There are many conflicts of interest in real estate to be wary of, especially if you are a first time home buyer in NYC. We’ll go over a number of examples of conflict of interest in real estate between listing agents, buyer’s agents, home buyers, home sellers and mortgage brokers in the article below.
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The most common conflict of interest in real estate scenarios occur between real estate agents and their customers. This is because real estate agents have competing motivations between an immediate commission and an outcome that leaves their customers happy in the long run.
Remember that real estate agents are paid on commission, meaning their focus is on closing deals vs all other factors. With that said, customer satisfaction is important for most serious real estate agents as well because repeat customers and referrals are the main source of business for most agents.
Preference for a Direct Buyer
Listing agents will typically prefer to find a direct buyer, because they will make double the commission per most Exclusive Right to Sell Listing Agreements. Instead of having to split 6% equally with a buyer’s agent, the listing agent typically gets to keep all 6% in commission for a direct buyer.
This can be problematic because more qualified buyers who happen to be represented by a buyer’s agent might be pushed aside in favor of less qualified direct buyers.
How is this possible when listing agents are required to present all offers to the seller? Well, the listing agent can always verbally pitch the various offers to the seller, and frame them in a way such that the direct buyer sounds more qualified vs the represented buyer.
This is especially problematic when competing bidders have roughly similar offer prices, and the nuances lie in the financial qualifications, backgrounds and motivations of the bidders.
Furthermore, if you’re selling a co-op apartment, you’ll have to factor in your co-op financial requirements and the likelihood that a buyer will muster co-op board approval. As a result, selling a co-op leads to even more opportunities for your listing agent to promote direct buyers so they can earn more commission.
Selling Faster for Less
A classic listing agent conflict of interest is how long a seller should hold out for in the hopes of receiving a higher offer. Because agents are paid on commission, they by default are incentivized to sell a home faster, even if they could have gotten a slightly higher price if they marketed it a bit longer.
For example, let’s say that a home has a chance of fetching $10,000 more if it was marketed for 1 month longer. While $10,000 more would be significant to the seller, it results in only $300 (3%) or $600 (6%) in additional commission for the broker.
From the seller’s broker’s perspective, it’d be much more beneficial to sell it faster, collect a commission and move on to the next deal. That’s because accepting an offer now and selling it for $1,000,000 instead of working another month in order to sell it for $1,010,000 means collecting $30,000 (3%) or $60,000 (6%) now instead of $30,300 (3%) or $60,600 (6%) after working another month.
As you can imagine, the math just doesn’t make sense for a broker to work hard for another whole month for $300 to $600 more, especially in an expensive city like NYC where that won’t even cover groceries for the month!
Lazy After Finding Offer
Another listing agent conflict of interest lies in the agent getting lazy after finding an acceptable offer. Even though offers can fall through at any time before contracts are fully executed, a listing agent might get lazy and stop showings or actively pursuing other potential bidders.
Why? Because there’s a good chance that the accepted offer will go through, so why go through all that additional work to find competing offers? Furthermore, if the offer falls through, the listing agent can always start re-marketing the property.
This presents a classic conflict of interest in real estate because the seller has more downside than the agent if an offer falls through. The seller will waste valuable days on the market that could have been spent finding other potential backup offers. Furthermore, finding additional buyers might spark a bidding war that could get the seller an even higher accepted offer.
Focus on Easier to Sell Listings
A listing agent might lose hope or focus if a listing is too hard to sell. If the property is priced simply too high or otherwise lacks features such as ample light which makes it undesirable, a listing agent may lose interest or focus and decide to spend more time on other opportunities.
While this makes sense from the agent’s perspective because he or she presumably has multiple balls in the air, it doesn’t make a whole lot of sense for the seller who has only one, very important property to sell.
Remember that this is just human nature and not entirely the agent’s fault. If a listing is priced too high, then why would a rational person agree to run around and show it when there’s zero to little chance that it will sell? No one wants to work for free, and the same goes for real estate agents.
Boycotting of Discount Brokers
A classic real estate conflict of interest is the boycotting of discount brokers by traditional brokers. A listing broker will likely resent a discount or rebate broker who’s openly offering commission back to buyers as a way to gain business.
Given the option of working with a direct buyer or a friendly, traditional broker who isn’t out to “disrupt” the industry, why would a listing broker cooperate with a discounter?
Sure, it’s true that listing agents who take their fiduciary duty seriously will present all offers to the seller, regardless of whether the agent is a discount broker or not. However, there are many grey ways we’ve discussed previously where a listing agent can influence the seller to choose one bidder over another.
As a result, a listing agent may very well vouch for a traditional broker’s offer but cast doubt on the offer submitted by a discount broker. This unfortunately can lead to less than optimal outcomes for the seller, as the seller won’t be able to compare the offers from a more neutral perspective.
Preference for higher priced properties
The most common buyer agent conflict of interest is the tendency for buyer agents to steer their customers towards higher priced listings so they can make more commission.
