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

Sameoffice1
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.’ “

Represent_3
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.

Yourfanniemaybenext_2
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.

Related Articles

DRAFT: April Fool’s Day 2008

Time to begin a discussion about systemmic flaws and conflicts of interest in the current real estate transaction, and cost of blind bidding wars, not just to individual buyers but to society. 

If attorney general office m

Two years ago: 

Is designated agency an April Fool’s Day joke?

http://realestatecafe.blogs.com/real_estate_cafe/2006/04/is_designated_a.html

RealEstateCafe

August 16, 2007 02:15 PM

What do real estate agents think about "bad brokers?"

http://tinyurl.com/2ryrdd

Speaking as a buyer agent, I hope it is just a matter of time before
the press begins asking if questionable real estate brokerage practices
contributed to the overvaluation of housing markets and unfolding
mortgage meltdown.

Here’s an example of another kind of "bad broker" from our blog post
entitled, Double Bubble: How counterfeit buyer agents inflated the
housing bubble:

"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?"

Full blog post online at:
http://tinyurl.com/yp8ocw

Proof of concept: Managed competition:  Auto insurance

Response to WBUR/NPR: American housing & finance: What went wrong & how to fix it

WBUR / NPR OnPointRadio:  Banks and Housing in Crisis
American housing and finance. What went wrong, and how to fix it.

You can join the conversation. What new rules should be in place? Should we make it more difficult to buy a home? Should we stop banks from playing with mortgage securities? Should we put up big firewalls on Wall Street to head off future disasters? Tell us what you think.

MY COMMENT TO WBUR BLOG, yours are welcome as well:

"Speed bumps" to protect the housing market from overheating? That’s the role of a buyer agent in individual real estate transactions. Unfortunately, over the past 15 years, the real estate lobby pushed state legislatures nationwide to remove speed bumps by legalizing conflicts of interest inherent in "designated agency."

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

From my day-to-day experience as a buyer agent in Greater Boston, I know there have been countless "bidding wars" over the past decade. Conflicts of interest and manipulative business practices made those bidding wars worse. Now the cost is being passed on to society as this case study demonstrates:

"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 congestion, 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."

This case study is an example of what’s wrong with dual agency / designated agency, and why I believe designated agency laws should be repealed and "blind" bidding wars should be managed with regulatory "speed bumps."

So, if Congress, policy makers, and consumers are asking what factors contributed to the overvaluation of housing markets, shouldn’t dual agency and blind bidding wars be included in that investigation? My hope is that others will agree that it’s time to expose systemic flaws and conflicts of interest in the residential brokerage practices, and the cost of blind bidding wars, not just to individual buyers but to tax payers.

This three minute audio post proposes four regulatory reforms to protect consumers — buyers, sellers, and tax payers — in the future. Please listen, comment, and / or join us for a TweetUp in Boston to listen to the rebroadcast of this program, 7-8pm in Boston.

AUDIO BLOG POST: What regulatory reforms are needed to protect real estate consumers?

Thank you WBUR for your continued coverage of this subject!

Double Bubble: How counterfeit buyer agents inflated the housing bubble

Doublebubble1_2
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?

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