REpiphany: Keep Calm & insist on a REAL buyer agent in 2014

Opposing Teams

This morning, Boston.com’s real estate blog is asking whether 2014 will bring the “Return of the crazy buyer?”  It’s a complex discussion, but beyond behavioral economics and predictable irrationality are legal responsibilities to protect individuals and calm the housing market overall. Today, in honor of the Three Kings Day, we’ll ask three questions hoping that homebuyers and real estate regulators have a “real estate Epiphany” before repeating mistakes of 2013 and the last real estate boom / bust cycle:

QUESTION #1:  What if buyer agents really acted as buyer advocates, instead of counterfeit buyer agents (aka designated buyer agents)? Would that reduce the level of “craziness” in the market?

If the buyer agent’s legal responsibility is to get the best price and terms for their buyer clients, what if they could be sued for the equivalent of malpractice if that buyer is upside down on their mortgage within 5 years?

Ridiculous idea?  Read this Flashback from January 2008 and then consider this angle:

QUESTION #2:  If tax payers are guaranteeing 90% of mortgages, should we insist that offers by “crazy buyers” be approved by a financial advisor / buyer agent — without any conflict of interest — to PROTECT OUR collective investment against another tax payer funded bailout? 

During the last boom, research revealed the impact of conflicts of interest in real estate and here’s what they found:

“Cornell researchers found that listing agents *** INCREASED asking prices by 10 percent “when an internal buyer with a high willingness-to-pay is available,” *** and generated sales prices 5 percent higher on transactions involving in-house sales.”

Significantly, that was BEFORE nearly half of sales were all cash transactions and international money was bloating bidding wars.

It sounds too simplistic to say, “Keep calm and use a buyer agent (without a conflict of interest),” but seriously, how do regulators protect tax payers when well-intended, ordinary homebuyers are competing against crazy buyers advised by agents a legal responsibility to get the highest price for the seller?

Fellow real estate consumer advocates, correct me if I am wrong, but wasn’t 2013 the first sellers’ market since agency laws in MA were rewritten to create designated agency — a hypocritical way to paper over conflicts of interest?  Regulators, investigative reporters, and class action attorneys, is it time to revisit the impact designated agents are having on prices?

BONUS QUESTION #3:  My question is what legal recourse do buyers—and TAX PAYERS in general—have against designated agents who helped create overvalued housing markets that we are paying BILLIONS to bail out? If you scoff at that notion, read this blog post about the “so-called buyer agent” who advised their client to “bid $750,000” …on a house listed at $699,900. It later sold for $70,000 less!

Taxpayers beware: Dual agents & designated agents expose all of us to risk

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Footnote on Question #2:  Wait, isn’t that one of the by-products of an independent bank appraisal?

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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!

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