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A Homebuyer's
Guide to Understanding Real Estate
By Donald J. Welsh, Ed.D.
Illustrations by John Bennetts
Advice, Advice, Advice!
How can you miss a GREAT DEAL?
The
minute someone knows you are interested in purchasing
a home, you begin to get advice. Your parents may have
more advice than you are interested in hearing. There is
a friend ready to recommend the best development in the city
and an agent that won't let you down. Brokers advertise:
We take care of our buyers, we offer unlimited services,
and we can help you find the right home. What the brokers
are really doing is advising why you should buy their listing.
Employees transferred to a new community get advice from
the personnel manager, relocation staff, secretaries, a
new manager and their agent. With so many people trying to
help, how can you miss that good deal?
Most people giving
advice have good intentions. However, they don't realize
their advice can cause problems. Others giving advice receive
personal gain when they influence you to use a certain
agent.
Real estate transactions promote professionalism,
fairness and good ethics leading you to believe that when
you work with an agent your needs and interests are paramount.
When the agent is promoting special features of a home,
you perceive this as good advice, however the agent is often
merely using a proven sales technique leading you to buy
the home.
You do need advice. However the advice should
come from a knowledgeable source. Devoting a majority of
my career in educational roles, I know how important education
is to expanding public awareness and to bring about change.
My experience in the real estate industry has revealed
that many homebuyers don't understand what is really happening
because they seem to have a blind trust of the agent
who appears to be working for them. The information presented
in this document is intended to make you a more knowledgeable
consumer. It's your choice to use the information,
take control of the buying process and to pocket the savings
when you buy right.
Who Protects the Homebuyer?
An investigation of state real
estate commissions reveals that the commissions are generally
responsible for the examination, licensing and regulation
of persons and firms who engage in real estate business.
Does this mean the commissions protect buyers? In a practical
and legal matter, no!
If real estate commissions don't
protect buyers, surely brokers and agents must have a responsibility
to protect the buyers they are work with. Wrong!
A study
conducted by the Fair Trade Commission in the 80's
revealed that more than 75% of homebuyers who were working
with an agent thought that the agent was working for them,
when in fact the agent was representing the seller. When
the agent is representing the seller there is no legal responsibility
to protect the buyer. As a result of this study, most
states now have a disclosure law requiring agents to inform
buyers that they represent the seller. Even with this disclosure
requirement, the Consumer Federation of America, in
a 1990 survey, found that 30% of the consumers don't understand
that the broker and agents usually work for the seller.
Why has there been such a mystery as to who the agents
and brokers represent? It's simply a matter of economics;
the brokers want the greatest income potential with the
least legal liability. Furthermore, large companies with
financial resource to advertise also have a strong influence
on the media. This influence tends to restrict the publishing
of information, which would inform buyers of options
to use a buyer agent.
This mystery of representation and
illusion in the industry was expected to change when the
Edina Realty class action suit was settled. In the Edina
case, Edina Realty a major broker in the Minneapolis metro
area was charged with illegally representing both buyers
and sellers in the same home transactions. Kelly and Wilson,
attorneys for the plaintiff contend that Edina did not
make adequate disclosures in an estimated 5,000 to 6,000
transactions involving an estimated $200 million in commissions.
Information revealed in the case demonstrated that agents
fraudulently told buyers and sellers what each wanted to
hear. In a situation where a prospective buyer was interviewing
an agent for buyer representation and the buyer asked: "How do you continue
to protect your sellers needs that you are supposed to be
representing when you represent a buyer?" The buyer
was told "We just make the seller think we are representing
them." In a similar case with an agent being interviewed
by a seller before listing their home, the agent was asked: "How
do you represent buyers needs when you have a responsibility
to represent our needs?" The seller was told "We
just make them think we are representing them."
Even
after a settlement of $36,000,000 to the plaintiff
the fear of lawsuits has not change the behavior of many
real estate agents and the mystery of who is really being
represented continues to exist. What has happened is a move
by The National Association of Realtors and state real estate
associations to lobby for new legislation. The goal of the
associations as demonstrated by the legislation has been
to give brokers the opportunity to serve both buyers and
sellers when purchasing homes listed by the company and to
reduce the brokers liability for action of their agents.
New agency designations now found across the country such
as: designated agent, facilitator, and transaction broker
allow agents in traditional brokerages to offer buyer agency
and then switch to these other statuses when showing company
listings. Even though it is legal to provide buyer agency
this way there still will be illusions as to who is being
represented, as many agents have not changed their behavior.
In addition some brokers are failing to provide the proper
training to teach their agents how to represent buyers.
The
best way to overcome the illusion is to secure a buyer
agency service from a broker that is an exclusive buyer broker.
These brokers do not list homes and therefore have no responsibility
to sellers other than to treat them "fair".
For a referral to such brokers, you may call (800) 359-2276.
How Buyers Get Caught in the Illusion
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Mary Doyle has been searching newspaper ads and
homebuyer guides with pictures of advertised homes.
She identified three homes in a good school district
and decided to call the listing agent.
Mary gives little thought to the agent's statement, "I
represent the seller" because she realizes the
listing agent is working for the seller. After looking
at the home, she knows her husband would not like it.
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| The agent is friendly and appears to be trustworthy
so Mary agrees to look at the homes. Knowing that the
other homes are not the agent's listings, she assumes
that he will be working for her. After looking at several
other homes, Mary and Tom find the home that fits their
needs. |
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Is there an illusion?
Has the agent been deceptive?
Did the agent make a proper disclosure as to who
he represents?
Before we follow Mary and Tom through
the home negotiation, let's look at other illusions. |
In the following scene, Jack and Judy have stopped at an
open house. The tour of the house elevates Judy's interest
in the home. She approaches the agent to ask several questions
about the home and neighborhood. The agent, assessing Judy's
emotions, asks…
Judy and Jack volunteer all information that the agent requested.
They told her about their professional jobs, salary history,
and savings and investment income. At this point, Judy and
Jack feel the agent is service oriented, helping them determine
the amount of loan they can qualify for.
Is this service or a deceptive practice to learn about their
finances?
The preceding scenarios happen with buyers looking
for homes in their own communities. When employees are
transferred they may face other types of illusions. In the
following scene, John has just received a big promotion and
is on the phone visiting with the company's relocation manager.
John has a secure feeling about this agent
because he thinks the relocation manager has a responsibility
to make his transfer a smooth one.
While relocation managers and their staff have a perceived
responsibility, this is often slighted when there are incentives
to refer business to agents, even though they represent the
sellers. In organizations where the relocation department
tries to arrange for the service of a buyer agent, frequently
the employee's new
manager will promote an agent who is with a company that
lists houses for sale and most frequently represents the
seller. This promotion by a manager is a real conflict of
interest because he is using the power of his position to
refer business to someone who generally provides an incentive
for the referrals. When moving from once city to another,
the real estate agent that lists your home often participates
in another illusion. Let's look in on the Smiths who have
just listed their home with Tony Brown.
Continue reading in Part
II >>>
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