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A few housing market observations:

(1) The saying that real estate is all about location has never seemed more true. Last Sunday, I attended an open house at a beautiful, well-priced house well inside the Beltway in a nice neighborhood in Bethesda, but not near a metro, and I was one of very few visitors (around 5) for the entire day. My next stop was an unrenovated old house in Chevy Chase near the Metro that cost close to $1 million. This open house attracted around a hundred people.

(2) Real estate agents in the DC area, and perhaps elsewhere, have developed norms that make in their lives a lot easier, but redound the detriment of sellers. For example, a few years ago my wife and I made an offer for a house with an escalation clause to $525,000. We lost the house to a couple who offered $526,000. We certainly would have come back and offered, say, $530,000, had the sellers made this counteroffer. Apparently, this would have been considered an "unfair" tactic by the sellers' agent, though I have a hard time understanding why. This was NOT a situation where the seller had said "all contracts will be reviewed Tuesday at 5:00 p.m.," which I can see includes an implicit promise that buyers won't be played off against each other.

My father experienced a similar phenomenon as a buyer in Long Island a few years back. He purchased a house via a closed bid auction among interested buyers(his wasn't the highest bid, but the highest bid offer fell through), and acknowledges that he would almost certainly have been willing to raise his offer if the agent had conducted an open auction among interested buyers, though this would have involved substantially more work for the agent.

(3) The houses that just sit and sit on the market are houses that were purchased, or refinanced for full market value, in 2005, at the market peak. Inevitably, these houses are priced so that the seller will make a profit or least break even after commission. But of course no buyers are willing to pay a premium from the market peak's price. I'm not sure if this is supporting evidence for the loss aversion hypothesis (that people "feel" a loss much more than they "feel" a gain) that is a popular in law and economics circles these days, or if the sellers simply can't afford to sell for less than the purchase price.

Nathan_M (mail):

My father experienced a similar phenomenon as a buyer in Long Island a few years back. He purchased a house via a closed bid auction among interested buyers(his wasn't the highest bid, but the highest bid offer fell through), and acknowledges that he would almost certainly have been willing to raise his offer if the agent had conducted an open auction among interested buyers, though this would have involved substantially more work for the agent.

Of course, the danger for the seller is that he would have paid less if no one else at the auction was as interested as he was.

It's strange how customs develop, though. It's extremely common for houses to be sold in an open auction in Australia, but it doesn't seem to happen much here. I wonder why.
6.6.2007 12:40pm
Preferred Customer:
An informed buyer can make these norms work in their favor. The key in an escalation clause, as you probably have figured out, is to make your maximum figure something that is not divisible by 5. Setting your maximum at, e.g., 527 will allow *you* to be the one that beats out the people who set 525 as their limit--and you'll pay less than if the seller's agent had come back to you and you had volunteered 530.

I know nothing about the ethics of the real estate business, but in my experience the agent probably (should have) told the seller that there were two bids, one for 525 and one for 526, and that there was a chance that the price could go higher. Presumably, the seller could have rejected both bids and asked for you both to resubmit--the fact that they did not means that they probably were happy with the 526 and did not want to risk losing it for the chance of a higher sale price.

In a competitive bidding situation, too, there's more at stake than simply the price. As a seller, I was interested first in the offer price, but almost as important to me was the solidity of the offer. A higher escrow amount, a deal without any conditions, or other, similar things that showed one deal was more likely to close than another could have led me to accept a lower bid. Perhaps, in your case, the 526 offer appeared rock-solid, and the seller just did not want to be bothered with trying to eke out another 5 or 10 grand.
6.6.2007 12:44pm
Pon Raul:
I don't really know anything about real estate law, but are you sure that the selling agent would have been allowed to call you to tell you what the other party had offered. Might there have been a confidentiality clause that made the offer void if shared with you? Are you sure that they simply offered $526,000? Maybe they also included an escalation clause up to some higher number that called for them to pay $1,000 more than the next highest bid? Plus, why would the sellers agent think that you would be willing to pay anything significant above to the top out of your escalation clause when this is suppose to be the highest price that you are willing to pay for the property?
6.6.2007 12:47pm
Per Son:
I agree with the above. When my wife and I bid on a house in DC, we put a 10,000 escalation clause with (1000 above the enxt highest bid).

