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:
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
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
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.’ "
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?
many of those deals involved brokers who are required to carry
professional liability insurance, presenting a tempting target for
‘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
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.
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.