REIV – Bad Investment Advice On Buyer’s Agents
OPINIONby Peter Mericka B.A., LL.B
Real Estate Consumer Advocate
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd
As an investment adviser Enzo Raimondo, CEO of the Real Estate Institute of Victoria is the last person a property purchaser should listen to. In his most recent article “Buyer’s agent a sound investment” in the Domain section of The Age newspaper Saturday 17 January, 2009, Raimondo is quite dishonest with readers as he misstates the law on purchaser advocacy and appears to deliberately misunderstand the real estate sale process.
In his most recent propaganda piece Enzo Raimondo tells readers, “All buyers’ agents must be licensed estate agents”. This statement is false, and Raimondo knows it to be false. It is one thing to make a false statement unknowingly – this is simply a mistake. But making a false statement, in the knowledge that it is false, is dishonest.
Not all estate agents have to be licensed
Let’s make one thing quite clear – not all estate agents have to be licensed. As a property lawyer, I am an estate agent as defined in theEstate Agents Act 1980, but I do not require an estate agent’s licence. Enzo Raimondo is quite aware that I sell real estate as an estate agent, that I have been doing so for some years now, and that I have over 150 sales to my credit. Enzo and the REIV have done what they can to stop me from competing against REIV members, and have failed. False information is now their last resort.
Similarly, as a lawyer I am a true buyer’s advocate, and I am qualified to perform tasks associated with buyer advocacy that are well beyond the capacity of any real estate agent.
I do not need an estate agent’s licence because property lawyers are exempted from having to comply with the Estate Agents Act 1980. So, there are two ways a person can be assisted in the sale or purchase of real estate:
- Full representation by a lawyer (who can perform all tasks associated with selling or purchasing real estate); or
- Partial representation by a non-lawyer estate agent (estate agents are licensed to perform only some of the things the lawyer can do).
Where a consumer opts to use a real estate agent they must also involve a lawyer. However, where a consumer is represented by a lawyer there is no need for the involvement of a real estate agent at all. The real estate agent becomes an impediment to the safe and effective sale or purchase of real estate. But don’t just take my word for it, here’s what a licensed estate agent has to say about buyer’s advocates and estate agents who represent vendors:
“Many selling agents are starting to call themselves buyer’s agents when it suits them. Some are designating one or two people in their office to work with buyers in order to get a fee from both buyers and sellers. In the USA this is called ‘dual agency’. In my opinion this is a clear conflict of interest which could lead to buyers and sellers being mislead (sic).” (From “The Insider’s Guide To Saving Thousands At Auction” p.10 by Patrick Bright)
Lawyers can do more than estate agents
An estate agent can never be a true buyer’s advocate. This is because estate agents are prohibited from performing the most important function of a buyer’s advocate – negotiation. Sure, Raimondo and his cronies try to persuade consumers that estate agents are negotiators, but the reality is that no estate agent has the qualifications, training or capacity to properly represent a client during sale negotiations. I will explain why.
1. Real estate agents are prohibited from giving legal advice
The real estate agent is prohibited by law from offering legal advice to a client. Real estate sales are legal transactions, and they involve legal rights, legal relationships and legal obligations. How can any purchaser be guided through the pitfalls associated with purchasing real estate without having their legal rights and obligations explained to them? How is a purchaser to make an informed decision without having the sale documents and applicable legislation explained to them?
2. Real estate agents are prohibited from drafting contract terms and conditions
Negotiations are useless unless the negotiated agreement can be put into written form and given the force of law. An estate agent can’t do this. Estate agents are not only prohibited from drafting legal documents, they are also prohibited from interpreting legal documents. This means that the estate agent is unable to draft a contract, to advise on terms and conditions or to explain the nature and effect of contract terms and conditions to the purchaser.
3. Real estate agents are always in a position of conflicting interests
The real estate agent will not be paid unless and until a contract is signed. This means that a client who is reluctant to commit to a purchase, or who wants to take their time in making a purchase, can become a problem for the agent. It is not in the interests of the estate agent to allow a purchaser to decide not to proceed, just as it is not in the interests of the vendor’s estate agent to allow the vendor not to proceed. Conflicts of interests always hamper negotiations.
4. Real estate agents are likely to collude
Real estate agents are renowned for their preparedness to collude with other parties contrary to the interests of their own clients. When an estate agent who needs his client to buy in order to win a buyer’s agent commission “negotiates” with an estate agent who needs to have her client sell in order to win a vendor’s agent commission, the negotiation has the potential to collapse into a collusion.
