Conflict
of interest in real estate is a well-known tradition, but its discussion
is taboo because the solution is not favored by the real estate
industry. It’s like speeding beyond the speed limit: you know you’re not
supposed to do it but you do it anyway, because you don’t expect to get
caught. Some people even have it perfected to an art, they have a
system, and even if they get caught they know how to get out of it.
What is
Conflict of Interest (COI)? Anytime someone, particularly a professional
in a position of trust, is gaining something at the expense of the
client, without the client’s knowledge, is a COI. Anytime a real estate
agent/broker is gaining something unbeknownst to the client, and
particularly when making more money at the expense of the client, it is
a COI.
With
unprecedented high home prices, overall shortage of market-priced
inventory and a substantial increase in the number of new agents in the
marketplace, the competition in real estate today is fierce. As a
result, more and more agents/brokers are pushing the envelope of ethics
and compromising their fiduciary duties towards their clients in order
to increase their profits—at the expense of sellers. COI in real estate
is the basis of the recent lawsuit filed by the U.S. Department of
Justice against the National Association of Realtors®.
The most
common and flagrant form of COI in real estate takes place during “dual
agency,” when the same company/brokerage represents both the seller and
buyer, even when different agents are involved, and typically earns a
“double commission,” or does not share the commission with another
broker. The critical element here is the additional compensation. Some
might want to conclude that maybe “dual agency” should be eliminated?
Not necessarily; dual agency can be actually very good for the consumer
because it puts additional burdens of disclosure and accountability on
the listing agent/company. As long as the listing agent/company is not
making more money for also representing the buyer, dual agency is
absolutely safe and legal. So the culprit, as usual, is money; the
additional commission that can be potentially reaped by violating
fiduciary duties toward a client.
In real
estate, violations of fiduciary duties and COI can generate high profits
for the offending real estate agent/broker — usually at the expense of
the seller. Of course, there are many honest real estate agents, just as
there are many drivers who never exceed the speed limit. But how can the
consumer tell who’s who and which one is which? If an agent does not
have any violations with the Department of Real Estate, can we assume
that he or she is safe? If a driver has not received a speeding ticket,
can we assume that he or she is a safe driver? Of course not; it only
means that he or she has not been caught yet. For a detective trying to
solve a murder, motivation leads him to suspects and ultimately the
guilty party.
How does
COI in real estate occur? Traditional real estate transactions create 2
conflicts of interest: one between the listing agent/company and the
seller, and another between the listing agent/company and all other
agents/companies. Both can be very costly to the seller and both can
easily be eliminated.
1. COI
with sellers. When a seller hires a listing agent/company to sell his
property, the seller wants the agent/company to find him the best buyer
that will net the seller the most amount of money, but the listing
agent’s/company’s incentive is to find the best buyer that will net the
listing agent/company the most amount of money by acting as “dual agent”
or representing both the seller and buyer on the same property.
Obviously the goal for the listing agent/company is to find a buyer
himself or herself, any buyer, so they can earn a “double commission,”
or keep the entire commission to themselves, instead of sharing it with
another agent/company. The best buyer for the seller may be willing to
pay more and offer better terms if the listing agent were to encourage
it. Some listing agents “hide” other offers or downplays its strengths
and exaggerates potential weaknesses, while accentuating and
exaggerating the virtues of the offer that will earn them a “double
commission.” Obviously, this may cost the seller dearly.
2. COI
with other agents/companies. The traditional real estate model set up of
independent contractors, who are paid on commission, creates another
natural conflict between the listing broker and all other brokers who
might have buyers for that property; very similar to the example given
above. The listing agent/broker who has insider information on all
details of the property and the seller, is competing with other agents,
both within and outside his or her company, for the commissions reserved
for the buyer’s agent and broker. The listing agent and broker would
rather keep all the commission within the company, instead of sharing it
with outside agents/brokers. Outside Buyer agents/brokers are
effectively competing with the listing agents/brokers that have insider
information. The listing agent/broker sees all the offers from the
agents he is competing with and can influence and control the outcome
for his or his company’s benefit. When this position of power is
exploited for self-gain at the expense of the seller, it is a COI and a
violation of the agent’s fiduciary duties toward his client. Obviously,
this too may cost a seller dearly.
