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More Real Estate Agent Conflicts of Interest November 9, 2006

Posted by federalist in Real Estate, Special Interests.
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One of the biggest problems with the American real-estate sales cartel (which is enforced primarily by the National Association of Realtors) is the contradictory incentives for “Buyer Agents.”  In principle a Buyer’s Agent is retained to ensure that a real estate Buyer has his interests fully represented in finding and buying property.  I.e., a Buyer’s Agent is supposed to be a licensed professional who is duty-bound to ensure that the Buyer (who may be familiar with neither the area nor the local market) is fully informed of inventory that might meet his criteria.  The Agent is then supposed to apply his expertise to ensure that the Buyer can purchase his desired property as expeditiously and cheaply as possible.

In reality Buyer’s Agents are typically nothing more than glorified chauffeurs, whose only interest is getting a Buyer into a property as quickly as possible.  Why?  Because they get paid for closing a transaction.  And, in fact, the more you spend the more they get paid.  Granted, their commission is traditionally paid by the Seller.  But this is an odd and counterproductive tradition.

In this age of broadband internet and consumer navigation systems there is really no need for a traditional Buyer’s Agent.  The problem is that the Realtor cartel is keeping incentives for Buyers to use them: If you buy a house without an agent, you don’t get a rebate.  If you buy it with an agent, the Seller pays double the commission — and the Buyer’s Agent gets half of it!  As a Buyer, why wouldn’t you use an Agent, when the cost to you is essentially nothing?

The answer is that Buyer’s Agents have incentives that are somewhat at odds with the interests of Buyers.  Both parties want to see the Buyer buy a property.  But the Buyer wants to find the best possible property at the best possible price.  The Agent — whose entire compensation comes as a percentage of a closed deal — wants the Buyer to end up in the most expensive possible property as quickly as possible.

At times the incentives may be even more opposed, as The Wall Street Journal highlights in today’s article, “Do Real-Estate Agents Have a Secret Agenda?

Real-estate agents increasingly have lucrative incentives to push one home over another.  Slow sales have prompted builders and some individual sellers to offer unusually generous incentives to agents whose clients buy a home. Sellers normally pay the buyer’s agent 2% to 3% of the home’s price. Now many are offering thousands of dollars or other rewards, such as travel vouchers, on top of the normal commission.

The problem with agent incentives is that consumers may not know their agents have a potential conflict of interest when they show and discuss certain properties. Of course, agents can’t make buyers want to buy an unsuitable home, and most buyers have strong ideas of their own. But agents can have a big influence on which homes consumers see. And agents’ influence can be particularly strong with newcomers to an area who don’t know which builders are considered most reliable and which neighborhoods most appealing.

The obvious solutions to the myriad problems surrounding Buyer’s Agents:

  • Buyers should pay a lawyer or licensed real-estate professional directly (by the hour, or by the job) for helping them to negotiate or close a deal.  That is the only way to ensure that the Buyer’s interests are represented.

  • Buyers should require that any additional compensation accrued by their Agent in the course of a transaction be given to the Buyer.  I.e., there is no reason for the Agent to enjoy an undisclosed kickback in the course of his employment for a Buyer.

  • If Buyers need the “search” services provided by the traditional Chauffeur Agent, they should agree to compensate the Chauffeur for his services but should require that any excess commission the Chauffeur earns from steering the Buyer to a deal should be returned to the Buyer.

The best defense for buyers may be to insist that agents disclose the compensation being offered on any property under serious consideration. That way, consumers could negotiate ways to share anything that goes beyond a normal pay day for the agent — or at least take the incentives into account in assessing the agent’s advice. But few consumers raise such questions. Daniel Ruben Odio-Paez, a broker in the Washington, D.C., area who operates a real-estate search site, http://www.tbhse.com, says he believes “most buyers have no clue how their agent is being compensated.”

The National Association of Realtors, the dominant trade group for real-estate agents, doesn’t require its members to tell buyers in advance of a purchase how much the agents will be compensated. Federal rules require bonuses and sales commissions to be disclosed on the HUD-1 settlement statement, but buyers don’t see that document until the closing or shortly before. At that point, it would be awkward to start negotiating with an agent about the compensation. The federal rules, enforced by the Department of Housing and Urban Development, or HUD, don’t require agents to disclose trips or other noncash awards.

By contrast, federal securities regulations say brokers must disclose any bonuses or special payments they might receive for recommending a particular security. The National Association of Securities Dealers bars the offering and acceptance of noncash awards that are used to promote the sale of specific products.

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Comments»

1. federalist - June 4, 2007

Just found this NYTimes article from 17-Sep-2005 describing seller alternatives to the 6% fee.

Homeowners across the United States are figuring out that they do not need to pay what agents demand and they may not need an agent at all. At the same time, technology is giving consumers tools to nearly circumvent the agent. If enough people try it, agents are at risk of losing a good portion of their commissions – $100 billion last year.

