Top 9 Worst Real Estate Business Practices



There are several bad business practices available to real estate professionals that are difficult to spot by sellers and buyers in the marketplace. Here are the worst of them. Most real estate professionals don’t engage in these but some do. Always insist your representative disclose all sources of compensation in the deal.

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Dual agency

This occurs when a single brokerage serves both the buyer and seller in the same transaction. No one can serve two masters. It doesn’t have to be the same agent serving both the seller and the buyer. It’s the broker that collects two commissions and will do whatever is needed to close the deal in-house. Avoid this at all costs.

Collusion between escrow services and brokerages

Competition between both title and escrow services is how you obtain the best service and price. When a broker refers all buyers to the same escrow or title serving company the competition is lost. As a buyer, you want to shop around and find reliable references for these services.

Attorneys selling title insurance

When an attorney represents both the buyer and the title underwriting insurance company, they cannot negotiate title coverage. When they do, they receive a very large fee from the title insurance company that is only paid if the transaction closes. The conflict of interest is clear.

Attorney referrals from real estate professionals

Always assume that attorneys referred to sellers and buyers by real estate professionals are paying a fee to the real estate agent. In exchange for that fee, they are really representing the real estate professional in exchange for future referrals.

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Market manipulation

These are real estate professionals that don’t fully market the property for sale. The most common tactic is pocket listings where the property is only marked for sale within the brokerage (dual agency) but not posted on the MLS. Another is not listing the property for sale with some of the most viewed real estate websites such as Realtor.com, Zillow, Trulia, MSN RealEstate, Yahoo Real Estate, and NeighborCity.com. The objective is keeping the commissions in-house.

Buyer broker compensated by the selling broker

While not overly popular, there are buyers that hire brokers to find a property. The buyer becomes responsible for paying the buyer broker’s commission rather than splitting the seller’s commission. This makes it tempting for the selling broker to offer additional compensation to the buyer’s broker to close the deal. Insist your buyer broker reveal all compensation they are receiving from the deal.

Open houses

These are full of possible conflicts of interest and serve little if any purpose for marketing a house. First, as a seller, your agent is just as interested in finding new buyer clients as they are in selling your house. Any potential buyers that attend the open house will be offered to be shown other houses by the open house agent. Second, a commission dispute can be created when the buyer first talks to the selling agent and then contracts with a buying agent to negotiate the deal. The effect is bad or little representation for the buyer in the end.

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One sided purchase agreements

The forms used in the real estate industry have been created by and serve the real estate industry. First and foremost, the industry is most protected and paid based on these forms. Rather than using the standard forms, hire an independent attorney to draw up a contract specific to your deal.

Home warrantees

Many real estate purchase agreements now have a checkbox for the buyer to require the seller to provide home repair insurance in the form of a home warrantee. Again, this is a perfect opportunity for the agent to receive a fee from the warrantee company. Before doing this, goggle the words “home warrantee rip-off”. You’ll find these companies almost always dispute any claim, only take responsibility for a portion of a claim, and insist that substandard contractors provide any agreed to services. If you want this service, first research home guarantee companies to find the most respected and then insist that your own company be named in the contract.

Yes, there are many opportunities for real estate professionals to take advantage of consumers in the most complicated deals they are ever involved with. It’s highly recommended that you have an independent attorney represent you.

Please leave a comment if this article was helpful or if you have a question.

 

About the author: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

Comments

  1. I don’t know where you are doing business but here in Long Island New York, I find as a highly educated agent in my field who is quite ethical that more agents than less follow the rules and are quite easy to do business with, especially with agency disclosed from the get go. Everyone is aware who they are working for and behave accordingly. Also as a CBR, when the deal is struck I give the initial offer as a Gross Price with a standard percentage of commission in my area to be taken directly from the sale of the house and then provide the net to the seller. There are many ways to present a deal. The issue is can a listing agent convey this to the seller in a manner the seller can understand so there are no hard feelings. The only problems I see are unscrupulous and greedy agents who hold pocket listings. There should be a form where the agent can check off that he is looking out for himself and represents himself in the deal so he can make the most money for himself. Not provide the seller with the best price. This unfortunately is in every business in one way or another and the ones that get hurt in the real estate business are buyers, sellers, and agents that follow the rules.

    Sincerely,
    Andra Matera
    NYS Licensed Real Estate Salesperson
    Charles Rutenberg Realty

    • Brian Kline says:

      Thanks Andra,
      I like the way you wrote the comment. I agree with you. By far, most real estate professionals are ethical. The article was intended to warn buyers and sellers to make sure they are working with ethical agents because there is plenty of opportunity for agents to line their own pockets at the expense of others.

      Best wishes,
      Brian Kline

  2. Thanks for the excellent post Brian. Let’s hope home sellers read it. I swear, in the $160 billion dollar real estate brokerage industry, it is hard to find two people who are actually on the side of the home seller. Quick question: is there a way to make that home warranty check box go away so that the seller doesn’t have to pay it? If anyone should be paying for a home warranty it should be the person actually purchasing the home, or am I crazy?

    • Brian Kline says:

      Thanks, Carl
      I agree both the seller and the buyer need better representation in the industry. For now, the best they can do is thoroughly vet the agent they are working with for integrity. Regarding the check box for the home warranty, it probably can’t be eliminated since the original purchase agreement is written up by the buyer’s agent. However, it’s always a negocible item that the seller doesn’t have to agree to.
      Best wishes,
      Brian