Real Estate Broker Arbitrage in Vancouver
theglobeandmail.com
theglobeandmail.com
It is an interesting question why the sellers are mispricing their homes by as much as 30%, but if you know anything about the Vancouver real estate market, it is perhaps not that surprising: numbers move very fast, a lot of inexperienced non-investors own property (that they have usually owned for a very long time) and have perhaps never been involved in a deal of such scale.
If I were the buyer in the first transaction, however, I'd be very upset with my real estate agent though: his job was to advise me, not to be my adversary in an internal negotiation. He did not act in my interest, despite representing himself as my agent. I would be promptly reviewing my real estate contract and the real estate laws in my province for words like "fiduciary duty" and given the size of the transaction, probably consulting a lawyer.
A stark reminder that real estate agents are not your friend -- and actually, that is true regardless of what side of the transaction you are on. They are almost always paid by the selling party and still even have non-aligned incentives even for that party: preferring to get a sale done quickly than to get a better price for their client (as they only earn a fraction of the increase, but there is a high fixed 'minimum' property price in any given jurisdiction; a second sale will do much better for them than a 5% increase in their current sale).
Maybe this is an opportunity for property appraisal companies to step in and make a B2C play..
Even if someone came up with an automated valuation model that predicted potential sale price with a high degree of accuracy, you really shouldn't trust it unless it was completely interpretable or open source. As seen here, there's a great deal of money to be had in misquoting that price. Even messier, these sellers would want a model that could predict sale price today as well as in 3 months (when the home is foreseeably being re-assigned).
If anyone has a model like this, I'd like to talk.
This is not the first time I hear of real estate agents buying houses from their customers and profiting from them. If my agent tried to pull that on me, I'd fire them, or if it was too costly to do so, I'd raise the price until they're not willing to buy. Then I know I would have reached a price closer to the real market price.
[0]: http://freakonomics.com/2008/02/26/real-estate-agents-revisi...
While the decision is ultimately up to the seller, I believe the agent is obliged to act transparently and in the best interest of their client and whether that is happening here is not clear.
If the broker landed what was truly the highest price at the time, then you're right. However, the implication is that the broker managed to get the deal done (ie, misrepresented the market-value) and then collected money in a side transaction when the second transaction completed. That's pretty dirty, if it's the case.
The buyer's agent, taking advantage of the assignment clause and delayed close, can now shop the property (probably without possibility of showings) and if somehow they can find a better offer, pass along to their buyer the chance to flip it for some quick cash.
I don't see anything remotely illegal, unethical, or even unfair.
It is possible that a seller's agent could fail to recognize a huge mispricing of the accepted offer, and if that is the case you are absolutely right.
However: The seller's agent failed to recognize a huge mispricing?! And lost all of those commission dollars (3-6% depending)? Totally suspicious. At best the broker is incompetent, at worst, corrupt.
BTW: During the previous housing bubble, several folks worried about "pocket listing', which could be a technique for pulling this off: https://en.wikipedia.org/wiki/Pocket_listing
I would say they're always paid by the buyer. No matter who pays for it in the contract, the buyer is the one bringing money to the deal.
The buyer doesn't have any payment terms with the agents. The agents are paid by the seller. This may normally be with the buyer's money, but that's irrelevant.
Presumably the first buyer is aware of what the agent is doing, and is okay with it. The first buyer gets $300k out of it (but no house).
You lose the ocean and the mountains though, and that can be a really hard sell (source: I moved here 5 years ago from Vancouver).
Say a house rents for $25,000/year. At 2007's rate of 4.76% on the 10yr T-bill plus ~200 points for the risk premium, the value of the house is $369,000 based solely on the NOI.
At 2016's rate of 1.85% + 200pts, the value of the house is $649,000, and that's with the same rent as 2007, not even adjusted for inflation.
That's a 75% gain on interest rates alone. Add in other factors such as increased economic activity and capital flight from overseas and you arrive at doubling.
> http://www.theglobeandmail.com/news/national/article28634862...
The contract is very clear when it says, "Buyer and/or assigns." In most states, that is written at the very beginning of the contract as well.
If they are acting like an adviser, there's something at least a bit smarmy about not actually advising. If they were simply interested buyers, its harder to impute an obligation to the seller.
The average property owner doesn't understand the market and is expecting the real estate agent to provide accurate price estimations.
I don't understand, ethically, how this sort of thing could be legal as its clearly a clause meant to allow misrepresentation to take rubes for their money.