So, agents are doing whatever they can to keep home sellers from paying less.

2. federalist - October 10, 2007

An earlier WSJ article offers this pithy observation:

We’ll also note the supreme irony that states and the federal government sued Microsoft for illegally “bundling” its software, whereas in the real estate market the states are requiring bundling. In either software or real estate, the choice should be up to the individual sellers.

In some states, real estate agents collude to boycott homes that are being sold by agents who provide commission discounts. This practice is a clear breach of the fiduciary duty of the agent to find the best home at the lowest price for clients. Instead, the brokers are in effect finding homes for their clients that will afford them the highest fee structure. To our knowledge, neither the National Association of Realtors nor the state real estate commissions have ever sanctioned a real estate agent for this breach of ethics.

3. Joe - December 7, 2007

What The National Association Of Realtors Don’t Want you to Know

The truth about board of Realtors® owned MLS throughout the country

For_Immediate_Release:

United States of America (Press Release) December 6, 2007 — Antitrust complaint unfair trade practices update to previous complaints.

Shutting off service to your MLS as stated in the letter below and shutting out to prevent non Realtors ( real estate agents) on Realtor owned MLS boards in my opinion is unfair trade practices on a large scale.

When a Realtor list a home is it disclosed to homeowners at the time of listing that all Non Realtors (real estate agents) will not be able to sell or show any homeowners listings unless they join the local board? Of course not, therefore limiting competition in the marketplace by the thousands of potential home sales from real estate agents nationwide with Realtor own MLS boards… I do believe that there are around 1.7 million real estate agents VS 1.3 million Realtors that leaves a Hugh gap for home buyers and home sellers if this information is not disclosed up front.

Now that shutting down Supra display keys attached to Realtor owned MLS boards because of unpaid Realtor Board dues, Not unpaid MLS dues only compounds this problem even further for the consumers who have active listings on the Realtor own MLS boards with the agents that are now shut out from a service that is provided by GE/Supra and in which the dues are not not in default..

Lets look at what I call the poster child state, Georgia

Georgia has two major Non MLS Realtor Boards GMLS and FMLS that do not discriminate between Realtor or Real Estate Agents therefore providing 100% competition for the consumers and has created a fair marketplace with a level playing field for all to enjoy.

Why have I choose not to renew my Realtor dues is a very simple explanation for me, I am shammed to be associated with NAR and to be dragged into the DOJ lawsuits against NAR for all the public to see and judge me as a not trustful Realtor (Anti trust) guilty by association, and to further damage the already scarred reputation of being a Realtor.

Were is NAR ethics here ? http://www.google.com/search?sourceid=navclient&I.e.=UTF-8&rlz=1T4GGIH_en__214__214&q=the+doj+vs+nar

So with an estimated Realtor loss of 10% at the Orlando Regional Board of Realtors not renewing next years dues and are paid up MLS dues have had there Supra keys shut off also, what do they tell there listing homeowners clients and Home buyers? When they can not gain access to there listing, or show potential home buyers homes..

This is fair practice!! Sorry I call it unfair trade practices on a large scale and I support The Department Of Justice actions 100% to protect the general public from this unfair trade practice.

4. Brian M. Watson - April 7, 2008

First off, the editorial has a lot of valid gripes/concerns about how the business of real estate is performed. As a Realtor, I wholeheartedly agree that broker compensation for selling a particular property should be disclosed, especially when the amount contains an added incentive of some sort. Buyers are justified to be concerned about their being a conflict of interest. While I take my fiduciary duty very seriously, and always place my clients’ interest above my own, this is certainly not always the case. I hope that fiduciary breaches are rare. But human nature is what it is. It must be counterbalanced by a deeply internalized code of ethics. Because figuring out just what a normal commission is, versus one that contains a bonus of some sort, would be difficult, and perhaps walk a fine legal line, I believe that we should disclose our commission up front. At the very least we should tell the buyer that some listings offer more commissions than others, therefore they should proceed with more vigilance.
Now, the Supra issue is another biggie in my book. As soon as GE bought Supra, I knew that it was going to be a problem for Realtors. GE only buys cash generators, virtual monopolies. When GE’s in control, the price will only go up, as their virtual monopolies are not lost on them. It’s why they buy companies. The captive audience of Realtors is just the type of setup they crave.
While Supra has offered some nice features, many are totally unnecessary and pure fluff. They control the market by deeming their product prematurely obsolescent and forcing a trade-in for the replacement product. The latest one is a huge step backward in terms of convenience and reliability. GE touted them as being of benefit because they didn’t have to be plugged in overnight to be updated with security codes like the “old” ones. What they didn’t tell you was that if you didn’t plug them in every two days or so, they would suffer a complete discharge. The ones that were replaced, for “no charge” at the time (The bill would come a few months later.), could sit unused and unplugged for months and still have a charge when you needed it.
In fact, I have considered going back to the old combination keysafe and eliminating all of the extra billing and forced obsolescence being perpetrated on Realtors by GE. This wouldn’t be too bad for GE because guess what? GE owns Supra, who makes the most popular mechanical combination keysafes. Yup, they’ve got it all wrapped up.
In closing, your editorial contained valid points. The use of the term “chauffeur”, in what could only be meant to insult, somehow diminishes the credibility of an opinion that otherwise seems relatively objective. JMHO
Brian M. Watson
SRAR

