Thursday, April 05, 2007

Schenanigans

by Osman Parvez
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Ah, Springtime. Inventory levels are rising, sales volume is picking up, and the Realty Unique Team is busy working with clients and scheduling back to back showings. In addition to the usual signs, you also know it's Spring when the schenanigans start picking up.

Yesterday we saw a new low. To protect the less than innocent, I'll withhold names.

A certain home popped up on the market this past Monday afternoon. The system we set-up worked. Our automated listing alerts notified our clients who immediately called us and expressed strong interest in the newly listed home. We called the listing agent's office and scheduled an appointment to see the property but the showing desk told us it could not be seen by anyone until Wednesday. So we scheduled the earliest possible appointment - 8:30AM, Wednesday morning.

Arriving at the home, no lock-box was found on the front door but the owner was in the house. She informed us that she had received an offer on Tuesday and had accepted it. The buyers had come over to see the property on Tuesday night, despite the information we received from the listing agent's office about it not being available until Wednesday.

The evidence of no lock-box and the listing agent's office telling us that it simply couldn't be shown until Wednesday strongly suggested that the offer could only have come from one possible source. The listing agent and his buyers.

Ethics?

Pocket listings are nothing new. Some might argue they have certain advantages, although I wouldn't. Unauthorized pocket listings, where new listings are first shown to the listing agent's buyers without the permission of the seller beg the question of whose interests are being served. Would additional showings held over a week or two have resulted in a stronger offer with better qualified buyers? I know our clients are ready to pull the trigger and yes, they're very well qualified. They've been shopping for several months and might have written an offer on this one. Was the home even properly priced to begin with?

Although we won't ever know what really happened, the experience left our buyers "thoroughly disappointed." And I don't blame them. I'm disappointed and frustrated too. And I'm also convinced that the seller was taken advantage of (by her listing agent).

The take-home lesson is that if you're listing your home, beware of actions that seem too good to be true. In today's market, if you get an offer within a day of listing your home, have had only one showing, and YOUR agent is also representing the buyers... be very careful. You could be dealing with an unethical agent. You've also probably under priced your home, leaving money on the table.

Remember, there's nothing wrong with negotiating with buyers for more time. You probably should also set up your listing so that offers will only be reviewed after the home has been on the market for a week or two. Ultimately, to get the best deal, you should want your home to be shown to a number of qualified buyers before accepting an offer.

Image: guano


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14 comments:

  1. I will never get into a dual-transaction. Ever, ever, ever. In fact, before we chose our realtor the first time, I looked at all his listings to make sure there weren't any I was even slightly interested in. I want to be sure my agent is representing only my interests. Call it selfish but there's a lot of money on the line and I suffer from inherent distrust disorder. Our next door neighbor got into that and as it turns out, the seller sold the house to his best friend (I found this out later, at the new owner's halloween party.) Hard to imagine anyone who could be totally neutral in that position and it's a shame the really nice people who sold the house probably got screwed.

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  2. I want to be sure my agent is representing only my interests.

    How is that possible with a buyer's agent? The buyer's agent is financially incentivized to get the highest price possible.

    And since most buyers would prefer low prices, the buyer's agent is automatically on the other side of the table when it comes to finances.

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  3. Every business relationship is structured to benefit both parties. Would lawyers represent clients if they weren't being compensated? Would health care professionals take care of patients if they weren't earning enough to take care of themselves? Would surgeons devote half their lives toward education if there wasn't a substantial monetary reward?

    The point is that if you've chosen to work with an agent and you compare a buyer’s agent with a listing agent, in a buyer’s agent you're much more likely to get someone who works in your interest and isn't conflicted with an earlier loyalty and fiduciary responsibility to the seller.

    As for incentive - if you're serious about buying you should do your homework and determine an acceptable price range before even talking to an agent. Once you're in the right price range, a buyer’s agent is not going to push for a higher price in negotiation only for the additional commission.

    Here's the math. Let's say you're buying a $500K house. If the house is priced right, it will sell for typically 2-3% discount from asking price. You're suggesting that your buyer’s agent won't negotiate properly on your behalf and instead guide you to a higher price because of the additional commission. So let's say she negotiates for only a 1% discount but you think you should have gotten a 3% discount from asking. That means you bought the house for $495K but you think you should have paid $485K. The net difference for your agent (if the house has the typical 2.8% buyer’s agent commission in our area) is $280.

    With some clients it takes months of work to get to the point of writing an offer. Even with the most ready/able client, it usually takes a couple of weeks. Do you really think an agent is going to jeopardize the deal for $280?

    Ok, let's say you're *still* worried that your agent would compromise you on negotiation for that $280. Go ahead and structure a capped commission based on the price range and not on the final buying price of the home.

    Look, there's nothing wrong with looking at how your agent gets paid and checking so that you're sure you get the most value from your relationship. But if you had any idea of how hard we work for our clients... well, you'd see that the idea of an additional $280 swaying our ethics is a little ridiculous.

