The most basic principle in real estate is that an agent’s fiduciary responsibility is to their client. If you trade stocks as a broker, the SEC oversees your activity and (hopefully) keeps you honest. In real estate, there is no such oversight. If an agent acts in their own interests and not their clients, it usually takes a formal complaint to trigger an investigation.
The interests of the client and the agent are not always the same. In most cases, a seller’s interests align with the agent’s – but not always.
There are disclosure laws in place that are set up to protect the client. If a real estate agent owns a property and is the seller, they must disclose that they are an agent. The same holds if the agent is looking to buy a property for personal use. But what does not have to be disclosed is the agent’s intent. The agent’s plans on what they will do after purchasing the property are not required to be disclosed.
It makes sense that real estate agents would buy and flip homes. They have an inside track on the market and know what a “good deal” looks like. In the early 2000s, when the new development market was frothy, several projects saw unusually high agent purchasing activity. A handful of entrepreneurial agents went into contract on multiple units early in the sales effort on some projects. For the agent, it was a smart bet. They put down 10% to be the first to go into contract, and by the time they had to close, the units appreciated in value. Then, they flipped the contracts and made a hefty profit: low risk and high reward. However, for the developer, these were potentially unrealized profits.
If you’re a seller – primarily a real estate developer – seeing vigorous broker activity should be a red flag. However, not all developers are savvy enough to know this. And then, some developers love that agents are buying in their building. They see it as an endorsement of their property and a signal to the market of the exceptionalism of their building – yes, but does this work out for them in the long run?
A project in the West Village launched about a decade ago and became known as the “broker” building. The number of agents who bought in this project was staggering. Everyone bought early and below market. Only a handful of the agents lived in the building. The majority quickly sold for hefty profits. Profits that the developer could have realized.
I’m not sure the developer knew how much he undersold his building, and I’m not sure he even cared. Most agents would argue that a seller goes into contract with eyes wide open, and it takes two to consummate a deal. It might also be argued that if an agent buys an apartment on spec and doesn’t advise the sponsor that the reason they are buying is to flip it to make a profit, then is that our version of insider trading? I’d love to hear your thoughts.
Side Bar:
Last week I offended quite a few people by quoting Henry Ford. I had no idea that he was a known antisemite and bigot. His autobiography didn’t go into this aspect of his belief system, and not growing up in America, I learned almost nothing about Ford. Had I been aware of his antisemitism, I certainly would not have referenced him. A good lesson for me on many levels, and I sincerely apologize to anyone offended. Thank you all for keeping me honest. I really do appreciate it.
Let’s do this.
-Shaun