds of the buyers agency fee, like Redfin; or rebate 3/4rds of the buyer agency fee, like BuyerSideRealty; or rebate 100% of the buyer agency fee, like The Real Estate Cafe to represent them.

Until real estate commissions are uncoupled, and buyer and sellers agents negotiate separate fees independently with their respective clients, web-savvy homebuyers need to be equally savvy about inadvertently forfeiting thousands of dollars in rebates by communicating directly with listing agents, online or off, who are always eager to collect both sides of the obsolete, two-sided real estate commission.  That's part of what is keeping the bloated real estate dinosaurs, Reynolds pokes fun at in his statement above, profitable.  As they fall under the weight over their own inefficiency, a new generation of "micro-brokers," with modest or minuscule overhead costs and reasonable consulting fees, will gladly help "An Army of Davids" save an estimated $30 billion dollars annually.

Is designated agency an April Fool's Day joke?

See anything wrong with this picture?  Too many brokerages in Massachusetts don't; that's why home buyers and sellers need to protect their financial interest by asking "their" real estate agency whom they represent.  Yes, Massachusetts law requires real estate licensees to disclose their ageny relationship at the first personal meeting to discuss a specific property, but too often agents fail to comply with this mandatory regulation.  Even when they do, those brokerages who see nothing wrong with designated agency have no obligation to explain potential conflicts of interest so buyers and sellers can make truly informed decisions. 

That's why The Real Estate Cafe has argued, for years, for a public information campaign at the start of the Spring homebuying season to protect real state consumers.  Why not use the Ides of March to warn buyers and sellers that designated agents can betray their financial interests?  Why not use April Fool's Day to caution consumers not to fooled by designated agents? 

Ten years ago, a state regulator participated in a consumer seminar at the "original" Real Estate Cafe to discuss a Wall Street Journal article entitled, "Will your agent become a dual agent?"  With nearly 50,000 MLS listings on the market across Massachusetts and a changing -- if not falling -- housing market, it's essential to ask "your" agent the same question, and understand the financial implications of potential conflicts of interest. 

If your agent does not present an agency disclosure form to you, email us at [email protected] and we'll send you one to protect yourself.  Before you sign a designated agency consent form, download the consumer pamphet online and discuss the checklist of ten dual agency issues with "your" agent. If you're not satisfied with their answers, The Real Estate Cafe can refer you to a brokerage firm with zero tolerance for conflicts of interest.

Shouldn't real estate consumers be free to choose based on informed consent?

Surveys conducted by the real estate industry over the past decade repeatedly find that some consumers want the convenience of one-stop shopping.  In response, real estate consumer advocates advise consumers to look carefully at the trade-off between time-saving convenience and cost, and to protect their right to make free, informed choices.  That's the goal of this second article of a proposed Real Estate Consumer Bill of Rights.  Initially drafted in 1999, how would you update it for 2005 and beyond?  If federal regulations were finally changed to allow banks to provide residential brokerage services, would this language need to be expanded? 

DRAFT REAL ESTATE CONSUMER BILL OF RIGHTS

2. Right not to be coerced into using products or service providers.
No consumer should be forced, without the consumer’s full informed consent, into using any particular service or product. Consumers should especially be cautioned where the real estate professional may, by office policy, be required to act as a dual representative or shift services without the consumer’s full informed consent. Consumers have the right NOT to use real estate brokerage services and to “self-represent” if so determined by the consumer.

As written in an earlier blog post entitled, Cell phone bill of rights? Why not real estate?, The Real Estate Cafe will:

1. Use this blog to release one item a day over ten days as a starting point for a draft Real Estate Consumer Bill of Rights;

2. If there is sufficient interest, we'll create a wiki and invite other real estate consumer advocates to to help create the draft Real Estate Consumer Bill of Rights;

3. If there is sufficient interest, invite consumers to comment, edit, or add items to the draft Real Estate Consumer Bill of Rights; and

4.  If our efforts are credible enough, we'll submit the draft Real Estate Consumer Bill of Rights as written testimony at the upcoming hearing on anti-competitive practices in the residential real estate industry, cosponsored by the Department of Justice and Federal Trade Commission in Washington, DC on October 25, 2005.

We invite your comments online or by calling us at 617-876-2117 to leave a one to three minute sound bite (which we may include in an upcoming podcast).

Heartbreaking news for real estate consumers

Just in time for Valentine's Day, here's the cartoon used in a Massachusetts statehouse blitz when the original designated agency legislation was proposed in Massachusetts.  As we know, the controversial legislation hidden in last years budget bill could open a new era of heart break for real estate consumers unless industry regulators adopt strict guidelines for certifying informed consent as proposed by REAFRA.