Who Is Your Buyer Agent Representing?

The case of a California couple who are suing their real estate agent because they feel they overpaid for their home in 2004 has ignited a firestorm within the real estate community. The N.Y. Times featured the case in a recent article, and the Today Show ran a segment on the suit. Amazingly, according to NAR, this is the first known case where a buyer's agent has been sued by a buyer over valuation issues.

According to the article in the Times, Marty and Vernon Ummel purchased a home in 2005 using the services of Mike Little, a veteran agent with Re/Max Associates. The Ummels claim that Mr. Ummel, who was also working as a mortgage broker, encouraged them to obtain their loan through him. The suit charges that the Ummels requested a copy of the appraisal ordered by Mr. Little prior to the closing, but that it was not provided to them until after they moved into the home.

The Ummels apparently realized something was amiss when they got a flier from another real estate agent in August of 2005, a few days after they moved into their home, which showed that a house up the street had just sold for $105,000 less than theirs, even though it was the same size. When they finally got their appraisal, they learned that the house up the street was not only cheaper, but that it also had a pool. In early October of that same year, they learned from a separate flier that yet another similar sized home on the same street closed the same day as theirs but sold for $175,000 less.

The Ummels accuse Mr. Little not only of withholding information, but of exaggerating the value of the house to push them into a deal. In her deposition, Mrs. Ummel testified that Mr. Little had told them "many times that it was a very good buy."

In an interview with the Times, Mr. Little called the case "ridiculous,", adding: "The lady's a nut job. I didn't do anything wrong." He blamed the suit on a declining market. "When people see their home values and assets declining, they always feel there's someone to blame," he said. "This is a dangerous time for all of us in the industry," Mr. Little remarked.

The mortgage broker, and the appraiser, who was accused of skewing his report to make the Ummel's house seem worth the purchase price, have both settled out of court. The case against Mr. Little and Re/Max Associates is scheduled to go to trial on Monday, January 28th in San Diego County.

If Mr Little did indeed fail to disclose the appraisal/prior sale information to his clients in order to save the deal, and his reported $30,000 commission, he has almost certainly breached his fiduciary duties to his clients as their buyer's agent (if he was in fact acting in that capacity, as there was no signed buyer agency agreement). The duty of an agent to disclose material information to their client is well-recognized. It is difficult for me to imagine a scenario where a recent comparable sale just up the street of which an agent has actual knowledge would not be considered to be material. If an agent has knowledge of any information which may influence their client's decision whether or not to purchase, that information is material and should be disclosed.

The fact that Mr. Little was also acting as the Ummels' loan originator is also of concern. Buyer agents must be cognizant of any relationship which could potentially pose a conflict of interest between the agent's duty of loyalty to their client and their own financial interests. A number of agents commenting on this case have repeated the old adage that "pigs get fat and hogs get slaughtered." Greed, and the viewing of a client as a profit center, rather than as a principal, can easily lead to legal liability for breach of one's fiduciary duties.

Undoubtedly, there have been a number of instances in recent years where buyer agents have not fulfilled their fiduciary obligations to their clients. Up until now, soaring property values have masked many of these shortcomings. With property values now in freefall, one can expect that buyer agents who have failed to fulfill their fiduciary duties to their clients will be called to task.

NAR's Antitrust Problems--The Tip of the Iceberg?

After reading Judge Mark Filip's opinion denying the National Ass'n of Realtors' (NAR's) motion for summary disposition in the U.S. Department of Justice's (DOJ's) antitrust case against NAR, I am left to wonder, is the Court's recent ruling only the tip of the iceberg when it comes to NAR's current antitrust problems?

I found the government's allegations of anticompetitive behavior to be quite interesting. The government has cited as evidence in its case a Cendant white paper asserting that it was "not feasible" for traditional brokerages to compete with large internet companies that operated or affiliated with brokers operating VOWs (Virtual Office Websites). The DOJ also cited public comments by the chairman of Re/Max expressing concern that VOW brokers would place downward pressure on brokers' commission rates. The U.S. further alleged that the head of NAR's working group on the VOW regulations argued that the new rules were needed because VOW brokers were "scooping up market share just below the radar."

The opt-out provisions contained in both NAR's initial VOW Policy and modified ILD (Internet Listing Display) Policy, along with an anti-referral provision, form the crux of the government's case. The initial VOW Policy contained opt-out provisions forbidding any broker in the MLS from sharing a listing with their customers over the internet without the permission of the listing broker. The Court noted that listing brokers were given the opportunity to choose from either a blanket opt-out (directing that their clients' listings not be displayed on any VOW), or a selective opt-out (directing that their clients' listings not be displayed on a particular targeted competing broker's or brokers' VOW(s)).