It ended up not working, since someone else who paid less had a much higher down payment, and the seller felt safer with that.

Jared
6.6.2007 12:48pm
byomtov (mail):
I'm not sure if this is supporting evidence for the loss aversion hypothesis (that people "feel" a loss much more than they "feel" a gain) that is a popular in law and economics circles these days, or if the sellers simply can't afford to sell for less than the purchase price.

This is not quite the "loss aversion" idea, but it does illustrate the unwillingness to recognize a loss that is often seen in investors' behavior in the stock markets. "I can't afford to sell and take a loss," is obviously foolish, since one has already taken it.

It's even worse with houses, because the holding cost of an unsold house is very high. While it sits on the market the seller incurs insurance costs, property taxes, and general maintenance costs, while forgoing interest on the possible sales proceeds (unless one expects the house to appreciate dramatically).
6.6.2007 12:53pm
DavidBernstein (mail):
The sellers didn't have to tell us the other offer. They could have just sent our contract back to us, with the numbers changed to 530K, and said, "either take this offer or we're going to accept another contract," which was better than yours, which would have been entirely true. The house had only been on the market a few days, and it snowed over the weekend, so the sellers shouldn't really have been in a rush!
6.6.2007 12:53pm
Ted Frank (www):
I agree with Pon. That 526 result probably stems from an escalation clause that maxed out well above your 525, which may be why no one went to you with a counteroffer. What I don't understand is why you didn't simply submit an escalation clause to 530 if you feel you missed out a chance to buy at that price. Of course then the house might have gone for 531.

I also don't understand why there aren't more open auctions; the economic literature shows that that results in higher prices than closed auctions, though perhaps that's just for economically sophisticated buyers.
6.6.2007 12:57pm
Ted Frank (www):
By the way, I agree completely about location. My building's values continue to appreciate, though the annual increase is in the single-digit percentage rather than the double-digits that it was the first few years I lived here.
6.6.2007 12:58pm
NARL RE Hunter:
Professor Bernstein, I am curious why you are looking for houses when metro-walkable SFH prices have not fallen (if anything, have gone up slightly) in the R-B corridor and MoCo, and you said in 2005 those prices were wildly inflated. Have you changed your mind?
6.6.2007 1:09pm
jallgor (mail):
Brooklyn probably has one of the most dysfunctional real estate markets when it comes to odd agent practices. First, there are a ton of small agencies that may have 20 or 30 listings. There are no buyer's agents only seller's agents. There is no MLS system and the agencies don't co-broke so to see all the listings available you have to go from agency to agency. Many times one seller will have multiple listing agents. So you can have a situation where two people are bidding on a house but they are both communicating their bids through different seller's agents. One agent could decide to sweeten his buyer's bid by reducing his commission. This is just one of the crazy scenarios that come up. I like the idea of an open auction system. I have some Australian friend who rave about it.

And speaking of location, New York City has yet to see any real decline in housing prices. I am in contract to sell an apt. for about 10% more than I was offered for it a year ago.
6.6.2007 1:21pm
David Drake:
Ted and Pon--

But, had the $526k contract had a higher escalation, shouldn't the seller's agent have tried to trigger the escalation and get a higher price for his or her client by going back to Prof. Bernstein with "someone topped you--try again," or with the price changed to $530k?
6.6.2007 1:22pm
JB:
David: But that would be some hours' work for (commission%)(sale price-526,000), which is a much less efficient use of their time than finding another client, which would net them (commission%)(sale price).

So doing that would cost them money, assuming they had enough potential clients.
6.6.2007 1:31pm
Preferred Customer:

The sellers didn't have to tell us the other offer. They could have just sent our contract back to us, with the numbers changed to 530K, and said, "either take this offer or we're going to accept another contract," which was better than yours, which would have been entirely true. The house had only been on the market a few days, and it snowed over the weekend, so the sellers shouldn't really have been in a rush!


I agree with the poster above, though--if you were willing to pay 530, why didn't you make 530 your limit in the escalation clause? Why stop at 525? More important, if (as a seller) I receive a contract with an escalation clause that goes to 525, why would I assume that the buyer would be interested in bidding 530? Escalation clauses operate on the idea that buyers are putting their true maximum in the clauses--in most cases, it would be a waste of time to go back to the buyer and ask for a higher price.

