CFAH

From a New York Times article profiling a couple who moved from San Francisco to San Diego and are now suing their agent for what they perceive as overpaying when they purchased their home:

Real estate lawyers and brokers say the case, which goes to trial in North County Superior Court on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from the agents who found them a home and arranged its purchase.

“When your house appreciates $100,000 in the first six months, you’re not quite as concerned that maybe the valuation was $25,000 or $50,000 off,” said Clifford Horner of the law firm Horner & Singer. “But when your house goes down, you ask: ‘Who might have led me astray here?'”

Note that the couple isn’t planning on selling anytime soon, haven’t realized a loss, and might very well sell their home one day for more than what they paid.
Feeling Misled on Home Price, Buyers Are Suing Their Agent [NYT]

Comments from Plugged-In Readers

  1. Posted by ex SF-er

    rediculous. they should be imprisoned for even trying this.
    on a side note, there’s a morning suprise for us!
    the Fed just did an emergency 75 bps rate cut.
    I’m sure they did that because they think that the economy is looking strong.
    I will now wait to hear that panic moves by the Federal Reserve Bank and global recession worries are not important to real estate valuations in San Francisco.

  2. Posted by Mystery Realtor

    Boo Hoo, I paid to much and now I’m not going to take personal responsibility for my actions. I was too greedy to look at comps and I got into a bidding war and now I have too much time on my hands so I’m going to sue my broker.
    Get a life.
    M.R.

  3. Posted by Jim

    Agreed, personal responsibility is key here, however a buyer’s agent has a built-in conflict of interest, in that his job is to help his clients buy a home in a fair and equitable manner yet at the same time the more the buyer pays the more money the agent makes. One could see where it would be easy to encourage them to pay more.

  4. Posted by SFwatcher

    Atleast someone started it. My friend bought a home recently. He was told by his agent that there are multiple bids and also told one of the bids amount and asked him to bid more than that. Later he found out that everything was manipulated. The other bids were from relatives and friends who were touch with buyer’s agent. It would be interesting how this suit goes. Depending on this, I am sure more will follow these days. Every one should be made accountable…..

  5. Posted by Trip

    We don’t know the true facts, of course, but the allegations, if borne out, certainly appear to support liability. The agent — acting as a fiduciary for the benefit of his client — is alleged to have withheld material information about other available properties/comps and arranging for an inflated appraisal. All to increase his own commission at the expense of his clients. While a buyer cannot reasonably expect his realtor to divine market trends, misrepresentations of present facts in violation of fiduciary duties should be punished. Why do buyers’ agents exist if all the “personal responsibility” is on the buyer rather than the agent?
    We’re certain to see many more like this. Doesn’t mean all (or any) have any merit, but you certainly can’t just dismiss fiduciary duties with an e caveat emptor defense.

  6. Posted by Tom

    The RE business is a fiduciary mess. I have not looked at this complaint, but I do hope there are some good lawsuits to motivate the industry to to fix itself. Seriously, as a lawyer, I would never represent both sides of a negotiation and I would almost never be ethically permitted. RE’s ability to do so and the system’s reward for RE’s who don’t look out for their client is hilarious.
    I predict this housing bubble burst will also result in a different RE industry that is revamped and regulated more intelligently.

  7. Posted by McBravio

    “All to increase his own commission at the expense of his clients.”
    Can we please stop using the “increase his own commission” reason? Say the agents convinces the buyer to pay $75,000 more (on the HIGH side for the sake of this argument). 5% of $75,000 is $3750, the Buyer’s agent would get half of that ($1875) and split that with the house = $937. It’s pennies compared when you look at the overall commission.
    The agent IS NOT convincing the buyers to over pay to increase his commission. He’s convincing them to over pay to get the house in a the multiple bid, high competition world of San Francisco real estate.

  8. Posted by toni

    @Mystery Realtor: If it’s my job to pull the comps, determine value and manage the bidding then why is my realtor walking away with a 2.5% commission? Just for writing the contract?
    You mention getting caught up in a bidding war. It’s relatively easy to stomach paying $100K+ over asking when you’re being advised by your agent that you’ll make it up in appreciation, but what happens if that appreciation fails to materialize?
    “The agent IS NOT convincing the buyers to over pay to increase his commission.”
    YES he is. Either his client pays more than anyone else and he gets a commission or his clients don’t and he earns nothing!

