Form 17 — an addendum to the contract? July 3, 2008
As always, this is not legal advice. If you want legal advice, consult an attorney, not a blog.
Is the Form 17 part of the purchase and sale agreement (PSA)? Should it be listed in the “Addendum” paragraph of the PSA? In a word: NO! (At least if you’re the seller — if you’re the buyer, then YES!)
First, some background: Here in Washington, a seller is required to provide a fairly comprehensive Seller Disclosure Statement to any buyer of real property. Our local MLS provides this to sellers as its “Form 17,” so everyone in the biz refers to this legally required disclosure statement as the Form 17. Pursuant to the statue, the Form 17 “is for disclosure only and is not intended to be part of any written agreement between the buyer and the seller,” i.e., it is not supposed to be part of the PSA. On the first page of a PSA, there is a section in which the various addendums to the PSA should be listed so that there is a clear description of the complete contract and its terms.
In practice, many agents (and unrepresented parties) will list the Form 17 along with the various addendums that are typically included in the PSA (e.g., financing contingency, title contingency, inspection coningency, etc.). If you are a seller, this is a significant mistake. Conversely, if you are a buyer, this provides you with some leverage if the seller fails to disclose or misreprsents a defect in the house.
By listing the Form 17 as an addendum to the contract, the parties incorporate the Form 17 into the contract notwithstanding the statutory language. In that event, if the seller fails to disclose or misrepresents a defect, then the seller has arguably breached the contract. This would give rise to a breach of contract claim against the seller, which is an easier claim to prove than a claim of fraud, the typical claim arising out of a seller’s misrepresentation. Moreover, the PSA contains an attorney’s fees clause. Thus, if the buyer were to prevail on the breach of contract claim, he would also be entitled to an award of his fees and costs incurred (which will very likely exceed the cost to repair the undisclosed defect). Fees and costs typically are not available on a fraud claim (although the case below calls that proposition into doubt, a topic of a future post).
A very recent case helps to illustrate this point. Stieneke v. Russi, decided July 1, involved a seller’s failure to disclose a leaking roof. At trial, the court concluded that the Form 17 was part of the contract, even though the buyers signed it four days after mutual acceptance. The trial court reasoned that a seller should not be able to easily avoid liability for the contents of the Form 17. The court found that there was “an understanding” between the parties that the Form 17 was “part of the deal.” Accordingly, the seller was liable for breach of contract.
On appeal, the appellate court reversed the trial court. The appellate court focused on several issues, including the fact that there was no mention of the Form 17 in the PSA itself. Had the PSA referenced the Form 17 in the “Addendums” section, thus specifically including the Form 17 in the terms of the contract, the appellate court would have had a much more difficult time concluding that the Form 17 was not part of the contract.
So, if you’re a seller and you receive an offer showing the Form 17 as an addendum, prudence would dictate that you strike that term and present the counteroffer back to the buyer. There is no reason to include the Form 17 in the contract, and indeed the legislature did not intend for it to be part of the contract as indicated by the statutory language. On the other hand, if you’re a buyer, go ahead and list the Form 17. Why not? It is common practice among agents and there is a good chance the seller will accept this term. In that event, you will have some additional protection to insure that the contents of the Form 17 really do reflect the actual knowledge of the seller. If the Form 17 does not reflect the seller’s actual knowledge, then you will have a good claim against the seller for the costs you incur as a result.
[Footnote: the damages in the Stieneke case, the cost to repair the leaking roof, was $72k, but the attorney's fees and costs were $175k. Clearly, as a buyer it is really, really good to preserve any ability to recover your fees and costs in the event you have a claim against the seller. In a future post, I'll discuss other interesting aspects of this case, including the basis for this award of fees even though there was no breach of contract claim.]
What do Governor Gregoire’s actions mean for local Countrywide employees and short selling homeowners? June 25, 2008
Is Governor Gregoire just a little too late in regards to Countrywide’s lending tactics? Aren’t we merely days away from the Bank of America takeover?
As I drove back to the office today after teaching yet another short sale class, I heard the news on KIRO 710 AM that Governor Gregoire is seeking to pull Countrywide’s lending license because of an investigation that uncovered predatory lending practices aimed at minorities. WA State will fine Countrywide 1 million dollars for discriminatory lending practices and attempt to collect an additional 5 million for back assessments due.