Now, there is an element of irrationality that can come out in an open auction, as you think to yourself "I'm so close--can't I just spend a bit more and get it?." But I would think that the escalation clause, which allows the buyer to rationally pick their maximum price and not be influenced by the heat of the moment, would be more appealing to someone like Prof. Bernstein.
6.6.2007 1:32pm
RPS (mail):
Ted,

My understanding (or at least how it worked in my situation) is that the escalation clause is not like an Ebay maximum bid, which tries to win you the auction at the lowest price possible. If the escalation clause kicks in, the whole thing kicks in. If that's right, then the winner's offer was $526.
6.6.2007 1:42pm
RPS (mail):
Of course, they could have had their excalation clause go up in increments...nevermind.
6.6.2007 1:50pm
Another Random Commenter:
Maybe I'm missing something, but if you were willing to pay 530k for the house, why did your escalation clause stop at 525k?
6.6.2007 1:57pm
gab:
Vis-a-vis #3 - If the owners have a 100% mortgage, then they really can't afford to sell the property for less than the purchase price, as they'd have to send the lender a check for the difference. Something most people are unwilling to do. Until forced to...
6.6.2007 2:15pm
Dan Weber:


I agree with the poster above, though--if you were willing to pay 530, why didn't you make 530 your limit in the escalation clause? Why stop at 525


Because people aren't entirely rational. Seeing many other people bid 525 is a signal to you that your valuation at 525 is a good one.

This is one of the reasons I only snipe eBay auctions now. In theory, it shouldn't matter if I bid $40 right now or 5 seconds from closing, but I get better results (more "wins" and at lower prices) with the latter strategy.
6.6.2007 2:42pm
davidbernstein (mail):
The other contract's escalation clause stopped at $526, we later learned. Why didn't we escalate higher? We actually debated among 525, 527, and 530, and rather arbitrarily settled on 525. One problem with escalation clauses is that you never know whether the other parties are putting contingencies on their contract that you don't have on yours, so you can wind up, in effect, outbidding yourself.

But my point is not to rely on this specific example, I can give others. The point is that the agents don't try to squeeze out the last dollar for their clients, and that the norms seem to favor ending negotiations as quickly as possible, which favors agents, not sellers.

As for prices, I don't know of anywhere in the area where I've seen houses selling for more than mid-'05 prices, though their might be very local exceptions. The range is early '04 (e.g., pricey houses in South Arlington, parts of Falls Church) to early '05 (e.g., Lyon Park Arlington) (maybe worse in the outer suburbs, but I don't look there). This is up to a 20% or so difference in how prices are doing relative to the peak. Just for example as to why I say prices haven't gone up since '05, even in the hottest areas, there is only one house for sale under $1 million in the still-very-hot Cleveland Park right now, the owner is asking 30K, or about 3%, more than she paid in '05, and can't get it (after already reducing by over 100K).

I still think prices are somewhat bubbly overall, though not as bad as the peak. We're ready to buy something for at least the medium term, so we're not that concerned about short-term declines.

As to why we looked specifically in Chevy Chase, MD, my wife loves the particular neighborhood where the house was, and we did see a house a few weeks ago walk to Bethesda metro that was actually pretty nice and reasonably priced. By Friendship Heights, we've learned, however, forget it. On the other hand, there are some nice houses we've seen not too pricey in D.C. walk to Friendship Heights. You never know till you investigate.
6.6.2007 2:47pm
PaulB (mail):
A couple of unelated points in response to the previous posts.

It's sometimes hard to tell when you're a prospective buyer why the seller acted the way he did. InProf. Bernstein's example, maybe the buyer who offered $1k more had fewer contingencies.

No question that the incentive of the broker is to close the deal ASAP rather than place a deal at risk by trying to get a slightly higher price. This is not necessarily all bad. Even in commercial real estate (my line of work) where you would think we principals must be far more rational than those in the purchase and sale of their home, my experience has been that a good broker can be invaluable in making their client get past the anxieties that arise when it's time to put your name on a contract. The trick, of course, is to not cede decision making to your agent.