Power
and money will always make people do things they should not do. The only
way not to succumb to the temptation, the only way to eliminate the most
common and flagrant COI in real estate is to remove the temptation
itself, completely, by never collecting a buyer-agent commission on dual
agency transactions, when the same company represents both seller and
buyer.
The most
egregious COI? In order to secure good listings, which are currently
scarce in Southern California, some real estate agents offer a
“discounted” commission to represent the seller, and a normal/higher
commission for the representation of the buyer. But, what they do not
tell the seller is that they will do anything and everything in their
power, ethical and/or unethical, to earn the additional commissions
reserved for the buyer’s agent/company. The only person truly
represented here is the agent, surely not the seller. Obviously, this
too may cost a seller dearly.
Glendale-based Right Home®, in business over seven years, has
published a free booklet entitled “How to avoid the costly trap of
conflict of interest in real estate.” Right Home® boasts that
its industry-unique structure of operation utilizing salaried agents and
many other unique features that benefit the consumer, is designed to
eliminate conflicts of interest not only with clients but with other
independent practitioners as well. It calls itself “the consumer’s
advocate.” “We are getting as many requests for the booklet from
consumers as we are from real estate agents and law firms,” says Paul
Yalnezian, president of Right Home®. “Even the district
attorney’s office requested several copies, because there is nothing on
the topic elsewhere and it is like the industry’s skeleton in the
closet.” For your copy of the booklet, call 818-240-7840 or visit
www.RightHome.com. Ask any agent or broker about conflict of interest
and you are likely to get a glass-eyed look… it is the same kind of look
one would get if we asked a driver “do you ever drive faster than the
speed limit?”
Why does
this happen so frequently? Why don’t the “good” agents tell on the “bad”
agents? It may be self-serving, but they will need each other on other
future transactions, and besides, they don’t want to be perceived as a
snitch within the professional community. Moreover, how many of us
report speeding violations to the highway patrol? Is it because we don’t
care about the safety of other drivers or is it because we don’t want
others snitching on us when we are speeding? Is it maybe because under
certain circumstances we might be speeding one day too, even though
we’re being righteous now? It would be great to have a car that never
exceeds the speed limit, just as it would be wonderful to have a real
estate company where the agents simply cannot violate their fiduciary
duties. This would be a great solution to fix the real estate industry
but the big players and large franchises won’t approve of it because it
would reduce their profits.
As a
result, today the real estate consumer is entrapped and can’t do
anything about it. It is the way it is and laws and regulations won’t be
changing it any time soon, because the industry is self-regulated and
there are no incentives to change the existing model.
But why
would Right Home® develop a business model that would cut its
profit in half when it represents both seller and buyer on a
transaction? What’s the hidden motive? It sounds too idealistic for a
company that has investors expecting a profit.
“Our
goal was to create the real estate company of the future that could
grow, the kind of company we would want to go to if we wanted to sell
our homes one day,” says Yalnezian. “The Realtor® Code of
Ethics is one of the most wonderful and inspiring mission statements of
any profession,” he continues, “but how many Realtors® take
that self-imposed duty seriously? How many agents have read it, believe
in it, let alone practice it? So how can a seller know if his or her
agent/company is ethical and honest and will not be tempted by the
additional profits? Is their word enough? How are sellers assured that
they will not be cheated? Some might say, ‘that’s business! Everyone
else is doing it!’ Or, ‘everyone else would do it if they were in my
shoes!’
“Those
were some of the questions that we asked when we were laying the
foundation of Right Home®. Real estate is a self-policing
industry and it would be naïve to expect the industry to adopt anything
new that will reduce profits for the benefit of the consumer. We believe
our consumer-friendly approach has growth potential, particularly since
our commissions are also extremely low by industry standards. But
righteousness, ethics and integrity also have a high price tag.
As a
result of its unique structure of operation, organizational efficiencies
and economies of scale, an innovative business model like Right Home®
can offer more for less by bundling services, eliminating double
commissions and passing on the benefits of disintermediation back to the
consumer. Will traditional agents and brokers rise to the challenge and
do what they know is a better way of doing business? At least one
company is betting that protecting the interests of the consumers is not
only the right thing to do but that it can be profitable too.
