More Real Estate Agent Conflicts of Interest November 9, 2006Posted by federalist in Real Estate, Special Interests.
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.