A final comment on the state of the housing market. I have noticed that central city and prime inner suburbs in the high end markets (San Francisco, New York, Boston, and DC come to mind) are currently doing very well. The lack of speculative purchases in these markets by speculators, the lesser impact of the subprime mortgage collapse on expensive home purchases, and strength in stock market prices and high end incomes has minimized the effect of the housing slowdown in these areas. The outer suburbs of these markets are doing much more poorly, though not nearly as bad as the boom markets of 2004-05 like Florida, Las Vegas, Phoenix and the California Central Valley.
6.6.2007 2:55pm
PersonFromPorlock:
Speaking of odd real estate practices, what on Earth is the purpose of a title search, besides separating the buyer from a few thousand more dollars? Just declare the title at the town office to be 'official' and deny any liens against the property which are not already posted there when the property is transferred.
6.6.2007 2:56pm
Dan Weber:
Title searches can also take care of things like, say, the previous owner getting a secret spouse in California who is then 50%-owner of the property.

Or someone committing indentity fraud and selling your own house out from underneath you.

I agree that the title search industry is way too fat for anyone's good but their own, but they're not entirely useless.
6.6.2007 2:59pm
left high and dry (mail):
A real estate story from about a week ago. The point of this story is not just to share an anecdote (although it does feel good to vent!), but also to point out another way real estate agents aren't as responsible as they should be.

My wife and I were looking at a house on May 28 -- Memorial Day. We wanted to put in an offer that day, but were told by the agent we were working with (call her "A") that we should wait a day, since nobody was doing anything that night, and tomorrow morning (at 9 am) would be soon enough. We agreed, and went home. The next day, we arrived at the home, and the owner greeted us at the door by telling us that a deal had been completed last night, and the house was no longer for sale.

The house was listed by a real estate agent in the same firm as A, whom I'll call B. B listed the house, and B was the agent for the eventual buyer, so B got the full commission (as opposed to splitting it with A, had we bought the house).

Based on what we learned (and as an earlier commenter noted -- we might never know the whole story), A told B that we were very interested in the house. B called the other buyers, and encouraged them to put in an offer. Then, B encouraged the seller to accept the offer. All this despite the knowledge that there were another set of buyers (us) who were very interested.

So, two points. First, B got the deal completed before we even put in our offer -- but he knew that we probably were going to put in an offer. Then, he got seller to accept that offer. Not very loyal to seller, since it is possible that we would have put in a higher offer in order to get the home.

Second, B never even told A that the house was sold. Instead, A took us to the house on Tuesday morning, only to be told at the doorstep that the house was no longer for sale. Not very classy at all.

Maybe this post is more about venting then about contributing, but to me it demonstrated that a real estate agent doesn't take his (or her) responsibilities or professionalism very seriously.
6.6.2007 3:34pm
Ella (www):
Left High - Not only not classy, but not ethical. This is why I'm always amazed when people are willing to engage in transactions where the same person acts as buyer's and seller's agent. The buyer would likely have done better if B had played your offer against the other one.

By the way, fire A. She is clearly incompetent and it sounds like she might have been in on B's scheme (God knows why). Everyone knows that real estate transactions take place outside banker's hours. As a typical example, I bought my current house after my agent showed it to me as an afterthought at 5:00 on a Tuesday. Three hours later, I had a contract. More recently, my neighbor had her first open house Sunday and by Monday morning the house was under contract.
6.6.2007 3:53pm
Buckland (mail):
The point is that the agents don't try to squeeze out the last dollar for their clients, and that the norms seem to favor ending negotiations as quickly as possible, which favors agents, not sellers.


This exact quandary is the subject of 1 chapterof Steven Levitt's Freakonomics. Here's the numbers as the agents see them: The commission tends to be broken 4 ways -- selling broker, selling agent, listing agent, and listing broker. With a sale price of $526k the total commission is roughly $31,560. Split 4 ways (the splits tend to be roughly equally) that gives each of the 4 parties about $7,890. If they could get the price up another $4k that would bring each of the parties another 60 bucks. Just not worth the hassle.