From Governor Gregoire’s website:
DFI is required to examine every home-lender licensed in the state of Washington. The agency conducted its fair lending examination of Countrywide last year. At that time, DFI looked at roughly 600 individual loan files and uncovered evidence that Countrywide engaged in discriminatory lending that targeted Washington’s minority communities. The agency also found significant underreporting of loans during its investigation.
“The allegation that Countrywide preyed on minority borrowers is extremely troubling to me,” Gregoire said. “And I hope to learn eventually just how much this may have contributed to foreclosures in our state. The allegation offers evidence that Countrywide engaged in a pattern to target minority groups and engage in predatory practices.”
“That’s why we intend to bring the full weight of the state on Countrywide to rewrite home loans for minority borrowers who may have been misled into signing predatory mortgages,” the governor noted. “My job is to protect hard-working Washingtonians, and protect them we will.”
This 13 page PDF provides the full statement of charges levied against Countrywide by the Dept of Financial Institutions. Among other things DFI uncovered the following:
Out of a sample of 600 loan files, 50 borrowers in a protected ethnicity were given less favorable loan products than other borrowers in similar circumstances, during the same time period;
Countrywide under-reported loan volume in their annual assessment reports for the years 2002-2007;
Nearly 150 of the 600 loans pulled for review contained innacuracies on the Home Mortgage Disclosure Act data (This is the section at the end of the loan application in which borrowers are required to identify their race and gender.)
When DFI pulled 30 additional loan files, they found that borrowers did not receive their Good Faith Estimate and Truth-In-Lending Act disclosure within 3 days of the date of the application as required under state and federal law.
I could keep going but why pile it on at this point? Read the Statement of Charges here.
A couple of things come to mind. First, I want to know what my friends at Countrywide here in WA State are going to do about this, if anything. What does one “say” to his or her clients with loans in process when news like this hits the airwaves? I would also like to know what happens once C-wide is absorbed by Bank of America? Will BOA be liable to Washington State for the 6 million dollars in fines?
Second, here is a piece of advice for homeowners and Realtors who are trying very hard to negotiate a short sale with Countrywide as the underlying lender. FIND THE HUD I Settlement Statement from the original loan! Look for those egregious high fees and use this to your advantage when negotiating with the loss mitigation department at Countrywide.
This goes for ANY Countrywide homeowner in financial distress, no matter what your ethnicity.
Our New Responsible Mortgage Lending law June 17, 2008
Just when you thought you had seen the most stupid law from our legislature regarding real estate omitting common sense, here comes another! House Bill 2770 aims to make what was a federal offense a state class-B felony. While it is aimed at mortgage brokers, it has wide sweeping implications to real estate agents, buyers, sellers, home inspectors, contractors, and just about anyone else who has even a limited financial interest in a real estate transaction involving a mortgage.
This law provides that a residential mortgage loan may not be made unless a disclosure summary of all material terms is placed on a separate sheet of paper and has been provided by a financial institution to the borrower and that a financial institution may not make or facilitate the origination of a residential mortgage loan that includes a prepayment penalty or that imposes negative amortization under certain circumstances. And here’s the catch-all clincher: The law says that certain acts and omissions by any person in connection with making, brokering, or obtaining a residential mortgage loan are unlawful.
While part of the law attacks important issues like negative amortization and pre-payment penalties, it’s the broad definition regarding the disclosure of material facts relating to a property that causes me the greatest concern.
Example: Buyer purchases a home “subject to inspection”. Buyer does the inspection and discovers that there is some older electrical knob-and-tube wiring, but it does not appear to be an immediate safety issue. Buyer asks for and receives a credit from Seller to partially compensate for the upcoming expense of replacement in a few years.
In this situation agents have written inspection responses with language like. “Seller to credit Buyer $XXXX at closing to be applied to allowable prepaids and closing costs” According to this new law, this is an example of where the reason for the credit must be disclosed or the agent could be charged with a class-B felony.
How this is going to play out in the market place is yet to be determined. At least one mortgage broker I’ve spoken with has said they will not be requiring copies of building inspection reports as standard operating procedure during loan application. However if they see an unexplained credit or price alteration they may make it a loan condition.
We may see a number of situations where repairs are getting done that would have been simple credits at closing before. This is going to make it important for agents to inform their clients of the risks and consequences associated with various situations that can arise.
Just a quick disclaimer: I’m not an attorney and this is not considered legal advice.
Not showing a less-than-3% SOC commission? That’s unethical and illegal June 11, 2008
This is not legal advice. For legal advice, consult an attorney directly, not a blog.