Ever wonder why your buyer’s agent only sends you listings that are around $1,500,000 when you specified that your budget was $750,000 to $1,500,000? It’s because most agents would much rather make twice as much in commission, fiduciary duty aside.
Furthermore, it’s reasonable for the buyer agent to assume that you might enjoy living in a nicer apartment, especially since you’ve stated that you can afford it.
Keep in mind that sometimes inventory can be scarce, so you’ll end up seeing everything anyway. That’s because a buyer’s agent would rather do a deal, even at the lower end of your budget, versus not doing a deal at all.
Preference for Listings with Higher Co-Brokes
Another Realtor conflict of interest happens when buyer agents steer their clients towards listings that offer higher co-brokes (i.e. offers of commission) in the MLS (RLS in NYC). This can be problematic as you won’t ever see a For Sale By Owner (FSBO) listing sent to you by your buyer’s agent.
This actually makes quite a bit of sense because there’s no mechanism for a buyer’s agent to be paid on a FSBO listing, and thus introducing a FSBO listing to a buyer entails a tremendous amount of risk for the agent. All the buyer has to do is to Google the address to discover that it’s being sold directly by the owner, in which case the buyer can simply go around the agent and contact the seller directly.
Buyers will also be less likely to see listings sent to them by discount brokers, typically because they are offering less than typical buyer agent fees.
However, even a normal co-broke by a discount listing broker might not be enough. That’s because buyer agents can easily skip over the listing of someone who’s out to destroy the industry when the vast majority of options are listed by traditional brokers. Thus, there’s really not much harm for a buyer’s agent to simply ignore listings by discount brokers.
Preference for Condos vs Co-ops
Buyer agents will typically steer their clients towards condos vs co-ops because they are dramatically easier to close. Co-ops take not only longer to close, but take significantly more work due do the co-op board approval process.
While many condos might have a one page registration form for new owners, a co-op building might require 10 copies of a monstrous, 400 page co-op board package. Not only does this asinine activity kill an enormous amount of trees, completing such a horrific project doesn’t even guarantee that the deal will go through.
That’s because co-op boards have the right to reject buyers for any reason whatsoever, though technically they are not allowed to do it for discriminatory reasons. However, co-op boards are not required to provide a reason for coop board rejection and typically never do, thus they essentially have a blank check to reject prospective purchasers as they please.
Preference for Easy Going Listing Agents
Another conflict of interest in real estate you’ll see is agents preferring to work with easy going or more relaxed agents. This makes a whole lot of sense because a difficult counter-party can not only kill a deal, but can make it absolute hell.
Buyers agents have no desire to work with a listing agent with a reputation for being nitpicky and “old school” on coop board applications.
For example, there are some listing agents who aren’t computer savvy and who demand buyer agents to print out entire board packages for a physical review, together at their offices before submission.
This type of behavior is egregious considering that it’s just as easy for the listing agent to review a PDF attachment on his computer, and save some trees. However, because there are people like this not just in real estate but all industries, it’s understandable why other agents will choose to avoid them if at all possible.
While sensible, this can present a conflict of interest for buyers. They might be steered away from listings with difficult listing agents that might otherwise have suited them.
Avoidance of FSBO listings
Buyers’ agents will almost universally avoid FSBO listings, which means the buyer might miss out on suitable properties just because they are being sold by owner.
This makes sense as we’ve previously discussed because no buyer’s agent will volunteer to work for free. Even if a FSBO listing promises in the listing description that a commission will be paid, or that the seller is happy to work with buyer agents, or even that a specific commission amount is offered, a buyer’s agent will be highly hesitant to engage.
Think about it, how binding is that arbitrary sentence in the listing description? Is it contractual? Furthermore, what’s to prevent the buyer from dealing with the seller directly? It’s just overall a bad situation for any agent to be in, which is why FSBO listings are never sent by buyer agents.
Avoidance of Discount Broker Listings
Buyer’s agents may avoid sending listings by discount brokers to their clients because there’s no need to help someone who’s out there to “disrupt” the industry, especially when there are so many competing, traditional listings available.
This is especially true in New York specifically and in the United States generally because discount brokers and FSBO sellers account for a mere fraction of the total listings volume (i.e a few percent at best).
As a result, a buyer’s agent really isn’t sacrificing much by steering customers to listings by other traditional brokers.
Potential conflicts of interest between real estate agents and mortgage brokers have decreased significantly post the Great Financial Crisis of 2007-2008 due to new regulations such as RESPA.
RESPA for example makes it illegal for a mortgage broker to give a kickback to a real estate agent for referring business.
This means real estate agents are much more likely to refer clients to mortgage brokers who are good vs mortgage brokers who will pay them.
These new regulations are pretty strictly enforced, both by regulators as well as by the compliance departments at banks.
Disclosure: Hauseit and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. You should consult your own tax, legal, financial and accounting advisors before engaging in any transaction. The services marketed on Hauseit.com are provided by licensed real estate brokers and other third party professional service providers. Hauseit LLC is not a licensed real estate broker nor a member of any multiple listing service (MLS).