The agent will always push for a quick sale for their client's properties, but will be more willing to wait on anything that they personally own.
6.6.2007 3:58pm
AU Park resident:
Not a comment on the housing market, but on your particular house search, Professor Bernstein: If you're looking at Chevy Chase and Bethesda, you should also check out nearby American University Park in D.C. It's nice and near two Metro stations (Friendship Heights and Tenleytown) and the neighborhood elementary school is good.
6.6.2007 4:07pm
NARL RE Hunter:
Professor Bernstein, are you saying SFHs in the Arlington orange line areas (Lyon Village, Lyon Park and Ashton Heights) are down off of their 05 peaks? Because I just don't see that. Even in those areas there is fairly low supply, and houses are moving pretty fast. I'll grant your point in 22204, Falls Church, etc. but in the metro-walkable SFH market I just don't see it.
6.6.2007 4:45pm
davidbernstein (mail):
Definitely in Ashton Heights. We almost put a contract on a house there that was last sold in Spring '04 and was listed for about 12% more than that previously sold price, which is almost certainly less than the house would have gone for in '05. I'm not as certain about the Lyons, because most of the houses we'd be interested in there are over our budget and thus out of my purview, but townhouses are down somewhat. E.g., I think AR6242536, now selling for 965K, would have gone for over a million at the peak. It sold for 886 in Spring '04.
6.6.2007 5:38pm
George Lyon (mail):
When I sold my North Carolina beach house three years ago, the agent told me there were three offers on the property, all of which in my view were too low. I told her to tell the two lower bidders the high bidder's price so they could rebid. She claimed this would be unethical. I said, why? I Got no answer which convinced me that my approach was immoral or illegal, and so instructed her to do what I wanted. One bidder dropped out, apparently convinced by that bidder's agent that I wanted a bidding war (duh), but the other bidder raised his price. If anyone has any basis why playing one offer against another is unethical, I'd love to hear it.
6.6.2007 6:00pm
NARL RE Hunter:
Am curious if the Ashton Heights house was actually walkable to the metro (Va. Sq. or Clarendon) or just "near" the metro. Because there are a number of houses, on 1st street or highland, for example, that are for sale and claim to be "walkable" but are really 3/4 of a mile or more away from the metro/Wilson.
6.6.2007 6:08pm
NOVAgator:
I actually think professor bernstein and some of the posters are talking past each others. Would some of the Orange Line SFHs purchased in 2005 go for less today? Sure. Would most of them? No. Are there any livable SFHs for sale within walking distance from the metro for under 800K? No. Were there in 2005? Yes (I sold mine then!). Neither of you should argue from anecdotes. I suspect if Professor Bernstein could find a livable house under 800K in AH or the Lyons he would buy it; there happen to be none on the market right now.
6.6.2007 6:22pm
byomtov (mail):
If the owners have a 100% mortgage, then they really can't afford to sell the property for less than the purchase price, as they'd have to send the lender a check for the difference. Something most people are unwilling to do. Until forced to...

I think this was addressed to me. Good point.

In some cases you might be able to work with the lender, who probably wants to avoid foreclosure, but maybe not, and lots of people are probably reluctant to try.
6.6.2007 6:31pm
Tyrone Slothrop (mail) (www):
When I sold my North Carolina beach house three years ago, the agent told me there were three offers on the property, all of which in my view were too low. I told her to tell the two lower bidders the high bidder's price so they could rebid. She claimed this would be unethical. I said, why? I Got no answer which convinced me that my approach was immoral or illegal, and so instructed her to do what I wanted. One bidder dropped out, apparently convinced by that bidder's agent that I wanted a bidding war (duh), but the other bidder raised his price. If anyone has any basis why playing one offer against another is unethical, I'd love to hear it.

When I bought a house several years ago in California, we were the next-highest of four bidders, by a substantial margin. But, my agent told us, the selling agent came back to him and told him that if we could come close to the high bid, they would sell to us since we seemed more likely to complete the transaction (we'd been in the property, which had issues, three times and the high bidder hadn't been in it). We re-bid $8K lower than the highbid (>1% of the sale price, <2%), and our second bid was accepted.