  9. Posted by chuck

    McBravio is exactly right. Your realtor wants you to just do the damn transaction…from my personal experience a few years ago buying a house. I know, one data point…

  10. Posted by Cary

    McBravio,
    I’m in the camp that thinks the RE model is a conflicted mess and undoubtably broken. This downturn will likely test the agent-client relationship.
    Your point is a good one if it’s true for this case, but it doesn’t address the conflict of being paid ONLY if the buyer does something.
    I think a better model would be to pay for service at a negotiated hourly rate. That would limit the “extra” unpaid services the agents complain their clients are always asking for and it would mean the buyers wouldn’t be paying for the “lookie lou’s”.
    Cary

  11. Posted by fred

    A lot of issues that had been swept under the rug are now going to see the light of day. I think the issue of whether or not there are multiple bids is key. I was advised by my agent on many occassions not to bother making an offer, even over list price, if it was not sufficiently high over list price. How does this make sense?

  12. Posted by Amen Corner

    Can’t tell the full details of this case from the article, but if agents misrepresent other offers and steer clients into inflated appraisals, why shouldn’t the buyer’s have legal redress? I’m all for personal due diligence, but equally I’m all for real estate agents having the same level of fiduciary responsibility as other financial professionals.

  13. Posted by Rillion

    I really appreciated the job my agent did for us. We got into a situation where we made an offer and then at the last minute someone else submitted a higher offer. My broker advised against getting into a bidding war over that property. Two weeks later a place we liked better came on the market and we got it for less then we offered on the first place. He was willing to advise us to wait and ended up with a lot lower commission as a result.

  14. Posted by johnmd

    Let’s see: A surgeon performs a hip replacement perfectly. Textbook technique. Unfortunately, the patient has a complication. Can the patient sue? Sure. Should they? Of course not, but if they find a sympathetic jury, they may just win.
    Now: A real estate agent knowingly advises their client to overbid on a house. Why shouldn’t they be just as liable as any other professional in this country. As the lawyer above says, “The RE business is a fiduciary mess;” Maybe a few lawsuits will help the real estate business see the light.

  15. Posted by Dude

    On the topic of fiduciary duty, how many agents, over the past few years, have told nervous clients, “This is a great investment” or “You never lose money on real estate” or “Don’t worry about the mortgage, you’ll just refi or sell in 2 years at a profit.”
    I bet it was a lot. And, according to the NAR commercials I keep hearing on the radio, anyone uncertain about the current market should speak to an expert Realtor, because it’s a great time to buy. So if Realtors want to be considered market experts and true advisors to their clients , shouldn’t they bear some responsibility for the advice they’ve given people?
    Yes, I realize we shouldn’t generalize, because there are some great agents out there. But a home is the largest purchase most folks will ever make. It makes sense for those brokering these assets to take as much responsibility (or liability) for their advice as those brokering other assets such as stocks or annuities. If real estate is no longer just shelter, and is now an investment, shouldn’t it be regulated and litigated accordingly?

  16. Posted by Trip

    Dude, you make a good point. I litigate a lot of professional negligence cases (never in the RE industry) and it is well-settled that if you take on certain duties, such as a realtor advising re the financial benefits of buying in this market, as you note, you can open yourself up to liability for the unsound nature of that advice even if you had no duty to provide expertise in the area to begin with. Any realtor who offers suggestions like this should think twice. (And California applies comparative negligence, so even if the client was partially at fault for the bad decision, that would not get the agent off the hook).

  17. Posted by Jeffrey W. Baker

    The real estate industry is badly in need of losing this case. If a stock broker behaved the way a real estate agent does, telling his clients that shares of XYZ never decline in value, that if he doesn’t buy XYZ at $30 he may never be able to afford it again, that the pride of owning XYZ will make him happy, the SEC would throw his ass in prison and bar him from the trade for life. Yet all of these things are routinely done in the real estate business, where the stakes are somewhat higher. The disparity needs to end.

  18. Posted by arlo

    Question for realtors out there: The listing agents receives offers from the buyers and their agents. As this process plays out, how much can the listing agent disclose to these buyers’ agents? Do they have to put all of the cards on the table? It would seem that ALL offers should be fully disclosed – how else could the buyer’s agent advise his clients?
    Process seems pretty gray with lots of potential conflicts. A falling market will certainly expose more problems than a rising market.

  19. Posted by S&S

    The way I see it, a property is only worth what I’M willing to pay for it. No agent is going to tell me what to do with MY money. Like I’ve mentioned before, I had an agent tell me to overbid every property we looked at and told me there are or she thinks there will multiple offers. So what? I said. They can have it if they want it that badly.
    Although I feel many agents are working for themselves to make an extra buck and not in the best interest of their client, the decision ultimately lies with me. That’s the problem with the country: People are too lazy (or don’t know how) to think for themselves, and when they find themselves in a predicament, it’s ALWAYS someone else’s fault.

  20. Posted by George Judson

    When we bought our flat in SF in 2004, the paperwork included a statement we were asked to sign that said, in effect: agents do not suggest offer prices. If you offer a certain amount and get the property and afterward decide you paid too much, it was your decision. If you didn’t offer enough and didn’t get the property, it was your decision. It seemed to us to be a warning that the market was totally irrational. In any case, I’d never seen anything like it before.
    But regardless of the merits of their complaint, the people in NYT are saying their agent didn’t give them accurate comps. That sure has been an agent’s job in my experience, even if I did doublecheck.