Now for the smoking guns. According to the United States, the working group that formulated NAR's initial VOW policy understood that the opt-out rights were fundamentally anticompetitive and harmful to consumers. Two members of the working group wrote that the opt-out right would be "abused beyond belief," with traditional brokers selectively withholding listings from particular VOW-based competitors, as they previously had been unable to do. The DOJ also asserts that the chairman of the working group also admitted that the opt-out right was likely to be exercised by brokers notwithstanding that "it may not be in the seller's best interest to opt out." The chairman, however, "took comfort in the fact that the rule did not require brokers to disclose to clients that their listings would be withheld from some prospective purchasers as a result of the brokers' opt-out decision, thus providing brokers 'flexibility without conversation'."

NAR attempted to have the government's claims that its initial VOW Policy violated antitrust law thrown out, on the basis that the initial VOW Policy, which was slated to go into effect on January 1, 2006, and which had already been adopted by approximately 200 local boards, was subsequently rescinded by NAR, in favor of the modified ILD Policy. The modified ILD policy does not contain the particularly offensive selective opt-out provision that was in the initial VOW policy. However it does contain a blanket opt-out provision which allows brokers to direct that their clients' listings not be displayed on any competitor's website, provided that the broker opting out does not display any competitor's listings on its own website, if it has one. The Court took notice of the fact that when exercised, this blanket opt-out would prevent a VOW broker from providing over the internet the same MLS information that can be provided in person, or through any non-internet technology, without restriction. The Court also noted that the blanket opt-out did not apply to NAR's own website, Realtor.com.

The DOJ has alleged that the NAR, by adopting the initial VOW Policy and the modified ILD Policy, violated the Sherman Act. More specifically, it is alleged that these policies constitute a contract, combination, or conspiracy by and between NAR and its members which unreasonably restrains competition in brokerage service markets throughout the U.S. to the detriment of American consumers. The United States further alleges that this combination or conspiracy has had and will continue to have anticompetitive effects in the market for residential real estate services by suppressing technological innovation, reducing competition on price and quality, raising barriers to entry, and restricting efficient cooperation among brokers, thereby making express or tacit collusion more likely.

In its motion for summary disposition, NAR argued that there is no case or controversy with respect to the intial VOW Policy because it rescinded that Policy before the DOJ's lawsuit was filed. Not only was the Court unswayed by NAR's arguments, noting that the government has alleged sufficient continuing adverse effects of the initial VOW Policy to warrant the granting of injunctive relief, the Court also ominously warned that if the DOJ's allegations are proven, the equitable remedies which may be imposed by the Court "can go beyond the prohibition of those practices which, strictly speaking, were found to constitute the illegal conduct."

The Court seems to have a very firm grasp on the complex issues involved in the case, especially as they relate to the potential harm caused to consumers. According to attorney Robert D. Butters, who was quoted by Inman News, "This judge clearly gets it. He understands how VOWs operate and the potential they have for making the marketing process far more efficient and consumer-friendly. He clearly comprehends that."

There are several aspects of the Court's opinion which I find to be of particular interest. One of NAR's core arguments against government regulation has been its continual assertion that the MLS is not a "public utility", and that MLS listings are the property of member listing brokers, who should be entitled to regulate the dissemination of those listings as they see fit. Not only was the MLS as public utility argument completely missing from its 29 page opinion, the Court continually refers to MLS listings in its Opinion as "clients' listings." I think that this is significant.

Additionally, the Court appears to be receptive to looking at the harm NAR's policies have caused not only to general public, but to those clients whose listings have been withheld by their brokers by means of either selective or blanket opt-out, without the clients' knowledge or consent. Ah yes, "flexibility without conversation", what a concept!

As an exclusive buyer agent, either the selective and/or the blanket opt-outs could potentially be the death knell of my business model. There were and continue to be brokers in my local MLS who have exercised blanket opt-outs with respect to the display of their clients' listings on my website, and that of other MLS participants, through NAR's Internet Data Exchange (IDX) Policy. In my opinion, these blanket opt-outs are harmful to competing brokers and to sellers, who generally haven't a clue that their listings are not being publicly disseminated on the websites of other MLS participants.

From what I can gather, this case is only just now getting started, and its ramifications will most likely be far-reaching. With this decision, I feel that NAR's prospects of maintaining the status quo have all but evaporated. I believe that this case (and more than likely even this Opinion), will in all likelihood accelerate the changes and innovations which we have been seeing in the marketplace, resulting in a transformation of the real estate industry as we know it. As far as NAR's antitrust problems go, this decision may just be the tip of the iceberg.