Commission Rage – Real Estate Rabies!
OPINIONby Peter Mericka B.A., LL.B
Real Estate Consumer Advocate
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd
Rabies is a terrible affliction. It can can quickly turn a friendly family pet into a belligerent biting beast. Commission rage can have a similar affect on real estate agents, changing them from ordinary salespeople into cruel and manipulative bullies.
Like rabies, commission rage cannot be treated. However, early detection means that a consumer can take precautions against its damaging effects.
What makes commission rage particularly dangerous is the fact that it is not immediately apparent. A seemingly kind and friendly real estate agent may be in the grip of advanced commission rage, without showing any symptoms – that is, until the vendor or purchaser attempts to take control, or becomes reluctant to proceed with the sale. It is at this point the lip curls, and the snarling starts.
Infection – the bite of the Exclusive Sale Authority
The bite of the Exclusive Sale Authority
Initial infection occurs at the listing stage, as soon as the vendor has signed the estate agent’s Exclusive Sale Authority. This document sets the period of time for which the estate agent has exclusive control over the listing.
The fever
Time feeds the commission-rage fever. As time runs out on the listing the fever increases, and the estate agent becomes increasingly agitated and desperate.
Sometimes the fever may be exacerbated by commission factoring. Some real estate agents experience cash-flow problems, and turn to the real estate equivalent of the pay-day lender. Commission factoring is an arrangement whereby the real estate agent “sells” the right to the commission to another party for cash, before the commission is payable to the real estate agent. For more information see “Commission Factoring – A Dangerous Development”
If a sale takes place well before the listing expires, the fever eases.
However, if a sale fails to eventuate before the listing expires, the fever rapidly develops into full-blown commission rage.
Low immunity – why real estate agents are so easily infected
Commission rage is directly linked to conflicting of interests and the lack of resolve on the part of Consumer Affairs Victoria, the real estate industry regulator in Victoria.
With the reputation for having the most corrupt real estate industry (including corruption in the conveyancing industry) in Australia, it is not surprising that the most outrageous examples of commission rage originate from Victoria.
Real estate agents in Victoria regularly do business in circumstances of conflicting interests, often aided and abetted by the lawyers and conveyancers whose role it is to protect consumers.
For example, a real estate agent should never prepare the contract. And yet, most real estate agent insist on doing this so that they can maintain control over the transaction.
Even where a contract has already been prepared by a lawyer, contract switching often takes place. Real estate agents exert enormous pressure on lawyers and conveyancers through their control over conveyancing referral bribes, and punishment referrals. As a result, a culture of deference to the real estate agent has developed among property lawyers and licensed conveyancers.
Insufficient effective vaccine available
The vaccine for prevention of commission rage is legal advice, obtained from an independent qualified legal practitioner. Unfortunately, this vaccine is in very short supply, and is often tainted by coming into contact with the infected real estate agent before it has been administered or before it has taken effect.
The usual scenario in a real estate sale is that the conveyancer or lawyer will prepare no more than the Section 32 Vendor’s Statement and deliver this to the estate agent. This puts the real estate agent in control of both sides of the transaction. The real estate agent will act for the vendor in delivering the contract to the purchaser, act for the purchaser by completing the purchaser’s offer, and then act for the vendor again by advising the vendor on the offer. The conveyancer or lawyer then receives the completed deal from the real estate agent, usually without having had the opportunity to provide legal advice to either party.
If the contract is defective the estate agent refers the complaining party to his or her lawyer. If the estate agent is blamed for the problem, the estate agent tells the complaining party, “You should have consulted your lawyer.”
Very few complaints ever result in the estate agent, the conveyancer or the lawyer being sued. When professionals are bound together through improper relationships they tend to protect each other, thereby perpetuating a system that promotes conflicting interests and incubates the commission rage virus.
Rotten Regulators
Consumer Affairs Victoria, whose role it is to regulate and control the industry, has been profoundly negligent in its duties, not only to consumers, but also to the estate agents themselves. The fact that estate agents are paid a pittance in wages and are forced to rely on the huge commissions extracted from consumers contributes to the pressure on estate agents to effect a sale at all costs.
Consumer Affairs Victoria has demonstrated that it is unwilling to intervene, incapable of acting proactively, and determined to maintain the status quo. This is evidenced by some of the material printed by Consumer Affairs Victoria, which ushers consumers towards estate agents and away from those who offer protection through legal representation and alternative sales methods.