It’s common knowledge (based on those comments, at least) that some buyer’s agents will not show properties with an SOC of less than 3%. Is that a problem? In a word, Yes.
First, the ethics: The term “ethics” in this context refers to the code of conduct by which a professional is expected to perform his or her duties. “Ethics” in this sense usually — but not always — correlates with what a layperson would consider “right” and “wrong.” Generally speaking, “ethics” in the professional sense imposes an obligation to perform a professional duty in a fair and reasonable matter.
Admittedly, I am not up to speed on the rules of ethics that would apply to a real estate agent. Many agents are also Realtors, and I know that they are thus subject to a particular code of ethics. Attorneys are subject by law to the Rules of Professional Conduct, rules of ethics formulated by the State Supreme Court. I am unaware of any similar rules that apply to agents.
With that disclaimer, it certainly seems like this conduct SHOULD be considered unethical. Surely an agent has an ethical duty to diligently work for the client, including the identification and showing of any property that is or may be suitable for the client. From an ethical perspective, I would even argue that this applies to properties with no SOC whatsoever. Admittedly, in that circumstance, the agent has every right to and should discuss this with the client, as the agent need not work for free. Thus, the agent should, either at the initiation of the representation or when the issue arises, discuss with the client whether and how the agent will be compensated if the agent finds a house that does not offer an SOC. The parties may agree that, in that instance, the client does not expect and has no right to receive information from the agent about that property. Regardless, with this conversation, whatever its outcome, the client can knowingly consent to any limited scope of representation, and consent is the key when dealing with an ethical issue.
Now, the legality: This conduct is almost certainly illegal (at least where there is something more than a 0% SOC), but there is very little chance that it will give rise to liability. How is it illegal? RCW 18.86.050 is the relevant statute. It requires a buyer’s agent to “make a good faith and continuous effort to find a property for the buyer,” except that the agent need not “show properties as to which there is no written agreement to pay compensation to the buyer’s agent.” In addition, the agent is relieved of this obligation entirely IF the buyer agrees otherwise in writing after receiving the required “Laws of Agency” pamphlet. So, assuming the property offers a commission in some amount (i.e., greater than zero), I believe the agent has a legal duty to bring that property to the client’s attention.
So why no liability if the agent fails to do so? That turns on general legal principles applicable to wrongful conduct. Where such conduct causes an injury, the wrongdoer is liable for the harm caused. Here, assume an agent fails to show a “dream house” to the client because of a 2% SOC. The client subsequently buys another house for the same price. The client then finds out that he was denied an opportunity to buy his dream house because his agent did not tell him about it. What is the injury? Given that they are the same price, there is no way to quantify the client’s injury. Under those circumstances, it will be difficult to find the agent liable. Note, however, that if the house actually purchased cost MORE than the dream house, the client may be able to recover the difference.
From a practical perspective, too, there is little chance of the agent being held liable. The whole claim turns on what the client did not know. So, in order to even raise the claim, the client has to learn that his agent failed to inform him of his dream house. Needless to say, it is hard to even fathom a situation where the client would learn of this information after the fact.
So, it ends up being one of those unfortunate facts of life where — as of today, given the laws as they exist — there is no real remedy for the injured party. Unethical? Yes. Illegal? Probably? Any way to stop the behavior? Unfortunately, probably not.
Realtors and mortgage brokers are warned that they will be prosecuted for RECEIVING title insurance company payola June 6, 2008
A “Risk Management” Alert bulletin was distributed to real estate brokers in Washington State this week by the Washington Assoc of Realtors in anticipation of yet another new state law, SB 6847 that will go into effect on June 12th. Here is the bulletin:
June 3, 2008
SUBJECT: RISK MANAGEMENT ALERT To Share at This Week’s Office Meetings
THIS WARNING APPLIES TO ALL BROKERS AND LICENSEES, BOTH COMMERCIAL AND RESIDENTIAL, REGARDLESS OF WHETHER BROKER HAS A FINANCIAL INTEREST IN A TITLE COMPANY.
Effective June 12th, Washington Law provides new legal authority for state regulators to take enforcement action against real estate agents and brokers who receive or accept inducements from title insurance companies unless those inducements are authorized by state agency administrative rules. To date, state agency administrative rules have not been adopted and therefore, for the time being, the only safe practice is to decline receipt of any offer of anything of value from any title company, agent or employee.
