Double Agents
In an industry politely described as resistant to change, real
estate broker Bill Wendel is part visionary, part eccentric. He once
ran his Real Estate Café—named for its menu of à la carte, fee-based
services that take the place of a commission—out of the smallest
commercial building in Cambridge. Six and a half feet at the widest, it
was more corridor than office. He now happily operates out of
WiFi-connected coffee shops.
When Wendel considers the old-fashioned, commission-based side of
his industry, he's occasionally seized by what he calls holy anger. He
remembers once sitting down in his tiny office with a giant sheet of
paper and a pencil, determined to map out all the places a real estate
deal could go wrong at the hands of an unscrupulous agent and at the
expense of an innocent homebuyer or seller. “I needed to see on paper
that I wasn't making this up,” he says. Before long, his tiny capital
letters blanketed the paper. Reading it over, he came to a realization:
“This process is a land mine. ”
In a real estate market as war-torn as Boston's— Kiplinger's Personal Finance
last month rated it the riskiest in the nation—it makes sense that
people would put their most valuable possession into the expert hands
of a traditional real estate agent. Indeed, the Massachusetts
Association of Realtors happily reports that 91 percent of sellers used
a real estate agent last year. But its news releases don't talk about
how the interests of these seemingly supportive agents frequently
diverge from those of sellers. They don't disclose how, in an era of
Craigslist and other high-tech tools that threaten to make brokers
irrelevant, the industry is working aggressively to block anyone from
cutting professionals out of the deal. They don't mention crooked
agents, trusting clients who fail to watch their step, impotent state
regulators, or a two-month-old state law that might make everything
worse, which real estate lobbyists slipped through the legislature
without public hearings.
The real estate industry doesn't like to talk about the land mines.
Like every other expert I speak to for this story, John Gosselin
gets his disclaimer out of the way first. “The people who are
successful in this business are successful because they're ethical,” he
says. Most real estate brokers, it's true, are perfectly honest.
But then Gosselin, who not only owns a real estate brokerage himself
but is also a lawyer who specializes in real estate litigation at
Gosselin & Associates in Winchester, adds: “A number of them are in
the business to screw people.”
At least 125 in the past two years, to be more exact. That's how
many Massachusetts agents and brokers have had their licenses suspended
or revoked, or were otherwise disciplined, according to state records.
Last year, there were more than 300 new complaints. One real estate
agent in Medford forged his client's signature; he lost his license for
two months. Another failed to pay back $130,000 in buyer deposits, and
was barred from the real estate business for two years. Another agent,
convicted of raping a child, lost his license forever. One agent
finally was stopped from doing business in the state after working two
years without a license.
It's actually surprising anyone was caught at all. The state's
Division of Professional Licensure, which oversees the real estate
licensing board, has only three investigators to police some 80,000
Massachusetts agents and brokers. It's a big job, complicated by the
fact that there's such a low price of admission. All the training it
takes to get an agent's license here is 24 classroom hours, the lowest
standard in the country. Some schools offer a complete course in a
weekend. Hairdressers, by comparison, are required to train for 1,000
hours.
Massachusetts' real estate market may be among the nation's
hottest—the state's top 100 real estate agents alone have listed nearly
$42 billion worth of properties so far this year—but its
real estate board is one of the lowest-funded, spending less per
licensee than almost any other state's. Even if it had the resources,
there is little the board can do to penalize shady operators in the
real estate business, the only one of the 43 professions licensed by
the Division of Professional Licensure that is exempt from being fined
for taking advantage of its customers.
Even honest agents don't always have the incentive that home sellers
probably think they do to get a higher price—say, an extra 10 grand for
a $300,000 house. Because of the complicated way commissions are
divided up among agents and their firms, the homeowner might make
thousands more but the agent stands to pocket only an extra 150 bucks.
When the incentive is there—meaning when agents sell their
own houses—it's a different story. Real estate agents keep their own
homes on the market 10 days longer, on average, and sell them for
nearly 4 percent more than what they get for clients' homes, economist
Steven Levitt reports in his bestseller Freakonomics. In a
town like Weston, where median home prices are in the neighborhood of
$1 million, a 4 percent hit translates into a loss for a homeowner of
upward of $40,000.
“Brokers' compensation has no correlation to the value of service
they provide,” says Gosselin. “It incentivizes them to go out and find
the highest-priced transactions and give those people the best service.
You can't blame them. It's how the system is biased.”
This doesn't mean the real estate industry is willing to let a single home-
owner slip through its fingers. The Massachusetts Association of
Realtors would like to persuade you that the number of homes sold
without an agent—so-called FSBOs, or “for sale by owner”s—dropped
nearly 40 percent last year, the triumphant result of a forceful
industry campaign to stop people from selling their own homes. The
association said something similar the year before, announcing that
only one in 10 houses was sold without an agent. An independent survey
suggests the true number was one in four. Meanwhile, flat-fee online
listing services report that their business has doubled.
Real estate agents hate this. Regulatory documents obtained through
public-records laws include a complaint from one buyer who found a
Worcester house for sale by its owners. She called her agent and
suggested making an offer the next day. The agent rushed to the sellers
that night and convinced them to sign with her. She also got them to
raise their price by nearly $60,000, significantly increasing her
commission. The agent's license was suspended by the state for all of
15 days.
