Agency: Biggest consumer problem in real estate
Originally appeared in Bay Area News Group publications on January 24, 2014
“…the laws of commerce…are the laws of nature, and consequently the laws of God.”
– Edmund Burke (1795)
As a Bay Area and East Bay real estate expert witness, I continually see specifics of how agents fail their clients. I have written many articles about agency because it is the most important function of a real estate licensee. Unfortunately, few buyers and sellers understand what an agent should do for them and too many licensees are not clear about agency.
Clients, usually buyers, generally find this out when it is too late and it has cost them money and heartache. This has not changed in my 34-plus years in the business.
According to California Civil Code, “An agent is one who represents another, called the principal, in dealings with third persons.” Despite common misconceptions, an agent is not simply a salesperson; he or she has much greater responsibilities.
Agents have a “fiduciary duty” to their clients. This duty includes “utmost care, integrity, honesty, loyalty” and is what some agents have forgotten from their real estate license preparation. It is at the heart of all the problems I see relating to client dissatisfaction with their real estate representative.
Selling vs. representing
As a buyer or seller, your primary responsibility is not to just find a house to buy or to get your house sold. Your primary responsibility is to make sure you are working with an agent who will represent your best interests. Is the agent focused only on doing the right thing for you, or is commission his or her basic interest?
In many instances, the licensee acts as though he is just a facilitator, bringing a buyer and seller together. Those are the agents who let their clients down.
Duty to advise
The best agents are not simply order-takers; they provide information to help you make important decisions. Sometimes, that includes advice to hold off from selling or buying right now.
For example, I have seen some homes sold in specific neighborhoods in the past year where the purchase price exceeded previous highs, even of the last wild seller’s market of the mid 2000’s.
When I observe sales like these, I wonder if the buyer’s agent explicitly explained the risks of paying well above market or if he felt it was simply the buyer’s decision. Of course, an agent too new in the business to know, or one from out of the area, might not even have the background to give this advice. Regardless, buyers who overpay now may eventually experience the same loss-of-equity hardships we saw before our market rebounded.
Another example is where the price seems reasonable for the buyer, but there are problems with condition that have unknown costs. Far too often, agents do not stress to their buyers that the purchase price, when added to fix-up and upgrade costs, makes that property an unreasonable candidate.
The buyer may spend a lot to improve the home, or he may do little to eliminate its problems. In the first case, the value of the property could end up being less than the buyer’s total investment. In the second instance, the condition issues are likely to worsen with the passage of time, negatively impacting the value of the property.
For either scenario, this might lead to the buyer losing, rather than making, money on his purchase.
Advice from agents to sellers can also be insufficient or non-existent. This includes situations where the house requires so much work that painting and new carpets/floors are actually a waste of money. Sadly, some agents suggest that their sellers needlessly spend money instead of trying to dissuade them from doing so.
Buyers and sellers rarely perceive when their agent has failed to adequately negotiate in their best interests. This can be relative to the price of the property when an offer is made or to adjustments in that price after buyer inspections.
Some agents do not know how to negotiate or, if they do, are not willing to expend the effort on their client’s behalf. Inadequate negotiating can cost their buyer or seller thousands or tens of thousands of dollars.
A “material fact” is any information that could influence a buyer’s decision to buy or not, and/or how much to pay. When representing sellers, competent agents explain this to help them fully disclose.
For instance, does the next door neighbor or the one across the street practice saxophone at midnight? Have there been back-ups in the sewer line? Does the seller know of stains or damage to hardwood floors under the carpeting? Providing this assistance not only helps the buyer, it can prevent future legal action by the buyer against the seller.
If anyone in the transaction knows that a nearby house slid down the hill and was destroyed years ago, or that there is a spring that runs under some homes in the area, these material facts must be disclosed.
Those who do not fully comprehend the most important duties of agents have a good chance of missing out on full, professional real estate representation. Choosing an agent who will stand in your shoes could be one of the most important decisions you will ever make.