Our agent told us that it was unethical of the selling agent to do this. Indeed, the strong feeling around town was that this agent played it fast and loose, something I later heard from multiple other agents. As George says, it wasn't clear to me why this would be unethical, except that if the common assumption going into the bidding is that this won't be permitted, then it's not right to change the rules in mid-game. You might submit a different bid if you thought an auction would ensue.
6.6.2007 6:32pm
Nicole:
You can do a search for homes for sale in the radius of Metro stops here:

http://nvfh.com/search.cgi?search_type=transit3

Then you can answer the question once and for all.
6.6.2007 6:45pm
NARL RE Hunter:
Thanks--that is a useful site. There is one 3/2 or better SFH under 800K within .5 miles of Va. square and none within .5 miles of Clarendon.
6.6.2007 7:02pm
Ella (www):
From the Realtors' (R) code of ethics (they really did copyright "realtors") at www.realtors.org:

Standard of Practice 1-15
"Realtors (R), in response to inquiries from buyers or cooperating agents shall, with the sellers' approval, disclose the existence of other offers on the property."

I couldn't find anything else about the ethics of giving the amounts of competing bids. The only problems I can see with the seller volunteering this information is (1) the potential for fraud (was there really a competing bid?); (2) the potential to use it as a means of discriminating against the high bidder (seller would rather sell to a white person who met the black person's price); and (3) the potential that the current high bidder won't be given a chance to meet or beat the rebidding buyer's price. Someone willing to violate the law by committing one of the first two infractions is hardly likely to be dissuaded by the rule against informing buyers of competing bids. It also seems that failing to solicit a higher bid from the original high bidder would be a violation of the agent's duty to the seller.

The "rule" seems to be more a way of making life easier for agents - quicker sales, less back-and-forth, and more opportunity to scratch each other's backs.
6.6.2007 7:05pm
David Drake:
JB--

Isn't an "agent" a fiduciary for his or her client and therefore bound to get the best price for the home? left high and dry and Ella allude to "ethics" but isn't the duty a legal one--that is to represent the client's interests?

E.g. I am an attorney, and often negotiate for clients. Let's say my client authorizes me to accept an offer of $100. The opposing counsel offers $100 but inkles to me that her client could go higher. My concept of my legal duty is not blindly to accept the $100, nor to refuse the offer, but to say "well, I'll see what my client says" then tell the client that the other side offered $100 but that I think I can get more. To do less oay be ethical-although I doubt it, but may also be a violation of my fiduciary duty and thus make me liable for the difference?

So why is a real estate agent different? Or am I wrong about my duty to my client?

I don't think that my legal duty changes if I have tghe case on a contingency basis, as does the real estate agent.

Or is a real estate agent in DC or not an agent in the legal sense?
6.6.2007 8:43pm
DavidBernstein (mail):
The only real data I can give you is that both medians and averages are down a bit in 22201 from Oct. 2005, the first month available online, to April 2007, the most recent month.
http://www.mris.com/reports/stats/zip_stats.cfm
From April 06 to April 07 there is an even greater drop, so 22201 may have started dropping later than other areas. There is a big caveat with these data, which is that they don't break out condos, townhouses, and SFHs.
6.6.2007 8:59pm
Harry:
Unethical is probably a little strong. When I sold my house 5 years ago, I had two close offers the same day. My agent cautioned against getting into a bidding war in part because if the first deal falls through in the end, you don't want to have upset the second buyer and agent that they would not discuss a fall back offer. You also have upset the committed buyer to back out if other issues arrise. In my case, the offer was contingent on an inspection, which uncovered a minor problem, which was remedied, but could have allowed the buyer to back out. The buyers told me at closing that they thought I had treated them fairly the whole way.
6.6.2007 10:48pm
left high and dry:
it wasn't clear to me why this would be unethical, except that if the common assumption going into the bidding is that this won't be permitted, then it's not right to change the rules in mid-game …

If the only reason for a rule is to have a level playing field, but that rule is not being followed (as we have seen from numerous posts on this page), then it seems that the rule should be scrapped. A rule should have some type of substantive purpose other than just "we need to have something for a rule." Otherwise, clear out the rule, and let the market go to work!

For that matter, get rid of "buyer's agents" all together -- outlaw them -- and let the sellers work the market … how many other industries -- industries that are not niche industries -- are there with "buyer's agents"? (note: I'm honestly curious about why we don't just abandon buyer's agents all together -- I'm only sort-of-joking)
6.6.2007 11:12pm
Ron Hardin (mail) (www):
A study a few years ago, probably in the WSJ, showed that houses owned by real estate agents sold for more than the average house, owing to just waiting for a better offer than what realtors typically recommend that their clients wait for. The difference comes down to how many extra dollars go where, from waiting longer. The owner gets the lion's share, and if the realtor is the owner, that changes the incentive into waiting over accepting.
6.7.2007 8:35am
Scaldis Noel:
As a licensed real estate agent in PA, I am torn by competing emotional reactions. First, I hate seeing my profession so thoroughly trashed in the comments. Second, I am horrified by the lack of ethics and professionalism of the agents that many commenters describe.