  21. Posted by anono

    I moved to S.F. from D.C. in late ’04 as the market was raging. When we started to look for a place here I was a bit surpised at the lack of information about the other bids on a property. In D.C., most offers included something called an “escalator clause”, which basically says for example that I will pay 500K for a property but I’ll pay 5K more than any other offer up to 600K. Many agents in D.C. in 2003 said you might as well not even bother making an offer without an escalator clause.
    In S.F., our agent said we wouldn’t need one because no seller’s agent would make the required disclosures to verify the offer price, and even went so far as to say it would be “unethical” of the seller’s agent to disclose such information. I was pretty stunned by the suggestion that a seller’s agent was required to hide price offer information from other buyers, but I generally found that attitude when looking for a place.
    Then my agent- who was very experienced- went on to say that he hadn’t done as well as some of the new agents on the buyers side during the runup because he had such a difficult time counseling buyers to bid so much over asking. He gave an example where a property went into escrow within days of opening for 100K over asking, and when he followed up with the other agent later to see how many offers were received the other agent said “one”.
    I think everything about the real estate boom led agents to encourage buyers to pay as much as they could afford regardless of whether it made sense, and the lending and appraisal industry was happy to go along to get fees.
    This lawsuit is just the beginning of suits against appraisers and agents and mortgage brokers. Real estate agents have insurance for this sort of thing so it will be interesting to see if these suits catch on.

  22. Posted by arlo

    S&S – I completely agree with you. My question relates to case where the buyer’s agent is advising/telling his client to overbid (or to not bother in that case where he “knew” the client would be outbid). On what basis does the buyer agent issue such advice? How much is the buyer agent entitled to know from the selling agent and how does he convey that information to his client?

  23. Posted by movingback

    @ S&S – I completely agree with you. Regardless of what you think of the situation, the bottom line is, in our world, when people do find themselves in ANY kind of predicament, it’s always someone else’s fault, never their own.

  24. Posted by fred

    S&S,
    Did you end up buying a place? If so, just curious, where was it?

  25. Posted by Dave

    From the discussion here, the dispute seems to revolve around the comps which were provided by the buyers’ agent. In my experience, there are two different times an agent is researching comps on behalf of a buyer. One is when the trying to determine the value of a property and what to offer. In this instance, it’s obviously essential to have a broad base of comparable properties and recent sales.
    The other time for buyer comps is for the purpose of appraisal. In an escalating market, I’ve often seen agents present the appraiser with the highest comps possible to justify the contract price, so that the appraisal will come in at or above the purchase price (and so that the buyer can get all of the financing they need.)
    The differences between these two sets of comps can be significant. Savvy agents may dance around the reasons for these differences, but “fair” comps should be used for determining the price, and “high” comps may be desirable later if the agent/buyer suspects that the agreed price may be difficult for the appraiser to justify.
    Although my first thought when reading about this case was that it was ridiculous, a lazy or sub-par agent who doesn’t give his buyers all of the information they need to make an informed decision should probably be held accountable for that failure. If that’s the case here, I applaud the buyers for bringing this case.
    The definition of “market value” is basically whatever an informed buyer is willing to pay. It’s the agent’s job to pass along the information a buyer needs to be “informed.”
    I’m guessing that most buyers don’t realize that, in the absence of a buyer-agency agreement, “their” agent actually works for the seller and has a fiduciary responsibility (as I understand it) to get the most money for the property that they can.
    Even where a buyer-agency agreement exists, there’s an incentive to get the deal closed. I’m wary any time an agent seems like they’re pushing me toward something. This couple seems to be denying their own responsibility for the decisions they made — but if they were fed bad data by the “expert” they hired, surely it’s not all their fault.
    This may be a case of a declining market where values were falling as these buyers were in the process of buying, making today’s value tough to determine. Or it may be a case of an overeager agent pushing a naive couple to buy at a price which couldn’t be justified with recent comps. I’ll be watching with interest to see what the court decides. (I’ll bet it settles before trial.

  26. Posted by S&S

    Fred, I have been fence-sitting for a couple of years now, so, no, I have not bought yet. I already own a home, so I’m not really in a hurry to buy, although I am seriously looking and interested in buying a second home. I have been looking mostly in SoMa and South Beach (condos–just cuz it would be fun), as the SFR options are almost nil unless one wants to get a place in the Bayview or some such. I have found a place that I really like (almost love) in SoMa that I have been contemplating making an offer on, but … I think, if I wait a few months longer, it’s going shave off a couple bucks. 😉

  27. Posted by S&S

    Oops, I didn’t mean to say SoMa. It’s in South Beach.

