I wrote an offer for a young couple who wished to purchase the home they were renting. The buyer and seller had already discussed a price of $400,000 before agents got involved. (The seller thought it wise that both parties be represented, which is when I came into the picture along with an agent for the seller.) I comp’d the home and the area: $400,000 was a stretch. But the buyers liked the property, wanted an extra large master bedroom (which this home had) and wanted to avoid the cost and hassle of moving. Fair enough; I’ve fulfilled my responsibility of providing accurate and professional counsel regarding value and the buyers have made an informed and justifiable decision.
We wrote the offer for $400,000 with 3% seller concessions for the repairs that the seller had already acknowledged. The listing agent scoffed. It seems she had advised her client the property, with a little cosmetic improvement, would sell for the mid $400s. Brilliant. Real Estate is by no means rocket science, but the ability to properly value a property and understand comparables is a skill and not every agent is adept. I sent along a 3 page analysis of comparables and pricing to buttress our offer. Seller came back at $410,000 with $10,000 in concessions. Once again I advised my clients that, in my professional opinion, the price was greater than the value, but the mitigating factors were enough for them to justify accepting the contract. Which they did. I agreed to a 2% commission as my work load was less and the listing agent admitted to me that she was working for only 1% as her work load was greatly diminished. And we all lived happily ever after, right? No…
In California, the standard contract calls for the loan contingency to be removed in 17 days. (This bit of paint-by-numbers idiocy came about during the hey-day of real estate when anyone with a pulse could get a loan. In the current economic market, it’s only purpose is to expose which agents are inexperienced and clueless enough to put their clients at risk.) The buyers needed roughly three weeks for their funds to fully season so we countered on that point while accepting the net price of $400,000. Seller (relying, I assume, on her agent’s advice) declined to extend the loan contingency. My buyers are logical people and chose not to put their earnest money at risk. Offer was dropped and we began a search of near-by homes.
Cut to the present: my clients are closing today on a home in much nicer condition, with a pool and a quieter street. They paid $410,000 and their financing worked out just fine. The home they were living in and wanted to buy? The seller took the listing agent’s advice and dropped a few thousand dollars into cosmetic improvements, then listed the place at $450,000. It’s been over six weeks and here’s a snap shot of the MLS listing as of yesterday:
(The buyer to whom this agent refers in the Remarks section made an offer, did the inspection, saw the problems my client was already intimately aware of and had accepted… and walked away.)
So, let’s tally the damage in relation to the offer my clients made: I’ll estimate $2000 out of pocket in updates, selling agent commission of 2.5% is $2000 more than I accepted, estimated listing agent commission of 2% (and 2.5% is more likely) means another $4000 cost to the seller, and of course the asking price is now lower than our actual offer… with no buyer in hand. Let’s be generous and assume an eventual buyer will pay only slightly less than list price (but still more than my original valuation) on a property that’s been Active for twice as long as the average, accurately priced property in this neighborhood. Final price of $390,000 is a final hit to the seller of $10,000. We won’t count “cost of carry” or the “opportunity cost” caused by delaying whatever plans the owner had. Total thus far: $18,000… and the house is still on the market. I’ll reiterate the question from this article’s title:
At what point does this agent stop being simply an incredibly incompetent agent and start being a criminal?
Tom Johnson says:
Sean: Nothing criminal here, but it may be actionable. A hungry RE Attorney will pick this up and run with it on contingency to run the limits of the listing broker’s E&O policy in settlement.
I wonder if there is a business model in here somewhere. RE agent w/ MLS access trolls for bust outs, bird dogs cases for a hungry attorney and earns expert witness fees from said hungry attorney.
September 15, 2010 — 7:55 am
Al Lorenz says:
Sean, not until incompetence becomes a crime. If that was the case, the justice department wouldn’t have to look beyond their doors to keep themselves busy for years.
September 15, 2010 — 11:09 am
Joe Hayden says:
I’m leaning towards incompetence, arrogance, and ignorance in this case, though it is hard to judge a complex transaction just from a blog post.
September 15, 2010 — 1:17 pm
Dan Connolly says:
Pretty good case study for proving the real benefit of dual agency. Had you been on both sides the seller would have benefited greatly.
September 15, 2010 — 4:06 pm
Sean Purcell says:
Tom – Geeze… don’t give ’em any ideas!
Al & Joe – Incompetence is putting it politely. Agency requires that the client’s financial interest comes first: might be argued that the L/A’s advice was in part motivated by increased commission and cost the client money. Not easily proven though.
Dan – Poor logic. Dual agency – by definition – means one party is represented and one only “thinks” they’re being represented. Fraud is not the answer to incompetence. If I had acted as some type of “facilitator” you might argue the seller would have been better off but neither party would have been represented. In this case, the buyer came out way ahead thanks to representation.
The answer, of course, is exactly what happened: only when bad agency leads to real and measureable losses will the market respond and drive out agents who are incompetent… even if not criminal.
September 15, 2010 — 5:01 pm
Jim Klein says:
> Dual agency – by definition – means one party is represented and one only “thinks” they’re being represented.
Why is this? I get all the negatives about dual agency, but I just don’t understand why y’all think it’s definitionally improper. There seems to be an underlying premise that an agent’s actual motivation is always maximizing commissions for himself and so therefore at least one of the parties must suffer. But of course in a given transaction, that’s not necessarily the only standard of the agent, just as it isn’t in nearly any business transaction of any type.
Why is it by definition impossible that a person can legitimately represent both sides of a given transaction in order to create a deal that maximizes benefit to both sides? I’ll grant that this would be a rare talent indeed, but I could never understand why so many believe it to be impossible.
