real estate investing

Today’s Real Estate Market Requires Extra Vigilance

The market is hot, but don’t get so excited that you go into a deal with blinders on. In particular, you should realize that your real estate broker may have a different agenda than yours.

“My 80-year-old father is selling and flipping properties like crazy, working with a real estate broker I have very bad feelings about. Do you have some suggestions of what I can do to help minimize the chances of Dad being taken advantage of? Thanks, Jeff.”

Hottest Real Estate Market Since before the Great Recession

I ran Jeff’s question by Walnut Creek, Calif.-based attorney and author Cliff Horner, whose practice concentrates on real estate litigation. As an expert in the obligations that real estate brokers have to their clients, he conducts continuing education seminars for them across the country.

“This is the hottest real estate market since just before the Great Recession,” he says, “and sometimes invites poor behavior by real estate brokers who aren’t looking out for the best interests of their clients.”

He listed several ways Jeff’s father can virtually guarantee winding up with the short end of the stick:                                       

1. Think that the broker has the same goals as you do.

Consequences: You may allow yourself to be forced to sell at a price you feel is below market or buy at a price higher than you believe the market demands.

There are inherent conflicts of interest in real estate transactions.  The broker always has different goals than the seller or buyer, because of the way they are compensated. Brokers only get paid if the sale closes. If the sale tanks, the broker gets paid $0 for his/her time spent, so the broker very much wants the sale to close, even if that might not be in the best interest of his/her client.

For example, one way those conflicts of interest can manifest themselves is that a buyer’s broker may downplay problems with the property to get a deal done.

For sellers, those conflicts of interest look a little different. The seller may think the property is worth more than the broker, who wants a quick sale and would be happier to sell under market in order to get paid immediately while doing little work.  This is why sellers need different “broker opinions of value.” A broker opinion of value (BOV) is a very rough appraisal of the value of the property provided to a prospective seller by a broker, and is often provided before the seller chooses which broker to represent them in the sale process. Note that brokers will NEVER call a BOV an “appraisal” because that is a very specific term. Appraisals are only allowed to be provided by certified and licensed appraisers and often cost considerable amounts of money and time to obtain, whereas brokers will typically and quickly provide BOVs to attempt to get the listing. Some brokers will inflate their BOV hoping to be selected as the seller’s broker for the sale, because the brokers know that the seller often chooses the broker who gives them the highest BOV (even though that highest BOV may be entirely unrealistic).

The bottom line for both buyers and sellers: Never assume that a broker wants to maximize value for you. They do not; they’d rather make slightly less money for very little work. 

2. Have no qualms about letting your real estate agent represent both sides of the transaction in a dual agency.

Consequences: Now they are being paid double if you sell to their buyer. Their commission doubles. They are going to push you to sell to that buyer. This is legal, however not recommended in general.  If you are going to do it, make sure you are getting a good price.

3. Rely solely on the broker to provide you, as the buyer, with all analyses of potential defects with property. Never hire an expert in that field.

Consequences: That crack you saw in the living room that the broker said, “That’s nothing. We can just plaster it over,” would have revealed a cracked foundation that will cost $150,000 to fix if you hired a real expert. But now you own it!

4. Fail to realize that the real estate sales contract form used in your state was most likely developed by brokers and is biased against both buyers and sellers.

Consequences: When things go south and you believe it is the broker’s fault, the contract protects only the broker. These forms typically advise you to hire every expert possible, but most brokers will say, “You don’t need to. I’ve inspected the home and reviewed the disclosures. It is in great shape.”

A good broker will look at the house, the seller’s written disclosures, and recommend that the buyer actually hire an expert or experts to look at any of the defects that have come up, and not just the pest inspection report!

Don’t ever trust home inspection reports, because they miss things all the time. They may note something and say, “This requires further inspection.”  But brokers almost never suggest that you obtain that inspection because they want the deal to close and not be bothered by a “little” problem that could cost you an arm and a leg later on. And be aware that inspectors also expressly limit their liability in the contract (which is written by the Home Inspection Association) to the amount of the inspection fee (typically around $750). Foundation and water intrusion issues can typically cost tens of thousands or even more than $100,000 to repair.

There are numerous types of other/additional expert inspectors you may want to consider consulting before striking a deal: geotechnical engineers, civil engineers, architects, zoning experts, surveyors, plumbers, electricians, roofing experts, asbestos and lead based paint inspectors, foundation/structural inspectors, sewer/septic inspectors, etc.

5. Just go ahead and agree to the arbitration clause.

Consequences: The typical sales contract does not require the broker to be in the arbitration!  So, the buyer says, “The broker never told me that,” and the seller says, “I told him that.” It becomes a “he said she said.” As the broker did not sign the arbitration clause — and you can only arbitrate with someone who has signed the arbitration clause portion of that contract — the buyer and seller fight only with each other in arbitration.

Do not sign that arbitration clause unless the broker agrees to also be in an arbitration with you.

6. Don’t document problems and fail to get things in writing.

Consequences: This allows things to be denied later. It is critical to confirm in writing things you are told by your broker and to keep copies. For example, after a meeting, it is a good idea to send a confirming email for the record to show what was discussed. Something like, “Thank you for coming out today and telling me the roof is old and leaks, but should last another 10 years at least.”

Horner concluded our interview with this observation:

“Real estate salespeople are only viewed slightly below attorneys and used car salesmen in the ways juries hate and distrust them, but buyers and sellers should still have good documentation to back up their claims against the broker.”

About the Author

H. Dennis Beaver, Esq.

Attorney at Law, Author of "You and the Law"

After attending Loyola University School of Law, H. Dennis Beaver joined California's Kern County District Attorney's Office, where he established a Consumer Fraud section. He is in the general practice of law and writes a syndicated newspaper column, "You and the Law." Through his column he offers readers in need of down-to-earth advice his help free of charge. "I know it sounds corny, but I just love to be able to use my education and experience to help, simply to help. When a reader contacts me, it is a gift." 

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