The law was adopted in response to investigations that disclosed title insurance industry-wide violations of limits on paying inducements. The concept of this law is not new but under this new law, title insurance companies will be prosecuted for paying the inducements AND AGENTS AND BROKERS WILL BE PROSECUTED FOR RECEIVING THE INDUCEMENTS. While residential agents have always been prohibited from receiving anything of value from a title company under RESPA, a federal law, RESPA has not often applied in the context of a commercial transaction. This new state law draws no distinctions between commercial and residential practices and creates a RESPA-like prohibition against ANY agent or broker accepting ANYTHING of value from a title insurance company, agent or employee.
In addition, Brokers/Owners of real estate companies who also have a financial interest in a title company, will be prohibited from paying inducements to their own agents for the referral of business to broker’s title insurance company.
The Washington REALTORS® will be meeting with representatives of the Real Estate Program of the Department of licensing later this week to seek additional clarifications on how the new law will be implemented.
In the meantime, agents and brokers should be aware that “inducements ” to real estate agents from Brokers who have financial interests in a title company may include items such as:
Reducing and/or paying of Desk fees for referring/directing title insurance business
Reducing and/or paying of Advertising for referring/directing title insurance business
Reducing and/or paying for reimbursements or expenses for referring/directing title insurance business
Waiving, reducing and/or directing payment of any other expenses or reimbursement for referring /directing title insurance businessIn addition ALL REAL ESTATE LICENSEES should be aware there are many ways they can be receivers of potential “Things of Value” from title companies. Receipt of any of these items is appropriate if agent pays value for the item but would possibly constitute a violation of the new law if agent receives the item, from a title insurance company or agent, without payment.
Shared advertisements in which agent does not pay a pro portional share of the costs based on the amount of ad space used
Payment, in whole or in part, for clock hours tuition or other related expenses
Title cancellation fees, owing from agent, that remain unpaid
Open house refreshments
Hand Outs that include anything other than the property’s last deed of record, last deed of Trust of record, a plat map and tax information. All other handouts must be purchased by agent.
Farming packages identifying names and addresses of multiple real property owners for use by an agent in soliciting business
Copies of CC&Rs
Comparable sales information
Entertainment
Gifts
Tickets to events or shows
Sponsorship of association, company or agent events
Any of the above that the title insurance company provided for a fee that has not been paid
Will fear of prosecution at the state licensing level motivate real estate agents, real estate brokers, mortgage loan originators and mortgage brokers to stop asking for payola? Clearly we have several thousand licensees in Washington State who have never lived in a world where title reps do not come loaded with a basket full of some kind of drug. Pick your poison from the list above. Accepting marketing subsidies can become addictive. Some title reps are so young that they have never known a world where selling skills were actually used in the title insurance industry.
Now I KNOW we’re going to get a slew of Realtors commenting here who will say “I’ve never asked for, offered or received anything in violation of RESPA.” That’s okay. We know you have to say that on a public blog.
The real question is, what will the title companies do with all the money they’ll be saving? Hmmm. I can think of SEVERAL things.
I predict that this new law will curtail a certain percentage of kickbacks, however, the rest of the kickbacks will move deeper underground. For example, a real estate broker owner giving preferential treatment to a top producing agent for referral of services to companies owned by his or her broker.
From the perspective of a RESPA instructor, I recommend real estate agents and mortgage folks spread your business around. By continuing to send your business to ONLY one title and escrow company, you’re drawing a target on your chest. If I were a state regulator, you’re who I’d audit first. ESPECIALLY if all that title and escrow business is going to a title and escrow company owned by your broker.
For consumers, if your real estate agent or mortgage loan originator is directing your title insurance and escrow business to a specific firm, ask, “can you please tell me what you are receiving in exchange for referring my business to that company?” The answer should be similar to, “great service and low rates.”
Just as the entire mortgage and real estate industries are reeling from the mortgage-brokers-and-Realtors-gone-wild days, the title insurance and escrow firms are also hitting control-alt-delete with the payola. It’s headed back underground, where it use to be, to a more quiet and respectable place, where only the unnamed will go to pay and collect.
Distressed Property Law June 2, 2008
There has been a lot of confusion, anger and fear surrounding the new Distressed Property Law. I’m not going to jump on the bandwagon and do a critical analysis of the law, tearing apart each section. The WA Assoc of Realtors has put their educational seminar online for free here for all of us. Instead of all the ranting and raving taking place on other blogs attacking this law, feel free to pause and re-live these foreclosure rescue scam case studies from 2004, 2005, 2006 and 2007 which may help us better understand the reasons why we have this new law.