Criminal deception in the real estate industry routinely ignored, and long-standing criminal provisions have been watered down by the introduction of lesser offences and lower penalties for behaviours which, if committed other than by real estate agents, would see the perpetrators appearing in a criminal court on charges under the Crimes Act.
The best deterrent to criminal behaviour is the knowledge that the behaviour will be quickly detected and promptly dealt with. The failure of the regulators to act in cases of clear criminal conduct confirms to the industry that its boundaries of very flexible, and a breeding ground for the commission rage virus.
Symptoms – what real estate agents do when commission rage flares
Taking control of the contract
In order to secure a commission, the estate agent needs to have the vendor and purchaser locked into a contract. To make this happen the estate agent will seize control of the sale contract at the first opportunity. This is easily achieved if the real estate agent can have a “pet” lawyer or conveyancer prepare only a Section 32 vendor statement without a contract (allowing the estate agent to prepare a Form 1 contract insert) or by contract “contract switching“.
Real estate agents often become quite snarly if a purchaser indicates an intention to obtain legal advice before signing an offer. Similarly, the estate agent will have the vendor accept a purchaser’s offer without having the offer checked by the vendor’s lawyer, just in case the vendor’s lawyer should point out that the contract is not really in the vendor’s interests (this is another situation where contract switching becomes a problem).
Advising the vendor
Real estate agents are supposed to respect the lawyer/client relationship. This means that when the real estate agent wants to communicate with the vendor regarding legal matters, the communication should be through the vendor’s lawyer. This ensures that the vendor is able to obtain legal advice before taking any action, but it also ensures that the real estate agent doesn’t do anything silly and to the detriment of both the client and the real estate agent.
When commission rage is present in the real estate agent the lawyer/client relationship is routinely ignored. The real estate agent becomes terrified of the client’s lawyer – even if the client had been referred to the lawyer by the real estate agent. While “pet” lawyers will bend to the will of the real estate agent, there are limits to such a relationship. Clear criminal behaviour is unlikely to be tolerated, even by the most agent-friendly lawyer. As commission rage takes hold of the real estate agent, the fear that the lawyer’s involvement may jeopardise the commission increases, and the real estate agent will make direct contact with the vendor more and more frequently.
In extreme cases the real estate agent will actually provide legal advice to the client, contrary to the advice already given by the client’s lawyer. For an example of a real estate agent making direct contact with a vendor, see “Shane Lowe of Methven Real Estate – Switching of Contracts and Conditions“.
Advising the purchaser
This is similar to the situation described above, regarding direct contact by the real estate agent and the vendor. When the real estate agent advises the purchaser there is a clear conflicting interests. Again the article “Shane Lowe of Methven Real Estate – Switching of Contracts and Conditions” provides an example of the way the real estate agent is able to convince a purchaser to sign a contract that has been drafted in a manner that puts the interests of the real estate agent ahead of those of the purchaser.
Controlling the deposit
Real estate agents are always keen to take control of the deposit. It is not the role of the real estate agent to hold the deposit, and most lawyers and even licensed conveyancers have trust accounts for this purpose. Alternatively, the deposit can be held in a joint bank account. So why is the real estate agent so keen to take the deposit and to hold it in the agency trust account? It’s a psychological ploy. “They don’t miss what they don’t have” is the way one real estate agent explained the reason. If the real estate agent doesn’t have control of the deposit, it becomes necessary to ask the vendor to pay an invoice. Most vendors are horrified when they finally receive the account from the real estate agent, with commission plus advertising, plus sundries etc. Controlling the deposit ensures that the real estate agent can withhold the commission, before the vendor receives it and comes to regard it as theirs.
As commission rage takes hold, the real estate agent becomes even more possessive of the deposit. We have seen cases where a contract has been properly ended (perhaps through the operation of a finance condition, or some other term of the contract), but the real estate agent has refused to refund the deposit. Of course, this is quite illegal, but if the real estate agent can act quickly enough, no-one will complain. The real estate agent by-passes the legal representatives of the parties, and frantically works behind-the-scenes to repair the failed sale (and to reinstate the right to a commission). Securing finance with a lender of last resort, making promises that can’t be enforced, or even telling lies to confuse the parties; we have seen all of these methods used by desperate real estate agents in the grips of advanced commission rage.