Also, in this particular incident, why is Dan wrong? Would not the best deal for both parties have gone through? What would’ve happened?
September 16, 2010 — 5:13 am
Sean Purcell says:
Hi Jim. I appreciate your questions and I’ll try to explain my (and others’) thinking on this. When you say that maximizing commission is not always the standard I agree. I don’t think it’s even mostly the standard. Most good agents I know aren’t focused on the commission much at all. But the underlying premise on why dual agency is definitionally deficient is not that commissin will trump all (though agent commission obviously trumps client interests as far as NAR is concerned), but simply that one cannot aggresively, or even professionally, represent the interests of two opposing parties. It’s like suggesting the same attorney could both prosecute and defend. Sure, things might be smoother in some cases, but there’s no way to absolutely hold both opposing clients interests at the foremost.
The skill you’re referring to is the skill to facilitate. Yes, one could facilitate a transaction and try to keep things as fair as possible, but then fair is not what people are expecting when they hire a fiduciary. They are expecting (or should be expecting) a professional to represent their interests. That’s not to say there’s anything wrong with two parties deciding they want to hire a facilitator to dot the i’s and cross the t’s, but don’t expect to get paid like a fiduciary.
I’m not sure why agents have this peculiar desire to eliminate risk and eliminate representative advice & counsel and strive to be functionaries. Functionaries get paid a hell of a lot less than agents. If agents want to help both sides process a fair deal they should just call themselves Processors and charge the few hundred dollars a Processor charges.
Finally, this specific transaction is a great example of why dual agency doesn’t work. If I had represented the seller AND the buyer, would I have recommended that the seller agree to the buyer’s request that the loan contingency be extended? Is that in the seller’s interest? It made the buyer look like they weren’t qualified. The list agent was right to be wary of that issue. My problem with this agent is her contemptable pricing advice, not her genuine wariness of financing questions. Or maybe I would have advised the buyers to go ahead and risk their earnest money on a 17 day contingency, thus smoothing the transaction… unless of course the buyer does not get the loan and loses a few thousand dollars. Never mind the pricing and the COE choices and all the myriad other parts of a contract; just look at the one issue of the loan contingency and tell me how a dual agent could possibly hold each clients’ financial interests above all else.
September 16, 2010 — 4:37 pm
Jim Klein says:
Thanks, Sean. Personally I don’t view a business deal as adversarial in the same way the courts are…”mutually beneficial” is the key idea here. On the specific question of the contingency, I see your point but I’m not sure why a straightforward explanation wouldn’t suffice.
Maybe it’s just me, but I don’t view the role of an fiduciary agent quite the same as, say, an attorney. Maybe I make too fine a distinction, but to me the fiduciary must represent his client’s best interests while the attorney is actually (for all practical purposes) /being/ the client in the legal setting. [I’m speaking of representation as opposed to counsel.]
I definitely see the problem, and understand why a dual agent can’t be maximally aggressive for both parties. But I don’t think aggressiveness is absolutely necessary, unlike with an attorney in an adversarial situation. Ideally, transactions aren’t adversarial at all, I’d say.
No, I wouldn’t want a dual agent for myself, but I still don’t see it black and white like you guys. I keep thinking of wedding planners, many of whom are a form of dual agent if they get kickbacks (oops, commissions) from the vendors. Obviously their position can work to the detriment of the (ostensive) client, but I don’t think it necessarily must be so. It’s the “definitionally” that I don’t get.
BTW, I didn’t have “fair” in mind at all; these days the very utterance makes me want to vomit! I had “optimally beneficial to both parties” in mind and it strikes me that a dual agent, by virtue of being familiar with both parties, can at least make an honest attempt at making that happen. But I also understand that there are lots of real people standing between theory and practice, and that you have tons more experience with how they really act. That much I get, and so understand your position.
September 16, 2010 — 7:59 pm
Bob Hunter says:
Sean, you seem to indicate Californias 17 day financing requirent as ‘idiocy’ but then say that asking for an extension exposes the buyers as potentially unqualified.
In the scenario you have described I would say it would have been most likley (obvious IMO) in the sellers best interest to extend the financing to a reasonable amount of time.
September 18, 2010 — 8:55 am
Sean Purcell says:
Thanks Bob – yeah, what I’ve said isn’t very consistent but let me clarify. I think having a 17 day loan contingency as part of the boiler plate on a purchase agreement is incredibly irresponsible. It misleads everyone into thinking that 17 days has some meaning when in fact it’s just an arbitrary number. When loans were easy we could get approval in a few days. In the current market, 17 days is often impossible. It made a lot more sense when the loan contingency lasted the length of the escrow. It was the listing agent’s job to evaluate the buyer’s offer and request whatever information was necessary in order to advise the seller on whether or not to remove their home from the market. (But that meant actually knowing what you’re doing and bringing value to the transaction. The various associations would much rather remove as much agent value as possible without affecting commission.)
In this particular case, the listing agent requested and received financial info re the buyers. It showed that they had the assets required (by a hair) but as I explained, the funds needed to season. I agree that there was no reason not to extend the contingency and the seller would have been much better off. Why the list agent counseled otherwise is only conjecture: maybe her wildly inaccurate and incompetent pricing played a part; maybe she had a vested interest in this becoming a “standard” listing… I can’t say. But I can’t fault an agent for being wary of a financial question, even if that question is trumped up by the pre-printed nonsense found on a purchase contract.
September 18, 2010 — 9:20 am