There are a few issues raised in the comments that I would like to address.

1) If the real estate professional is called an "agent" they surely do have fiduciary responsibilities. I make a point of explaining these thoroughly at the first meeting with any potential client, both because it is the right thing to do and because it is the law in PA.

2) The commenter who suggested outlawing Buyer's Agents simply cannot possibly understand what a Buyer's Agent is or does, or he would not suggest it. Having a Buyers Agent who is doing his job properly is as valuable to a home buyer as it is for anyone in a legal proceeding to have their own legal representation. What alternative does the commenter suggest that is a preferable way of insuring that the Buyer is represented?

3) For each of you who have had bad experiences with real estate agents, please report them to the appropriate state board. In Pennsylvania, when agents and companies are found to be violating the law and/or acting unethically, they are dealt with quite harshly (appropriately so). The problem is, all too often, violations are not reported.

4) Most of the experienced agents I encounter are honest and consider their ethical responsibilities as essential to their jobs. Unfortunately, there are too many inexperienced agents who, even if they want to do the right thing, do things that are unethical out of ignorance. Also, there are a few (but always too many) experienced agents who are satisfied with lax ethics as long as they don't get caught. They give my profession a bad name and I wish that more people would report their unethical and illegal behavior to the appropriate authorities.

5) Regarding David's post and subsequent followup - It appears that the agent did not provide the seller with good advice regarding the way to get the best price, however, there is enough information that we don't know, that I would not be willing to say that for sure.

6) There is nothing illegal or unethical about a seller playing one offer against another, and nothing illegal or unethical is done when an agent follows the seller's instructions to disclose any terms of an offer to other potential buyers. On the contrary, it is the agent's fiduciary responsibility to follow the seller's legal instructions. However, playing one offer against another does risk the possibility of losing both offers, because many buyers simply don't want to get into a bidding war. In my area, bidding wars are very unusual. My responsibility as an agent is to make my client aware of all of the reasonably forseeable possibilities, give them recommendations on what is likely to happen, and then follow their legal instructions.
6.7.2007 1:42pm
left high and dry:
My further thoughts on why buyer's agents are not necessary. But first, a few disclaimers. Scaldis Noel -- I can imagine it does not feel good to have your profession criticized. I do not mean any criticism of an individual to be a criticism of all people in that profession. My profession -- law -- is the subject of similar trashings -- and I know it doesn't feel good! Also, you are correct to note that I do not understand all that a buyer's agent does. But, with that ignorance in mind, here goes …

I see three problems with a buyer's agent. First, there is a high potential for conflicts of interest. Real estate agents serve in either buying or selling capacity. Attorneys have the potential to be in similar situations. To address this, attorneys have a lot of education (3 years of school), testing (MPRE and BAR exams), a system of checks and balances (adversarial system motivates the other side to check your work), and a lot of oversight (judges or disciplinary boards) to keep this potential problem in check. I don't sense that the real estate industry similarly manages potential conflicts of interest.

Second, real estate agents deal with unsophisticated people. Even on this board, which probably includes some of the brightest minds in the country, people don't have a strong understanding of what is happening. This lack of knowledge makes it more likely that an unscrupulous buyer's agent could slip something past.

Third, a buyer's agent is paid on commission based on the sale price. The higher the sale, the higher the commission paid to the buyer's agent. Thus, the duty to the buyer is at odds with the buyer agent's motivation to make money. And, the fee is often paid by the seller. Odd arrangement.

I can think of two ways a buyer's agent may be useful. First, a buyer is faced with many choices, and a buyer's agent may assist in sorting options. Second, a buyer is faced with an unfamiliar process, and a buyer's agent may provide guidance.

Both concerns could be addressed without a buyer's agent. Why not just rely on a selling agent's ability to get a buyer? If I am looking for a house for $200k, an agent selling a house for $200k should be doing all he or she can to get me to look at that house. Rather than relying on a buyer's agent to bring me to a house, why not rely on a selling agent's ability in the marketplace to bring the house to me?