  28. Posted by Kathleen

    Buyers advisory and market condition advisories are standard practice in San Francisco.
    Buyers are alerted and advised real estate values flucuate, markets have volatility, and any offers should reflect only the price that buyer themselves has determined they are ready and willing to pay for a home after expert advise and research.
    It’s is the buyer’s responsiblity to decide what they want to offer for a home.
    Commissions come and go. Clients, like lawyers, are forever.
    Why jeopardize a client, for a paycheck? They live in neighborhoods where you work.
    Most realtor business comes from referrals from happy clients.
    Most happy clients remain silent. Up to 80% who are thrilled with Brokerage services never refer any business.
    Unhappy clients get published in the New York Times.

  29. Posted by Mole Man

    100k here, 100k there, and pretty soon you are talking about real money.

  30. Posted by joe shmoe

    No doubt the incentives in the buyer’s agent relationship are not line up right, but when people are spending and borrowing such large sums there is some expectation that they will engage in some due care and caution. If this were some poor first time buyer guided into buying at an inflated value in an undesirable neighborhood, I might have more sympathy. The buyers in this case appear to have the experience needed to make their own decisions and resist manipulation.

  31. Posted by Mystery Realtor

    There are two other problems with this story that have not been discussed and they are:
    The very real conflict of interest that exists when a buyer’s agent also acts as the buyer’s mortgage broker. That person is getting paid twice for the same transaction. (don’t let any mortage brooker fool you, they make just as much money as the agent does, even if the buyer does not pay points).
    The other issue is that this couple had previously used and fired another agent and had written offers on two other properties. I find it very hard to fathom that they, the buyers, did not know enough to ask their new agent what the neighborhood comps were at the time the offer was written.
    Because they didn’t have a seperate entity writing the mortgage, there was the very real possibility that the appraiser may have been pressured. However, as S&S points out, we are ultimatly responsible for our own actions.
    Others have mentioned that the Real Estate industry needs to put it’s house in order. I couldn’t agree more. Until last Fall, all one needed to do to get a license was pass an online class and then score a 70 out of 100 (that’s a D+) on the state test. Thankfully the rules have tightened slightly and prospective agents now need to complete three courses prior to being allowed to sit for the state exam. By the way, no high school diploma is necessary to become an agent.
    M.R.

  32. Posted by kathleen

    In the crazy days, I spent more time talking people out of TICS, bigs offers, or recommend clients write lower offesrs than they wanted, then the other way around.
    I started to talked to clients about “MOAA”” [prono : MO-AH] ‘multiple offers over asking’ and describing it’s effect:
    If you offer over list, you may have to wait several years for the price make sense, you are paying future value to get the home now.
    Offering much over asking price is a gamble on future value for property now. Gambling on future appreciation to cover your spread on the points. Paying the VIG to Tony Soprano now.
    It’s something that happens in tight markets where there is a lot of buyer fatigue.
    Always stick to the fundamentals: what is it worth to you, as a buyer.
    The list price should be an accurate indicator of comparable value. If not, the listing agent or the seller is either ill informed, or attempting to establish an auction.
    Either way, have a separate agent from the listing agent, analyze the deal on your behalf. Have your own representation. It is generally free.
    Hint that seller and the listing agent seeks to establish an auction:
    “Seller reserves the right to reject any and all offers.”
    That sentence broadcasts this listing is a really an auction.
    The seller took specific performance off the table.
    Comparable sales are not a mystery.
    If everyone who bought in your neighborhood fell victim to MOAA, is that the new market value, the traditional approach to valuation, what sold nearby that is similar in the last six months, or a series of weary buyers gambling on the future value to get a home now at any price?
    How does motivation matter? When we put a disclaimer in front of a client, we are saying, make sure you want to do what you are doing.
    I have invested in stocks and have had to sign the same waiver from the brokerage firms selling internet and technology stocks.
    Market Volatility exists and it pays to be aware of the conditions and it signs.
    I do not know too many real estate agents with guns pointed to the heads of their buyers.
    I always caution, not only against price, but against the cost of the money. Understanding your note is more important the price.
    Now known as the sub prime meltdown, the current state of affairs
    is a reflection of a lot of naive borrowers, who did not understand what they were signing, when they signed. Where does the responsibility lie?
    I do not think mortgage brokers should have the right to represent buyers in a real estate transaction. That is a clear conflict of interest.
    That is popular/SOP in San Jose and there, the foreclosure rate there is huge.
    Real estate is good conservative investment, long term YOY solid yield, not very liquid.
    Do not treat your home as an investment.
    Investments come and go, your home is where your heart lives.
    – Just another realtor.

  33. Posted by citydwell4me

    Thanks Kathleen, we needed that. A lot of typos, but some good stuff, nonetheless.

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