5. Lawyers always have to be involved anyway
Someone has to take responsibility for the entire sale or purchaser transaction, and this always falls to the lawyer. Of course, estate agents like to look as though they have a role in the legal process and so they busy themselves handing out Section 32 Vendor Statements, filling in blank contract documents, and talking about terms and conditions. But estate agents NEVER take responsibility for the transaction – this always falls to the lawyer.
It is the lawyer who prepares the Section 32 Vendor Statement and takes responsibility for its legal compliance and accuracy, it is the lawyer who prepares the contract of sale or who takes responsibility for sorting things out when the estate agent makes a mess of the simple task of filling in the blanks of a standard contract document, and it is the lawyer who is called in if a licensed conveyancer (usually nominated by an estate agent) gets out of their depth with legal issues.
Importing a nasty American concept
The concept of the buyer advocate is really an attempt to import a nasty American concept. In the USA the real estate industry operates the Multi Listing Services (MLS), which gives real estate agents something of a monopoly over internet real estate sale listings. Real estate agent commissions in America are around 6%, with 3% going to the vendor’s estate agent and 3% going to the purchaser’s estate agent.
Unlike the situation in Australia, where anyone can go to one of the major internet portals to find real estate (e.g. www.realestate.com.au or www.domain.com.au) American purchasers can only access the MLS database through a licensed estate agent, or Buyer’s Advocate.
Australian real estate agents envy the American system where the vendor’s estate agent can push the vendor to sell, the purchaser’s estate agent can push the purchaser to buy, and both agents make a packet. When the economy threatens to put a dent in the massive profits raked in by real estate agents the REIV trots out the “buyer’s advocate” concept again. (See our critique of a similar article by Enzo Raimondo in 2004 “Buyers’ Agents – A Critique“).
See also an article by business analyst Alan Kohler “Buyer Beware“, in which he makes the following observation:
“One of the most amazing trends in real estate over the past few years has been the growth in the use of buyers’ advocates. It’s not that they are being used that’s amazing – in fact, that’s an inevitable result of the way in which real-estate buyers are kept in the dark and fed manure by vendors’ agents and the property information system.What is amazing is that almost all buyers’ advocates charge a percentage of the sale price; and even more astonishing is that clients are paying it.“
The true role of the estate agent buyer’s agent
There is a role for the estate agent buyer agent, but it is limited to sourcing real estate only. An honest buyer’s agent does not pretend to provide full legal representation through the negotiation and closure stages of a transaction, but advises the purchaser to seek advice from his or her lawyer.
There are some estate agents who have become buyers’ agents on the basis of “poacher turned gamekeeper”, using their knowledge of shonky real estate practices in favour of their purchaser clients. Patrick Bright (quoted above) is a former real estate agent who readily admits that estate agents use “deceptive and sneaky tricks“, and he purports to offer assistance to consumers based on his knowledge of what’s rotten in the industry.
While estate agent buyers’ advocates may be aware of the practical methods estate agents use in order to deceive consumers, they do not properly understand the legal significance of the tricks and scams. Many illegal and deceptive practices used by estate agents are not recognised by estate agents as criminal behaviour. Indeed, even Enzo Raimondo once claimed that he did not know what dummy bidding was, and that he did not know it was illegal. Estate agents who become buyer agents are in no better position. Only a trained lawyer can properly identify illegal behaviours and advise their clients accordingly.
Patrick Bright also acknowledges that getting a sale, any sale, is the priority of the estate agent:
“When a selling agent signs up a vendor their basic plan of attack is to find out the lowest price the vendor will accept, sell the property and move onto the next property..their motivation to achieve the best price is not as high as getting a sale. It’s sale first, best price second – that’s the typical mentality…consider the economics of the situation…if the property isn’t sold the selling agent gets nothing.” (From “The Insider’s Guide To Saving Thousands At Auction” p.10 by Patrick Bright)
What Patrick Bright fails to mention, however, is that a buyer’s advocate who operates on the all-or-nothing basis of a commission based on the purchase price is in exactly the same position as the vendor’s agent – any purchase at any price is the first requirement.
The only way to ensure the integrity of the buyer’s agent is to keep him or her well away from the final negotiation and contract closure stage of the transaction, and to seek the opinion and the advice of a qualified legal practitioner. This approach separates the roles: the buyer’s agent simply finds the property, and the buyer’s advocate (the lawyer) advises on the proposal, negotiates the terms, and closes the sale through finalisation of the contract.
Conclusion
Three simple rules of thumb will keep the average real estate consumer safe when choosing a buyer’s advocate:
- Ignore self-serving and bogus “consumer advice” from the Real Estate Institute of Victoria (REIV);
- Choose a lawyer for full representation; and
- Never use any representative who charges on the basis of commission.
If using a real estate agent to source a property for purchase, ensure that he or she has no role whatsoever in the final negotiation and contract stages of the transaction.
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