Transforming real estate – whom do agents really represent?

transforming real estate
Real estate transformation over time (infographic from movoto.com)

The continuously transforming real estate industry continues to change because of two forces, consumers and real estate professionals.  It would seem intuitive that the forces should be complimentary, but a deeper analysis might suggest conflicting interests between consumers and real estate agents. Whom do agents really represent?

Efficiency, although not openly stated, is a main goal of both home sellers and real estate agents.  Home sellers want to sell their homes efficiently (as quick as possible and for the most money); while the real estate agent may be focused on collecting the most commission in the least amount of time.  A.W. Jenkins’ ground breaking research looked into why consumers continued to use brokers in a transforming real estate environment as a means of buying and selling a home.  Jenkins determined that the only reason why consumers did not use a more efficient “used house dealer” is because they don’t exist (Home, Sweet Home: Real Estate Brokerage in Canada, Vancouver, Canada: The Fraser Institute, 1989).  Jenkins discussed the incentive for consumers to sign commission based broker agreements, even when there are more efficient means of buying and selling a home; including a used house dealer, sell the house on their own, or even pay a flat listing fee.

Anglin & Arnott furthered Jenkins’ line of questioning and came to the conclusion that although a used house dealership (like the used car dealership) may be the most efficient means of buying and selling a home for the consumer, it is not an efficient business model for residential real estate professionals (Residential real estate brokerage as a principal-agent problem; The Journal of Real Estate Finance and Economics; 1991, vol 4, no 2, pp 99–125).  The cost of maintaining a used house inventory for the dealer is prohibitive because home resale usually takes longer than reselling an automobile.  Another reason for non-existent used house dealers is government regulation: The sale of residential real estate by individuals other than the owner is highly regulated and sets standards for real estate brokerage.

Furthermore, they hypothesize that there may be broker “collusion” in maintaining existing business models:

…Collusion, we argued, is particularly easy to sustain and enforce in the residential real estate market because transactions require cooperation between the buying and selling broker…

As the transforming real estate industry continues its journey, the notion of efficiency has taken a substantial turn in favor of the real estate agent.  The advent of buyer agency and dual agency has allowed agents to leverage their name and reputation to other agents through a “team.”  Much like the medical office business model of luring patients through someone’s name and reputation, only to see the lower techs; the real estate team has become a popular business mode because an agent can leverage their time by having other agents do their work.  To further the confusion, in some cases there are teams within teams. But to understand the structure of the real estate team concept, think of a Russian nesting doll.  The team is a smaller nesting doll which is embedded in the larger nesting doll (the broker); and the team members are even smaller nesting dolls embedded within the team nesting doll.  To be fair, there are various team models in use today; some are better than others with respect to transparency.  The transforming real estate industry has moved towards real estate teams, which essentially operate as a brokerage within a brokerage.

Real estate team advertising and disclosure have become the focus of regulation in recent years, but has not entirely thwarted unscrupulous advertising that intends to mislead the consumer.  Furthermore, agents who are independent contractors and sub-contractors of brokers and other agents, can not only muddy the waters of agency, but can further distance the agent’s incentive and duty to their client.

In his article about the dual agency controversy (From subagency to non-agency: a history; inman.com; Feb 27, 2012), Matt Carter reminded us about a 1993 treatise by the former National Association of Realtors general counsel William North titled “Agency, Facilitation and the Realtor.”  The essay was written at a time when transforming real estate was about acknowledging buyer agency.  Agency relationships between Realtors and their clients were under scrutiny.  North was questioning whom agents really represent and if agents actually knew their role.  To make it easier for agents to know to whom they have a duty, North made an argument for eliminating the independent contractor status that prevails throughout the industry.  He stated:

An approach more difficult of acceptance by NAR membership would be the abandonment of the independent contractor status…The prevailing independent contractor relationship between broker and salesperson encourages “quantity” over “quality…It is clear from the letters which have been received by Realtor News on the Agency issue that far too many Realtors and Realtor Associations simply have no concept of what an agent is, does or cannot do or that their status as an “independent contractor” vis-à-vis their broker has nothing to do with their obligations, as an agent, to the seller or the buyer.  It only compounds the public confusion as to the status of a Realtor when Realtors themselves do not understand who and what they are.