We have even seen purchasers tricked into unnecessary and complicated finance arrangements, so that a cash deposit would be paid instead of a deposit bond, just so that the real estate agent could gain access to the deposit funds prior to settlement.
Fomenting distrust between the parties
Related to some of the above symptoms is the need to create distrust between the parties, and even between the parties and their own legal advisers. As commission rage takes hold of the real estate agent, relationships between the parties are seen as a threat. The best example of this is where the commission is at risk of being lost because the purchaser has been unable to secure finance, and the contract allows for the cancellation of the contract if finance is not approved.
We have previously discussed the way real estate agents ensure that purchasers remain unaware of their rights under General Condition 14 of the standard Contract of Sale of Real Estate by using only the Form 1 Particulars of Sale Insert, and withholding the General Conditions. But the real estate agent is fully aware of General Condition 14, and the way it can be used to force the parties to remain locked in a contract against their will.
To fully understand how the finance condition can be used against both parties, it is necessary to read “Subject to Finance FAQ“. Now, consider this situation: The purchaser has advised the vendor that finance has not been approved to the level required to complete the purchase, and that the contract is therefore cancelled. The real estate agent is horrified and, consumed by commission rage fever, he makes direct contact with the purchaser to find out exactly what happened. The real estate agent tells the purchaser he wants to “help”, and interrogates the purchaser about her financial situation. When he discovers that the purchaser can obtain further finance if she takes out “bridging finance”, the real estate agent pounces on clause (d) of General Condition 14, which states that the purchaser can end the contract “only if the purchaser…is not in default under any other condition of this contract…“. The real estate agent tells the purchaser that she cannot end the contract because she had not yet paid the full deposit (a very common situation).
Although the vendor understands the purchaser’s situation, and is prepared to allow her to cancel the contract, the real estate agent is not prepared to lose the commission. The real estate agent then draws the vendor’s attention to the Exclusive Sale Authority, which states that in the event that the vendor becomes entitled to a forfeited deposit, the vendor must pursue the purchaser to recover enough of the forfeited deposit to pay the real estate agent. Alternatively, the vendor must pay the real estate agent a commission from the vendor’s own pocket. Faced with these problems, the vendor is forced to enforce the contract against the purchaser, and the purchaser is forced to obtain expensive bridging finance.
If a friendly relationship develops between the vendor and purchaser, a real estate agent suffering from commission rage will see a threat and seek to keep the parties apart. Similarly, the real estate agent will work hard to ensure that he, and not a party’s lawyer, is regarded as the person in control of the transaction. It is quite common for a real estate agent who has been taken to task by a party’s lawyer for improper conduct to contact that party and complain that, “Your lawyer is being a bit over-the-top and it’s going to jeopardise your sale.” It is in such circumstances that the “punishment referral” may be used.
Countermeasures – protecting yourself from an infected real estate agent
Vaccination – pre-sale legal advice for vendors
Talk to your lawyer before engaging a real estate agent, and certainly before signing an Exclusive Sale Authority. Avoid using a licensed conveyancer, as too many licensed conveyancers rely heavily on real estate agent referrals and advice on handling the real estate agent may not be reliable. It is also necessary to take care with lawyers who are close to real estate agents. Of course, any lawyer or conveyancer recommended by the real estate agent should be avoided.
The Estate Agents Act 1980 requires that an estate agent must have some form of written agency agreement with a client, but this doesn’t mean that the Exclusive Sale Authority must be used. However, it is highly unlikely that any real estate agent will allow the use of any form of agreement other than the Exclusive Sale Authority.
If the Exclusive Sale Authority is to be used, ensure that your lawyer explains the definitions contained in the fine print and makes any changes that you may require.
NOTE: Extreme care must be exercised if the Exclusive Sale Authority is to be executed with the assistance of the real estate agent, as we have seen instances of conditions being added to the document without the client’s consent or full understanding. The most common method of adding further conditions is the use of a stamp or a sticker applied to one of the margins of the document.
Vaccination – pre-purchase advice for buyers
It is essential that a purchaser of real estate obtain pre-purchase legal advice from a qualified lawyer before signing a contract. It is at this stage of the transaction that commission rage can be difficult to spot. This is because an estate agent, even one suffering from advanced commission rage, will outwardly exhibit emotions of happiness and euphoria. This is because the signing of the contract is the trigger that releases the commission obligation. (The Exclusive Sale Authority states that commission is payable by the vendor once the real estate agent obtains a “binding offer”.)