At the height of the bubble run up in 2005, there were hundreds of people attending foreclosure auctions, planning on making millions in real estate, usually after attending a get-rich-quick seminar. Even today, the get-rich-quick hucksters are still luring in the same type of person who thinks there’s a magic diet pill that will help you lose those last ten pounds, and who thinks there’s still a way to make six figures with no experience, or in the case of this company, $2,000 per hour.
Readers on this blog and elsewhere have been highly critical of our state lawmakers for being reactionary and passing laws only after they would have done any good. In this case, our legislature has tried to be pro-active and place boundaries around “distressed property transactions.” Yes, the law as passed has some flaws. Yes, there are parts that could be re-drafted for clarity. However, we’re stuck with it until the next legislative session so we might as well learn how to live with it.
This law should have come as no surprise to anyone, especially our state Realtor association, WAR. Governor Gregoire’s task force recommended passage of this legislation and Attorney General Rob McKenna put “foreclosure rescue scam legislation” on his agenda for 2008. Even so, Realtors and real estate agents were caught off guard. They’ve been swept into the definition of being a “distressed home consultant” by way of not being excluded.
The highest risk transaction under the new law is when a homebuyer purchases a distressed home from a distressed homeowner and is allowing the homeowner to rent the home back, and is also offering to share any equity upon a future sale. As of June 12, 2008, taking part in a distressed home transaction such as this will become enormously risky. I recommend that get-rich-quick investors put some of their profits into hiring an attorney to be on retainer and available to you 24/7. Critics of the new law say that this means homeowners who might have otherwise been helped by the “rescue” crowd will now end up going into foreclosure. Critics have miraculously turned themselves into victims and state that there are only a few bad apples, only a few scammers and the rest of them are above-board, honest and honorable yet this website devotes an entire section on exposing a long list of his possible scammer colleagues.
If it is true that the foreclosure rescue angels have floated from the heavens down to the earth and now can be seen wandering the streets of Seattle wearing a baseball cap and a jean jacket with the slogan “I buy homes in foreclosure call me” on the back like the guy who was in front of me at the Sprint store this week, then Realtors should be pro-actively seeking out angel rescuers and bringing them together with homeowners in financial distress. However, I believe the opposite to be true.
Instead, I believe most the rescue guys and gals never met a Realtor they liked nor do they have any intention of coming anywhere near a Realtor, (because they want to keep the commission for themselves, as part of their riches) are in it for the cash, couldn’t give a rip about the homeowner, and are taught how to embody the caring compassionate stance of someone who does care in order to use the homeowner’s trust against them to “get rich quick.”
I believe that this law, no matter how flawed, has more good consequences than bad.
Real estate agents and Realtors are on the front lines when the homeowner comes out of denial and starts looking at their options.
For those real estate agents and Realtors who say, “Well, this law is so confusing that I’m not going to work with any distressed homeowners.” First, that’s going to rule out a whole lot of your market area in the next several years and second, would you answer the question differently if you were the one who sold them the home?
It is possible that fear will drive Realtors to not take these listings, although I don’t think that will happen because there are still way too many hungry Realtors out there who will take a listing at the drop of a hat. If the law does scare Realtors away, this means we’ll see more foreclosures in Washington State. Get-rich-quick buyers can still buy the home at the trustee sale or directly from the lender after foreclosure; neither of these types of transactions is affected by the new law.
I have heard people say “this law will be repealed the next legislative session.” I’m not so sure about that, nor am I sure that Realtors will automatically be “exempt” from being a “distressed home consultant.”
It’s time we acknowledge that distressed home transactions are becoming more and more specialized. The topic of foreclosure is not taught in real estate pre-licensing classes. It’s time to admit that a real estate agent with ZERO training on foreclosures and short sales is doing a home seller a grave disservice by taking that listing. More harm could be done in this instance than good, and it appears as though our legislature understands this. Unfortunately, the get-rich-quick investors probably know more about foreclosure laws than your average real estate agent. Average real estate agents, you have some work to do.
Real estate agents ARE distressed home consultants when they take a home that’s in pre-foreclosure or a home that has short sale terms. Exempting real estate agents from this law will not happen, nor should it.