Copyright © Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Realtor ethics and presidential election

realtor ethics
Realtor ethics (infographic from visualistan.com)

Allegations of sabotage, fraud, and collusion.  A yearning for power and money.  And let’s not forget about the sex, lies, and video tape.  No, I’m not referring to this year’s presidential election – I’m talking about Realtor ethics (although the similarities are intriguing).  I’ve reported in the past about real estate agents who’ve engaged in fraud, sabotage and collusion while taking part in scams.  There have also been the recent reports of alleged money laundering and extortion.  And let’s not forget the agents caught on video in homes for sale engaging in sexual acts, rummaging through underwear drawers, and stealing.

The National Association of Realtors® (realtor.org) is proud of their Code of Ethics, which was first introduced in 1913. And for years, the NAR has promoted the Code of Ethics as one of the feature advantages of hiring a Realtor®.  And notwithstanding the focus on high ethical standards, some agents still act repugnantly.  And as a result, it’s not a surprise that real estate agents typically fall in the lower to middle range of Gallup’s Honesty/Ethics in Professions poll (gallup.com).  The December 2-5th 2015 poll indicated real estate agents ranked below journalists, bankers, and lawyers in honesty and ethical standards (lobbyists and members of congress are at the bottom of the ranking).

So, why are agents often viewed as unscrupulous and dishonest?  The answer begins with the purpose of the NAR Code of Ethics.  Jeremiah Conway and John Houlihan’s 1982 study (The Real Estate Code of Ethics: Viable or Vaporous?; Journal of Business Ethics. 1;201-210) determined to find out if the NAR Code of Ethics was just a “clever” marketing scheme or a viable tool for “promoting and enforcing” ethical behavior.  Their critique of the 1982 version of the NAR Code of Ethics exposed “numerous ethical flaws.”  They revealed loopholes for enforcement as well as statements that promoted the interests of Realtors®, contrary to the “service of the public.”

And although required to adhere to the NAR Code of Ethics, there are still some agents who breach their duties to the public and their clients for their own benefit.  George Izzo’s 2000 study of moral reasoning and ethical decisions in real estate (Cognitive Moral Development and Real Estate Practitioners. Journal of Real Estate Research., 20;1;179-188) revealed that cognitive moral development and ethics are mutually exclusive.  While some are more “mature” in their moral reasoning and motivations, the study determined there is no difference among stages of moral development when making ethical decisions.

Sometimes a person’s moral reasoning is just irrational, illogical, or unfounded – regardless of how high the purpose.

It has been thirty-four years since Conway and Houlihan’s assessment of the NAR Code of Ethics.  Of course, the NAR Code of Ethics is updated each year to reflect changes in technology and business; however, the basic purpose remains unchanged – promote your client’s best interest, cooperate with other agents, treat all parties honestly, a commitment to the truth and refrain from misrepresentation (among other things).  Since then, the changes to the Code have been overwhelmingly positive such that the NAR Code of Ethics framework has been adopted into real estate licensing laws across the country.

Nevertheless, after decades of promoting Realtor ethics as a basis for hiring one, it became clear that consumers did not choose their agents based on ethical behavior.  As a result, in 2014 the NAR began to promote Realtor added value.

Copyright © Dan Krell

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when real estate agents go over the line to gain edge

Luxury Real EstateAlthough not listed in this year’s Careercast’s annual Top 10 Most Stressful Jobs, “real estate agent” has been included in previous years’ lists. Supposedly, real estate is one of those industries where “frequent or difficult interactions with the public or clients” along with high levels of stress may also be responsible for high levels of depression, as described by Wulsin, Alterman, Bushnell, Li, & Shen in their 2014 study (Prevalence rates for depression by industry: A claims database analysis. Soc Psychiatry Psychiatric Epidemiology, 49,1805-1821). Results suggested that the real estate industry has the second highest rate of depression, second only to bus drivers and transit workers. Certainly to be included in such lists is not an achievement. However, it may explain the erratic behavior of the few agents who are willing to go over the line to gain an edge over their competitors; such as in this recent account…

In their November 2nd Miami Herald article (Secret tapes, blackmail threat: Luxe real-estate rivalry turns nasty in Miami; miamiherald.com), David Ovalle and Nicholas Nehamas gives us insight to the highly competitive Miami uber-luxury real estate market. What seems to be the plot of a TV crime drama is the real life story that will soon conclude in a court room. Having pleaded not guilty, a middle aged real estate agent is now awaiting trial for “felony extortion, resisting arrest with violence and attempting to deprive an officer of his weapon.”

