Misleading home buyers: Conflict of Interest? What conflict of interest?
Friday, January 25, 2008 at 11:23AM 
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:
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:
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?
'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.
Reader Comments (12)
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 Salcedohttp://renohomeblog.com
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
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.
Rogan McGilliswww.reversemortgagecity.com