Real estate agents should embrace this new law. Some might decide that distressed property is going to be their new market niche. Commercial real estate, property management, multifamily homes, resort and vacation homes, all are specialty areas. It’s time that the real estate industry creates a new specialty area for distressed property transactions. Perhaps all “get rich quick” investors will be required, at the very least, to have a real estate license or some other sort of professional license (oh boy, what will my friend Brian Brady say about that?) and all real estate licensees who want to become purchasers of distressed homes will now be taking part in a high risk transaction with elevated duties. There are other ways for real estate agents to buy homes for investment purpose. Maybe this option should only be for those with the capital to cushion the risk, the willingness and ability to consider the homeowner’s interests, and the education to feel secure in their actions.
Realtors, becoming a fiduciary of a distressed homeowner is not a human rights violation.
My advice is to embrace the new law. An alternative choice, from the perspective of a distressed home seller, would be to hire an attorney to do the job Realtors claim to know how to do. Very soon, distressed home sellers in Washington State will find out exactly who those Realtors are.
Keeping the Keys to Your Home May 15, 2008
I love reading the comments over on the CR blog. They’re great entertainment when I need a break from trying to dig my way out from deep inside the new WA State Distressed Property Law class I’m writing. Tonight, as I was reading the comments from this post on Fannie Mae lifting the “declining markets” rule, I found a link to this website (hat tip w.)
Keepingthekeys.com is providing hope (for a fee) for homeowners who wish to use legal options to stay in their home as long as possible, or to prevent foreclosure altogether.
We’ve all read, and some RCG commenters have complained loudly, about loan servicing companies being slow to approve short sales, modify loans, or engage in any kind of foreclosure workout with homeowners. Well, perhaps the threat of predatory lending and violations of state and federal law at loan origination will bring loan servicers to their knees.
The legal team at Keepingthekeys.com seems to be focused mainly in California, where the current count of 1000 foreclosures per day seems to ensure a model for business growth for the next decade.
So what can homeowners do who are located in Washington State and want legal help? Sometimes homeowners in financial distress just want an attorney to take a look at their documents. Taking this simple step is better than full blown homeowner denial, and legal help can often be more affordable than the homeowner might think. I’ve been on the look out for Seattle area law firms offering affordable legal counsel for homeowners facing foreclosure. Now I’ve found one and I bet you’ll never guess which firm decided to extend a hand to this market. Thanks, Craig and Marc.
Now, what to do about all those homeowners who committed stated income fraud at application in 2007. Hmmm. Perhaps there’s a reason why foreclosure rates continue to climb. Maybe it’s not just “denial” or “loan servicing” backlogs.
The Commission-Based Fee Structure: it’s Bad for Buyers April 22, 2008
This post is not legal advice. For legal advice, consult an attorney in person, not a blog.
[Sorry, no links or cites here, but I think the following historical perspective is undisputed:] Originally, real estate agents (and brokers, referred to collectively in this post as “agents”) represented only the seller. The “listing” agent signed the contract with the seller that entitled the agent to a commission. This agent then informed other agents about the house now available for purchase by posting on the Multiple Listing Service. Another agent, the “selling” agent, would see the listing and show it to a potential buyer. Even though the selling agent then assisted the buyer in purchasing the property, she actually — and legally — worked for and owed a duty to the seller only. Because the “selling” agent assisted with the sale of the property, the “listing” agent would then split the commission paid upon the sale. The system made sense, as only the seller paid the commission to the listing agent, the listing agent then offered to share the commission as means of finding a buyer, and both agents eventually assisted with the sale. Indeed, some agents today still look at commissions in this light. As James Melanowski, an agent, said in a recent comment (#20):
There is one commission. I get paid x% to sell your property and with that x% I will do everything in my power to do my job. That may include paying a buyer’s agent, it may not. I may want to pay that agent y%, y-1/2%, or y+1/2% to bring that buyer to the table. The point is, x% is what you pay ME and it is to do with as I please.
Unfortunately, in this system, buyers usually mistakenly believed that “their” agent represented them in the transaction, when in fact they had no representation at all and “their” agent worked for the seller. With the evolution of consumer protections, many states revised this system. In 1996, Washington passed RCW Chapter 18.86, which by law altered this arrangement. Since then, in Washington a “buyer’s” agent owes a duty only to the buyer, regardless of the source of compensation, while a “seller’s” agent represents only the seller. Notwithstanding this new legal arrangement, the term “selling” agent is still used today by the MLS to describe a buyer’s agent(much to the chagrin of enlightened agents — right, Ardell?).