    Here's an example;

    A few months ago I started something with clients called "work sessions." The idea was to slow down the rush to see listings and instead spend some time thinking through the purchase or sale decision. I bring my laptop, we use the realtor only tools plus a lot more to help a client think through the decision. Thus far, work sessions have been very well received because we accomplish what would take weeks doing it the old fashioned way. I initially thought work sessions would last 30 minutes. The typical session is now 3-4 hours. Some clients have multiple sessions.

    A few months ago, I built a robust buy vs. rent financial model with 25+ variables and started walking people through the math. We're probably the only agents out there who will tell clients that they should probably rent after spending four hours with them during an unpaid work session.

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  4. Nice rebuttal, Osman.

    Yes, the fact is that very few people work for free, including real estate agents. However, I do believe there ARE those agents who will work FOR you. Osman sounds like one of them (as was my agent, Tony Martinez.) Not everyone out there is in it to scam people.

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  5. You spent an awful lot of words explaining that the conflict-of-interest is ok in this case:

    Every business relationship is structured to benefit both parties.

    Absolutely not. There are many many predatory biz relationships. Witness the CO foreclosure debacle in progress, if nothing else. In fact, your own "Schenanigans" post hinted that the realtors took advantage of the sellers.

    Would lawyers represent clients if they weren't being compensated?

    Would you let your lawyer be compensated by how much your opponent wins in a lawsuit?

    FYI: any lawyer agreeing to such a deal would be disbarred. But buyer's agents are compensated exactly in this manner!

    The net difference for your agent ... is $280.

    So why don't all buyer's agents move to flat fee if the difference is so little? And the answer is that all professionals choose the avenue that nets them the largest gain.

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  6. Anon,

    If you're here in the Boulder/Denver region, I'm happy to represent you a flat fee basis. Frankly, if I thought most buyers would be willing to pay up front for services I would love to move to that model.

    It's the same reason very few attorneys charge up front for services. They require a retainer and then bill off the retainer. OR, you can pay up front with pre-paid legal services as well which from what I can tell isn't an entirely different concept than a retainer. But let's stop here before I digress further into a subject I am not an expert on.

    In any case, I disagree with you heartily on one item. If a business relationship doesn't work for both parties, then it doesn't work, period.

    Yes, there are those out there looking for suckers and ready to take advantage of them. But to slander an entire profession on the basis of your concern with financial incentives is undue. It's not a difficult matter to structure a relationship around your issues with incentives.

    Don't forget to look me up if you want an agent on a flat fee basis.

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  7. Welcome to business 101, kiddos.

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  8. Oh yes - the pillars of the professional fields: medicine, law, architecture, and REAL ESTATE? Not so fast Osman - try another analogy my friend.

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  9. It doesn't matter what the profession is, the principle is the same. An exchange of value is required in order for the relationship to be long term and sustainable.

    While we're delving into economic theory, I'd even say the benefits have to be transparent and recognized by all involved. I would even argue that it applies to all relationships.

    And therein is the current problem with real estate. There's a widespread perception, in many cases deserved, that agents are paid without creating value. This is one of the reasons why finding ways to add value to the relationship (like my "work sessions") is our approach. It's also how I believe the industry should right itself in the face of a changing paradigm.

    In any case... thanks for commenting.

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  10. So here's a proposal: Base your commission with how much you negotiate DOWN the price. Combined that with (an enforcable) contract that you have no connection with the sellers. That would be an actual alignment of your interest with the buyer.

    Flat-fee is incentivizing you to have no skin off your nose about the negotiation.

    FYI, the equivalent of the above statement-of-no-conflict is regularly used in the legal profession. Large law houses will ensure that none of the parters has ever dealt with an opposing party, or will disclose the representation.

    Also FYI: your description of payment to law firms is not universal. The ones that demand payment up front are often worried about nonpayment.

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  11. No problem with that arrangement, Anon. Like I wrote before, look me up when you're ready to buy or sell a house and I'm happy to set-up the relationship along those lines. If you're worried about being compromised on negotiation, restructuring compensation with your agent to keep interests aligned is a good idea.

    As for the legal profession. I didn't mean to imply that lawyers only work on a prepaid/retainer basis. Contingency, billable hours, and certainly other common structures exist. And just as with real estate, they all have their pros/cons.

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  12. No problem with that arrangement, Anon.

    Then you're my man why I buy.
    See you once REO sales shoot up.

    And if I find someone who's even near buying, I'll point them your way with that info. It may be a while though, I don't know too many that think Boulder prices are low at the moment. (You cover nearby towns too, no?)

    Personally, I think you deserve a ton of buyers biz for correct alignment of financial interest. It will be a incredible edge.

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  13. Then you're my man why I buy.

    Ug. Make that:
    Then you're my man when I buy.

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