The story’s main characters are the agent duo known as “the Jills” and Kevin Tomlinson. The Jills have been recognized as being a top producing team in Miami’s luxury real estate market for some time. Tomlinson is no slouch either. He has also been recognized as a top Miami luxury agent, and in the past served on the board for the Miami Association of Realtors®. And although Ovalle and Nehamas’ report suggested that the Jills garnered jealousy from other agents; others have also questioned their business practices.

At the heart of the matter was the allegation that the Jills hid expired listings so the properties would not be solicited from their competition. The allegation is that MLS listing data (such as address, city, and neighborhood) were changed to “hide” expired listings. In an attempt to end the practice, Tomlinson filed a complaint of listing manipulation in April of this year. And that’s when things got interesting.

Rather than waiting for the ethics complaint to process through the system, Tomlinson allegedly asked the Jills on several occasions for large sums of money (up to $800,000), to rescind the complaint. Tomlinson supposedly also threatened to go public if they didn’t pay up.

The combination of high end real estate, allegations of unethical behavior, extortion claims, a police sting operation, may already be the basis for a night’s entertainment. However, the ending sounds like a “take down” scene from Hawaii Five-0: no one expected that Tomlinson would be also charged for going for a policeman’s gun while charged for resisting arrest.

Although the public details may seem incriminating, it appears that there’s more to the story; and maybe each is a “villain protagonist.” Many in the Miami real estate community have rallied around Tomlinson, and some “have petitioned the Miami Association of Realtors® to take ‘disciplinary action of the highest severity’ against the Jills.” For the thrilling account details, please read Ovalle and Nehamas’ story at (miamiherald.com/news/local/community/miami-dade/miami-beach/article42178872.html).

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Trust and verify – home buyer due diligence

home for saleIf you’re a home buyer who’s ready to jump into the housing market this spring, you’ve probably begun searching to see what’s on the market. You may have already met a real estate agent or two; and if you’ve haven’t yet talked with a mortgage lender for a prequalification, it’s probably high on your priority list.

Before you know it, you’ve selected an agent, mortgage lender, and title attorney to assist you; and you find yourself increasingly perceptive and selective about the homes you view. Guess what? You’re in the process of buying a home! But before you put the buying process on cruise control, how much trust should you put into the professionals helping you?

It’s not to say that real estate agents, loan officers, home inspectors, and anyone else assisting your home purchase are not qualified – but no one is perfect. Buying a home is probably one of the biggest purchases you’ll make during your life. The idiom “trust but verify” should be your mantra throughout the home buying process to ensure due diligence.

Have you verified the credentials of those you’ve hired? Believe it or not, there are some who are doing business without the authorization of the corresponding licensing agency. And yet, some reasons given for not having a license may sound innocuous, such as forgetting about a license renewal deadline; other reasons may not seem as innocent (for example, licensed professionals from neighboring jurisdictions, DC or VA, attempt to do business locally where they are not licensed).

Professional licensure is a regulatory safeguard that provides consumers a pool of professionals that meet or exceed a minimum professional competency. Agencies such as the Maryland Real Estate Commission; Maryland Home Improvement Commission; Maryland Commission of Real Estate Appraisers, Appraisal Management Companies, and Home Inspectors; Office of the Commissioner of Financial Regulation; and the Maryland Insurance Administration offers an internet portal to verify a licensee’s status, check for disciplinary actions, and also explains how to file a complaint.