But if the buyer’s agent now represents the buyer, why is the buyer’s agent paid by the seller? This alone is enough to create a conflict of interest that could potentially impact the quality of the buyer’s representation (see RPC 1.08(f)). Furthermore, if the buyer selects her agent and works closely with the agent to find and buy a house, and the agent owes a duty only to the buyer, shouldn’t the buyer have the ability to decide how much to pay the agent? Under the current system, based on an outdated and no-longer-applicable model of representation, it is the seller — not the buyer — who ultimately determines the buyer’s agent’s compensation.
In addition, agents can and do represent both buyers and sellers. Thus, they have a vested interest in a system that promises a significant commission for both sides of the transaction. With flat fee listing and FSBO, the listing agent commission has come under increasing price pressure, and indeed it is not uncommon for listing agents to reduce their commission from the previously “standard” 3% (often times as long as the seller will also use the same agent for the following purchase, thus allowing the agent a subsequent and “full” 3% commission). The “selling” agent commission, however, is immune from such price pressure given the current business model. Indeed, as Kary Krismer, another agent, said in a comment (#31) to a recent post in reference to a buyer’s agent’s commission of 2.5%, rather than the standard 3%:
Well, it’s not that it’s a waste, but it’s not a wise decision at all. We’ll show buyers 2.5% properties, and have actually had a number of transactions in them. But there are some agents that won’t, or that subconsciously might down-talk the property.
Agents may argue that they are “entitled” — or, more accurately, earn — a full 3% given the time and efforts they invest in a sale, but that alone cannot justify this failure to show properties with a slightly lesser commission. After all, even 2.5% is a reasonable — to say the least — paycheck given the average house price (2.5% of $400k is $10,000). Thus, whether consciously or subconsciously, a signifcant number of agents fail to best serve their clients’ interests (by showing them ALL suitable properties and giving honest and accurate advice about each) simply because they won’t make as much money. While that is not absolutely wrong, at a minimum the buyer should be aware of this “limited” representation. How many buyer’s agents — who discriminate against commissions of less than the “full” 3% — have that conversation with their clients?
Finally, because the commission is a transaction cost, it stands to reason that a decrease in that cost will benefit either buyers or sellers or both (either prices remain the same with less costs and more money to the seller, or prices are reduced to reflect the reduction in costs, or both). With the current system, there is virtually no incentive to reduce this cost — or, for that matter even an ability to do so, unless the buyer is willing to forego an agent and either use another professional (say, ahem, an attorney) or self-represent.
So, the current commission-based fee structure, based on an outdated and now inapplicable model, leads to increased transaction costs (than what would be available in a truly competitive market) and a decreased quality of buyer’s representation. I’d say that’s bad for buyers.
Buying without an Agent: How to get that 3% April 3, 2008
This post is not legal advice. For legal advice, consult an attorney in person and do not rely on a blog.
Earlier this week, I authored a post giving some historical context and practical tips for buying a house without using an agent. The Big Question, of course, is this: Will that save me any money? It should if you approach the transaction correctly.
As an initial matter, you must understand where the money starts and where it goes in a typical transaction. It starts, of course, with you, the Buyer. It’s not uncommon to hear someone say, “Oh, sure I used an agent to buy my house — he was free! I didn’t pay him anything!” That is simply not true. Remember that, of all the parties involved in the transaction (seller, buyer, listing agent, buyer’s agent, title insurance, escrow, lender, mortgage broker, etc.) only one brings money — you, the Buyer. Everyone else gets paid from the Buyer’s money. So while you may not pay your agent directly, you most certainly do pay him out of your pocket (or, more accurately, out of the money you have borrowed from the bank, and which you must repay, with interest).
And exactly how does your agent get paid with your money? Well, the seller previously signed a contract with the listing agent where the seller promised to pay a certain percentage in exchange for the agent finding a buyer. The “typical” percentage paid is 6%, although there is some degree of variability with figure. Per the rules of the MLS, that commission is then shared with the buyer’s agent when the house is sold (or, more accurately, with the buyer’s broker, but I won’t get into that for simplicity’s sake). Most sellers and listing agents agree to give 3% to the buyer’s agent, on the theory that anything less will attract less interest from buyer’s agents (I’ll get into the ethical issues of that dilemma in a future post).
The listing agent has a contractual right to the full commission. If you go without an agent (e.g., drafting the offer yourself (discouraged) or using an attorney), then the listing agent will not need to share any portion of the commission. While the agent has no legal obligation to accept anything less than the full commission as set by the listing agreement, the agent is free to accept less than full payment if he is so inclined. So, the buyer can structure the offer such that, if the listing agent cooperates, the selling price is reduced by 3% (or whatever percentage was to be shared with a buyer’s agent). The seller will presumably lean on the listing agent to reduce the commission, as everyone gets what they expected out of the transaction.