As to needing a person to look out for a buyer's interests, I know little about what interests need protecting. But what I do know is that most people get a mortgage for a home. To get a mortgage, the lender has an interest in making sure that the home is in good condition, and worth the money that will be loaned. Doesn't this do a lot to cover the buyer's best interests?

Finally, if there are other buyer's interests, perhaps a different industry would be appropriate. There are "assist to buy" companies who help people though owner to owner transactions. Couldn't a person such as this be hired by a buyer at a much lower cost than paying a buyer's agent 3% of the sale price of the home?

Sorry this post is so long, so I better stop there. I am curious to hear criticisms -- b/c I am sure there are flaws in my reasoning.
6.7.2007 4:41pm
Ella (www):
Left high -

You don't have to use a buyer's agent if you don't want to. You can just hire a lawyer to handle the legal documents and leave it at that. The experienced buyers I've known who went that route did fine. Most of the inexperienced ones ended up having problems. And, of course, you have to pay for the lawyer on top of the purchase price and closing costs - it's unlikely that your purchase price will be 3% lower, since the seller's agent will be thrilled to take the full commission from the seller.

As to your other concerns, REALTORS (R) do have a few incentives - beyond professional ethics - not to screw you over. They depend on (1) repeat business (when you sell, your "buyer's" agent hopes to become your "seller's" agent) and (2) personal recommendations from satisfied customers.

A good real estate agent can be invaluable, especially if you're unfamiliar with the process or the market. Your (hopefully, former) agent is clearly incompetent and/or unethical. If she hasn't soured you completely on the whole profession, you may want to ask around and get a few recommendations. Otherwise, assuming your market is as much of a buyer's market as most places, you can probably do pretty well representing yourself.
6.7.2007 5:21pm
Scaldis Noel:
Left high,

I'll try to address each of the issues you raise regarding potential problems with buyer agency.

1)High potential for conflict of interest - Your specific concerns deal not with the potential for conflicts of interest, but with a lack of oversight. And you really don't say anything about how buyer's agency is more fertile ground for a conflict of interest. In my opinion, the advent of buyer's agency has done more to remove conflicts of interest in my profession than any other recent changes. Before buyer agency, the buyer developed a relationship with a sellers agent (or sub-agent), who intentionally or not, gave the impression to buyers that the agent was working for them. That was a system with a much higher likelihood of abuse and conflict of interest. That is why buyers agency was developed, to minimize the conflict of interest.

2) Real estate agents deal with unsophisticated people - How is that different from any other professional service? That is why lawyers, doctors, financial advisors, etc. are hired, because our clients don't have the knowledge we do. Again, not a problem with buyers agency. In fact, I don't see how this is a problem. It is the reason that those of us who provide professional services to others exist.

3) Buyer's agent is paid based on the sale price, which is at odds with the responsibility of representing the buyer - I do not disagree that this can be a concern. But, as has been mentioned earlier, the difference in commission on a few thousand dollars in higher sale price is negligible. It is extremely rare for the difference in what a buyer pays and what a buyer can actually negotiate down to will make a significant difference in commission. Few agents, except for the unscrupulous ones (which can be found in any profession), are going to ignore their fiduciary responsibilities over a 1% higher sale price. Bottom line, there is the potential for conflict of interest in any profession where a professional is responsible for representing the interests of their client. If the real estate industry isn't good at policing that, it isn't a problem with buyers agency in and of itself, it is a problem with policing violations.

To sum up all of your arguments, they really deal with proper policing of the profession, not with buyer's agency. I totally agree that the real estate profession doesn't have enough oversight, but I think the same could be said of nearly any profession. I am sure that you have come across unscrupulous lawyers and doctors that have never been sanctioned. That isn't a problem with the professions themselves, just the oversight.

One additional point you made, that the seller payes the commission for the buyers agent, and that it is an odd arrangement. Simple answer, it doesn't have any influence on me as a buyer's agent. It is really simple economics, the cash is in the sellers hands at the end of the transaction, not the buyers. Both sides are effectively paying for the commissions when they negotiate a sale price and agree to have real estate brokerages involved. It is part of the cost of doing business.
6.8.2007 12:01am