One man who sold his own condo reports having gotten a call from an
agent who said her clients would love the place, but she wouldn't show
it to them unless she got a half-percent-higher commission. “All I
could think about was how her buyers thought she was dedicating herself
to finding them the perfect home, when she was only interested in
making a couple more bucks,” this seller says. When other agents did
promise to bring clients, he says, he left work only to find that they
had come with nothing more than fistfuls of brochures, and in one case
a PowerPoint presentation, all about the mortal dangers of going it
alone.
That's the ultimate sales pitch. If real estate agents aren't
selling your house, they'll try selling you fear. You won't get your
price, they say. You open yourself up to liability. But it's true, one
real estate executive insists ominously when asked about this: “When
you open your door and let people into your home, what liability are
you running? There are people who prey on that situation.”
it's all about Commissions. A buyer tells of how his own agent tried
to move up his closing from January to December so her sales numbers
would be higher for that year. When he declined, citing the extra
interest costs he'd have to pay, she went behind his back and appealed
to the seller to force the closing forward.
Another story comes from a couple who found a house in a new
development west of Boston. It was $600,000 but they loved it, so they
signed the contract. Their agent and the listing broker agreed to split
the commission at the closing, slated for that spring or at close of
construction, whichever came last. By early spring, however, the market
spiked and the listing broker found someone who would pay $800,000 for
the house. She wouldn't even have to split her commission: If she broke
the first contract, worth $15,000, she would get $40,000 from the
second. The listing broker and the builder stalled construction so
effectively that the first buyers walked away.
This kind of thing happens regularly in hot markets like Boston,
says Gosselin, who represented the initial buyers when they discovered
the scam and filed suit. Brokers who know about problems will fail to
mention them because they have a sucker on the line, he says. Then a
bigger one comes along. “They'll say, 'Did I mention the termites? Did
I mention the murder that happened in the house?'” His clients
ultimately won a settlement that included the house, legal fees, and
enough cash for an epic spending spree at Home Depot.
No matter the game, the deck is stacked in the broker's favor. It
was a fluke that Gosselin's couple ever discovered what was going on:
The second buyer's mother, who had been let in on the scheme,
unwittingly told the couple's agent the whole story. “It's very easy to
get away with midlevel fibbing as a real estate broker,” Gosselin says.
If you find out you were had—and that's not likely—you might hire a
lawyer, but that's even more cash down the money pit. The only other
real choices are the Better Business Bureau, “which is basically kind
of useless,” or the Attorney General's Office, which will typically
send you back to the licensing board.
That could soon change. The U.S. Department of Justice and the
Federal Trade Commission have opened investigations into how the
traditional real estate industry may be trying to restrict online
competition, and the Government Accountability Office is also looking
into the real estate business nationwide.
An enormous amount of power is now concentrated in the hands of a
few real estate companies. ERA Real Estate, Century 21, and Coldwell
Banker Residential Brokerage, among others, for instance, are all owned
by Cendant, the world's largest brokerage franchiser. Coldwell Banker,
in turn, is the largest real estate firm in New England, with
Massachusetts residential sales volume last year of more than $14
billion. In some Massachusetts towns, these companies control more than
half the market. Understandably, they like the status quo. The
traditional industry attitude is “defend, defend, defend; resist,
resist, resist,” says Bill Wendel. “[They say,] 'If we change anything,
we'll change the law to protect what we're doing.'”
Few examples of this are as stark as a measure that quietly became
effective in this state on July 1. Primarily supported by large real
estate agencies, it offers greater liability protection to brokerages
that tread on the dangerous ground of representing both the buyer and
seller of the same house—so-called designated agency. Opponents compare
this to the same law firm representing both sides in a divorce—a clear
conflict of interest.
The measure died in committee when it was first proposed in 1997,
thanks to spirited testimony against it. But its strongest backer, the
Massachusetts Association of Realtors, helped get a streamlined version
tacked onto this year's state budget as a last-minute amendment. This
time there was no public hearing.
Critics of the new law worry that customers will sign the required
designated-agency consent form amid a stack of other papers without
understanding what it means. “It's an innocuous form that describes
what's happening, but explains nothing about the potential
consequences,” says independent agent Barry Nystedt, who owns Buyer
Brokerage Realty in Newton. “Once the consumers sign it, they've signed
away their rights.”
Massachusetts Association of Realtors associate general counsel
Margy Grant disputes this. “At the end of the day, any kind of
violation on behalf of any agent falls back on the firm, regardless of
its relationship with the consumer,” Grant says. She and others insist
that most agents disclose potential conflicts of interest fully and
accurately.
History suggests there's cause for alarm, however. Since 1993,
agents in Massachusetts have been required to get clients to sign a
different disclosure form acknowledging that they've been told who in
the transaction the agent represents, the buyer or the seller. Four
years later, undercover investigators walked into 45 real estate
offices, posing as customers. Not a single real estate agent properly
disclosed his or her allegiance.