5. C. Morgan - May 16, 2008

GE can’t make money the old fashioned way so they are weasling
their way through government mandates to mandate their profits.
Enron was doing the same thing through manipulation of Al Gore
-fortunatley they crumbled from their own corruption before they
got too far. GE is now the big devil out to make us dupes to global
warming fear tactics and mandating buying green.. Aren’t they now
after the Home Depot green profits? Then they go after us poor
realtors like a leach looking for blood to survive. Ayn Rand was
right in Atlas Shrugged. The governmnent is the big lobster and
that is the big ticket for these failing and corrupt corporations.
They can’t make money so they mandate us to be their slaves.

6. Joel Stern - January 6, 2009

Excellent article.
I was victimized by a sham buyers agent who switched roles at the very last minute without my informed consent (in 2005, the Weichert Company of Maryland).
To find out more about my case, go to Google and type in my name “Joel Stern”, then “Weichert”; you’ll find numerous websites and blogs discussing this matter.
Contact me for more information.

7. Crystal L. Cox - May 20, 2009

There is Currently No Consumer Protection in Real Estate. I am the Real Estate Industry Whistleblower, find out the Truth of What really goes on behind the closed doors of your real estate transaction.

8. federalist - July 23, 2009
9. Miep - July 31, 2009

I have another issue for which you may want to refer me to another BLOG:

I have sold my house through a Realtor X, using agent A.
Buyers use agent B, from the very same Realtor X.

Transfer took place through conveyancing lawyer Y.
Mr. X is also the owner of the Franchised Realtor, which employs a large number of individual agents, including agent A and B.
Whilst these agents work independently, they collectively use the secretarial, sales and marketing services of Realtor X.
Commission is shared with the Realtor and, as it happens, with other agents.

Buyers were unable to cough up the purchasing price.
I therefore offered them an interest bearing loan over the missing amount.
The contract was drawn up by the Conveyancing Lawyer’s office, on the letterhead of the Realtor X.
Payments to be done in installments, whereby buyers agreed to pay off as soon as possible, but no later than within 36 months.

By the time the last payments were due, buyers refused to pay the outstanding interest.
Naturally I contact my Agent A, who became evasive.
Conveyancing Lawyer Mr. Y agrees that my explanation is plausible, but unfortunately he can’t be of assistance and suggests to take a lawyer.

By coincidence I find out that the buyers have decided to put their house on the market again – just around the same time of the argument with the buyers of my house.
Guess who their agent is: Agent A, from Realtor X.
Conveyancing Lawyer happens to be, you guess correctly, Mr. Y.

They are about to collect the equivalent of USD 30.000 on commissions. So why would they bother with the outstanding USD 2.000 the buyers owe me?

What bothers me is the clear conflict of interest.
In my case the outstanding amount is USD 2000. But with the next ‘victim’ it could be 50.000.

Now HOW do I sort this out.
If I want to report the agent and the lawyer’s, where do I go?
And what are my chances?

Can I claim the outstanding on the agent?

10. CARIE CHERMAN/INNOVATIVE BROKERS /CARROLLTON GA - October 21, 2010

There are plenty of bad agents out there that only care about a pay check BUT there are also some GOOD ones left that actually care about their clients and work hard to get them a good deal- A buyers agent will work for your best interest FEE paid by the seller while the listing agent works to get you to pay more to benefit their client the seller. I am a Real Estate Broker that ALWAYS works for my buyer clients to get them the best terms and most favorable deal. If you are buying you need a good realtor to represent you and look out for your best interest. There are still honest agents out there & I think it is a shame this article makes all agents out to be BAD and out for only themselves. THERE ARE STILL GOOD PEOPLE IN THIS WORLD!! <3

11. Robert Cumings - May 16, 2011

If a person functions as a subdivision trustee and has held the books (including checking) for ten years without reconciliation by others. She lists and sells real estate within that subdivision. Is there a conflict of interest?

12. Amy - April 30, 2012

I’m saddened that my industry behaves in a way that causes articles like this to have to be written. After 11 years, I can honestly say I’ve never directed a client toward a particular home due to financial incentives offered. It’s pathetic and uncalled for but I know it happens. I offer my deepest personal apologies to those in the public who’ve endured experiences with these (less mindful) colleagues of mine.


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