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.
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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.