A properly prepared pre-purchase legal advice report will explain, not only the legal rights of the parties in relation to each other, but also the tactics used by real estate agents when handling contracts. If possible, it is best to have the contract executed with the assistance of your lawyer, rather than with the real estate agent. However, if this is not possible, obtaining pre-purchase legal advice before executing the contract will provide some measure of safety.
Engage an estate agent handler – an independent lawyer
We have discussed the need for pre-sale or pre-purchase legal advice. But sometimes there is little alternative but to sign a contract “on the spot” in order to finalise a sale or purchase. If this occurs with a purchase, there may be a small window of opportunity to engage a lawyer and to obtain cooling off advice. This is similar to pre-purchase legal advice but is provided after the contract has been signed, but before the cooling off period has expired.
Purchasers are usually aware that the real estate agent cannot be relied upon for legal advice or assistance, and that any assistance offered by the real estate agent is likely to take into account the real estate agent’s interests first (i.e. bringing about a commission-releasing sale), the vendor’s interests second (it is the vendor who has engaged the real estate agent) and the purchaser’s last. A purchaser should always ensure that any information or advice offered by the real estate agent is put to their own legal representative, and proper legal advice obtained before any action is taken.
Vendors are particularly vulnerable to loss and damage caused by a real estate agent acting under the influence of commission rage. This is because the vendor will have chosen the real estate agent, and a relationship of trust may have developed. Often, this relationship of trust can be so strong that the vendor will accept legal advice from the real estate agent ahead of that offered by the vendor’s own lawyer. This misplaced trust makes a vendor particularly susceptible to attack from an enraged real estate agent, as a real estate agent who has gained the trust of a vendor has reduced immunity to commission rage. Why? Because the higher the perceived level of trust, the more the real estate agent regards the commission as having been won, before a sale has even taken place. Consequently, any indication that the commission may be jeopadised will result in the very swift onset of commission rage.
Quarantine the real estate agent
As discussed above, commission rage infects the real estate agent as soon as the Exclusive Sale Authority has been signed, but it can remain dormant for some time before manifesting in sudden and shocking onset of symptoms.
To avoid being taken by surprise, it is best to quarantine the real estate agent from the outset of the transaction. The real estate agent should not be permitted to have personal contact with the vendor for any matter that is commission-related. In other words, anything relating to:
- The Section 32 Vendors Statement
- The Contract of Sale
- The Section 27 Deposit Release Statement
- The purchaser’s side of the sale transaction
- Legal advice of any kind
- Contact with third parties (banks, brokers, insurers, owners corporations etc.)
While these matters may not appear to be commission-related, the fact that they may have some bearing on the completion of the transaction means that they are definitely commission-related. Another indication is the very fact that the real estate agent may seek to become involved with them. The only reason why a real estate agent would assume responsibility for any aspect of the conveyancing transaction is to ensure that the commission is kept safe.
A humorous reference to the involvement of the real estate agent is the 3 laws of real estate agency (with apologies to Isaac Asimov):
First law:
“A real estate agent must never endanger the commission.”
Second law:
“A real estate agent must obey the Principal of the real estate agency, so long as this does not conflict with the first law.”
Third law:
“A real estate agent must never endanger the vendor, so long as this does not conflict with the first or second laws.”
The real estate agent should be informed from the outset that all communications regarding any of the above matters MUST be directed through the vendor’s legal representative.
Conclusion
This has been a somewhat humorous look at the effect that a commission-based remuneration system has on the behaviour of otherwise decent people. Real estate agents are ordinary salespersons, the majority of whom enter the industry to “try their luck” at making big money in a short time. Most are unsuccessful, and return to their “real” jobs after only a few years in the industry. (See Australian Finance Review “Going, going, 10,000 estate agents gone” which states, “The industry has always had a relatively high turnover. Airey (REIA president, David Airey) says 80 per cent of real estate agent sales people turn over within five years, facing low starting wages and long hours.”
Real estate commission is a corrupting influence in the real estate industry (See “Real Estate Commission – A Corrupting Influence“) and must be replaced by a fee-for-service model, preferably fixed fee. Until this occurs, consumers will continue to be savaged by real estate agents whose senses of reason, honesty and fair dealing have been eaten away by that horrible illness, “real estate rabies” manifesting as commission rage.
To post your comment on this item, please return to:
 |