Information is believed to be accurate, but should not be relied upon without verification. Accuracy of square footage, lot size, schools and other information is not guaranteed…” is a disclaimer used by Metropolitan Regional Information Systems, Inc (MRIS) prompting you to verify MLS listing information. Although MRIS strives for accuracy in MLS listings, providing guidelines and standards for MLS data; exactness and truthfulness can vary because data input is performed by many agents and/or their staff. You can verify schools by checking the Montgomery County Public Schools “School Assignment Tool” (gis.mcpsmd.org/SchoolAssignmentTool2/Index.xhtml); zoning, development and other information can be verified through the Montgomery County Planning Department (montgomeryplanning.org).

Was the home seller into the DYI (do-it-yourself) trend? Is it possible the seller hired unlicensed contractors to repair or renovate the home prior to listing? Make sure any improvements and recent repairs have had the proper permitting! The permitting process certifies that repairs/renovations comply with building and zoning codes, which are in place to ensure that houses are safe, structurally sound, and meet health standards. Most permits can be checked online via Montgomery County Department of Permitting Services (permittingservices.montgomerycountymd.gov) “eServices” data search portal.

Most home buyers are familiar with basics of the home buying process. However, “trust and verify” can help identify and reduce hidden and obscure risks; conducting due diligence can make your home buying experience increasingly trouble free and more enjoyable.

© Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Changing the public’s opinion of real estate professionals

real estateGallup (gallup.com) conducts a regular poll of ethics and honesty of various professions. Although the survey is not inclusive of all professions, many are covered in alternating years. Results from the 2013 survey ranked the top five professions as (along with their corresponding “Very High/High” rating) nurses (82%), pharmacists (70%), grade school teachers (70%), medical doctors (69%), and military officers (69%). At the bottom of the list we can find lobbyists (6%), members of congress (8%), car salespeople (9%), state office holders and advertising practitioners were tied at 14%, and lawyers and TV reporters were tied at 20%.

Real estate agents were included in the 2011 Gallup Ethics and Honesty survey, where they were rated with a 20% Very High/High rating; which would be toward the bottom of the list. The 20% rating is actually an improvement from the 17% rating given in 2008. Believe it or not, the 20% rating seems to be the highest rating achieved by real estate agents since the first time they appeared in the poll in 1977; and 2011 was the second time for such a rating (2005 was the first). Historically, the rating ranged from 13% to 19%; not surprisingly, the lowest ratings seem to coincide with housing market slowdowns.

The “Very High/High” rating used to compare consumer opinion of professions may be a little misleading. The 20% “Very High/High” rating in ethics and honesty could lead one to believe that agents are generally viewed negatively. However, in 2011 the “Low/Very Low” rating was 22%; while the 57% “Average” rating may be more indicative of consumers’ opinion of real estate agents’ ethics – which is indifference.

The National Association of Realtors® has for years tried to influence public opinion of Realtors® and the industry (not all real estate agents are Realtors®; Realtors® are members of the NAR), by publicly promoting the high ethical standards by which Realtors® are held. Many are unaware that a code of ethics was adopted in 1913 by the association (which was then called the National Association of Real Estate Boards), and has since strived to instill and maintain a high level of integrity in the field.

With such emphasis on ethics, you might expect that public opinion would be much higher. Unfortunately, the limited research on consumer perception of ethics is mixed at best. And according to one study, consumers consider price, quality, and value more important than ethical criteria in purchase behavior (The myth of the ethical consumer – do ethics matter in purchase behaviour? The Journal of Consumer Marketing. 2001;18(7),560-577.)

The reality may be that consumers are not necessarily concerned about ethical behavior or honesty when hiring agents; which may be why the NAR has decided to add a compulsory dimension of “value” for practitioners so as to increase public opinion of the industry. In an effort to increase professionalism standards, the NAR recently approved an “aspirational” Code of Excellence. A report on the November 10th NAR Board of Directors meeting stated (realtor.org), “The goal is to raise the practice of real estate measurably through increased training in the competencies that consumers value. These competencies include the stewardship of property listing data, privacy and security of consumer information, advocacy of property rights, community involvement, and technology.” NAR President Steve Brown was quoted to say, “This is the first step in a process for the continuing improvement of our profession…”

© Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.