What about dual agency? Well, the listing agent is the agent of the seller. It is incumbent upon the listing agent, in dealing with the buyer under these circumstances, to explicitly make clear that she does not represent the buyer and is not concerned with the buyer’s interests. That may be an uncomfortable conversation, but it is one that any professional “agent” (i.e., any professional who represents the interests of a principal) must have with an unrepresented party.
Finally, what about all of the extra work for the listing agent? Yes, there may be a more work, such as being there for the inspection since there is no buyer’s agent. But don’t forget that, in any one transaction, a listing agent makes a very fair fee. What is the average amount of time a good listing agent invests in a listing? And, assuming a 1.5% commission to the agent (after the broker’s cut), what is the average fee? Given a median home price of $400k, the agent will make $6k. Assuming 50 hours of time, that’s $200 per hour. A little “extra” work (it is, after all, all part of the job) is not unreasonable if necessary to secure that amount of compensation.
So, if you’re thinking of buying a house, consider ALL of your options and figure out what is best for you. If you want to save a lot of money (we’re not talking pennies here), consider using an attorney instead of an agent (you should absolutely use a professional given the value of the transaction, and realistically these are your two options).
Using an agent to buy a house? That is soooo 20th century… March 31, 2008
This post is not legal advice. For legal advice, consult an attorney directly (i.e. not via a blog).
This is Part I of a multi-part post.
Part I: Visiting the Property
Several months ago, I authored a post about buying a house without utilizing the services of an agent. It generated quite the conversation (concluding with this tasteful comment from our friends at Bloodhound Blog: “Entirely self serving, badly argued with serious errors of omission, it generated some pleasant acrimony in the comment section…”) and eventually led to the promise of a “blogging death match” between me and Ardell — okay, Ardell, it’s ON!
It used to be, way back in the 20th century, that a potential buyer had no way of searching the “market” for the perfect home. There was no single “market” (as in marketplace) for consumers because properties were invariably listed on the MLS, and MLS data was private and accessible only through an agent. Thus, to search the marketplace, the buyer needed to hire an agent who could then search the data for the perfect home.
The advent of the internet changed all that, of course. Today, while agents (or more accurately, brokers) still control the data, it is available publicly through innumerable search engines . Thus, a buyer can now find the perfect home without ever speaking with an agent — until it is time to actually visit the property before making an offer (buying a home sight unseen based on pictures on the internet is only for the very brave and the very foolish). As a result, most buyers at that point simply contact an agent (we’ve all got family, friends, friends-of-family, and family-of-friends who are agents and who would love to assist) who can then provide them with access to the property.
But that service (and perhaps others! Good agents are a veritable repository of helpful information concerning property) comes at a significant cost. The typical buyer’s agent expects to be paid 3% of the selling price as a fee for his or her services (with some portion of that going to the buyer’s broker). This substantial sum (do the math yourself — it is a lot of money for even an “affordable” starter home) travels a circuitous route from the buyer to the agent. When listing the property on the MLS (still the de facto marketplace) the seller signs a contract with the listing agent (more accurately, the listing broker). That contract entitles the agent to a certain percentage of the sales price (typically 6% but there are many exceptions). That commission is then shared via MLS rules with a buyer’s agent, with 3% usually going to the buyer’s agent. Accordingly, at closing, 3% of the purchase price is paid by the buyer to the seller, who then pays it to his listing agent/broker, who then pays it to the buyer’s agent/broker.
So if you want to see the property but don’t want to hire an agent because you don’t want to pay such a significant sum, how do you get in to see the property? Easy: Contact the listing agent. Way back when property values were skyrocketing, some listing agents felt that they should not have to assist a buyer in seeing the property. Those days — at least for now — are over. As TJ commented on my last post:
I think the time when sellers and sellers agents have the luxuary to pick and choose buyers on petty criteria’s like if they have a buyer’s agent or not is soon going to be history.
Contact the listing agent, let her know you want to see the property, and schedule a mutually convenient time. In this market, the listing agent should be more than happy to show the property to a prospective buyer.
[Part II coming soon: "how to get that 3% back into the buyer's pocket" which will further discuss the services that might otherwise be provided by the agent.]
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