Ethics revolves around ensuring that everybody's interests are protected. A broker is supposed to be a neutral party that does not have an interest in the transaction. The seller's interests are not being represented.
If buyers are willing to pay a certain amount for a house of their choice, isn't that the definition of market price?
I think the effect you mention is probably a lot more relevant to the people selling at below market to speculators that approached them, because if they were assuming that they could finance a home purchase in the city with the proceeds of the sale, they're going to find their purchasing power significantly weaker than they were probably expecting (given that they just clear 3x their original investment, "YAY!"). On top of that, with many agents speculating themselves, and a lot of foreign investors on the buy side of the market, they're likely to find that they are now swimming with sharks having just sold their boat.
Additional commentary: If you find yourself in this situation, you might as well try to get a loan to buy a new house before you sell your current shelter from the elements. If you're no longer able to get a loan for an amount that would get you a house in your area, perhaps that's an indication that you should be very careful with how you proceed. It still may be worth selling, even taking a below market offer (conceivably). But now you know that selling your house is going to mean moving to a more buyer friendly market in advance of committing yourself. Or... if you're the gambling type, renting in anticipation of a bubble burst (though I think heavy foreign investment messes with people's expectations of what is too hot for a given market; certainly it is fickle, but can potentially prop prices up significantly above historical levels for a long time).
This is simply 3 rapid sales compressed into a single closing to save on the transfer taxes. Literally everyone wins.
How is this different from, for example, complaining that it's unfair for a stock to continue going up after you sell it?
The article mentions that the buyer's agent find another buyer who will pay more than Buyer #1. So, what's the problem with that?
The buyer's agent has a fiduciary duty to the buyer, not to the seller. If the buyer's agent convinces the seller to sell at a price below market, and then finds Buyer #2 to buy at market, and Buyer #1 picks up the profits, that's a great agent ... for the buyer.
The seller should have his own agent, who's job it is to find the highest bidder and to not sell below market.
I had my own experience buying my first home, the new construction condo agent told me that I didn't have to have a buyer's agent and could just deal with them but the more I did my research the more I realized that my agent would be legally required to represent my best interests and could do a better job advising me on a process that might seem intimidating to a first time buyer.
I can understand why some of these sellers said "YES!" when someone knocks on their door and offers them cash that's equivalent to a lifetime's worth of savings but there is some fault to be assigned to seller's who don't do their due diligence. If someone says they'll pay cash right away to you, you have to think that perhaps you should see if there are other buyers in the market.
This would protect the interests of the seller and align the agents with their interests, something which is required to happen in theory but seems lacking in practice with rules easily skirted by an agent making laughable claims like "oh, I wasn't aware that I would be interested in having a financial stake in this property until an hour after the buyer accepted the offer".
I bought both of my houses with an "or assigns" clause in the offer. In both cases, I expected to (and did) move into the house as my personal residence, but if a seller balked at the "or assigns" bit, I would have walked on the first house and not sure on the second house. Why? Because I may want to assign the contract to a trust, partnership or LLC, in addition to the freedom it gives me to assign to another buyer.
The couple in the article were OK with selling their house for it to razed and a new structure built, but weren't OK with the new buyer selling the house to someone else?! That makes no sense to me...
As a seller, you agreed to price X. As a buyer, I contracted with you (the hypothetical you) to ensure you are paid X. I then do some legwork and find another buyer for X+P, and assign the contract to them. At closing, you get ~X; I get ~P; new buyer gets the property, and a bunch of do-littles in the process take a bunch of fees, expenses, taxes, and commissions off the table. I don't see the problem for you or I. You do and I acknowledge that.
You can feel free to insist (in the contract) that, under those circumstances, you are due X+P, and what you'll find is that the subset of the buyers who wish to assign the contract won't deal with you (you've taken their economic value add away), but you'll eventually sell the house. It might be for X - L, where L is the loss you take by excluding that subset of buyers, as remember that X was the highest offer you were able to find otherwise and that was from a buyer that you've now excluded. But at least you can feel good that you got the "full value" of the transaction.
The only reason this is possible is because the market is inefficient and I'd like to see more efficiency introduced into the market, whether that comes through legislation or via technical means, so that people aren't leaving $1M on the table to be scooped up by others. In reality that $5.2M property which ultimately closed at $6.2M might have sold for $5.7M, earning the family another $500K and saving the real buyer $500K.
If the buyer's agent is acting on behalf of the buyer, they were under no obligation (legal certainly, nor ethical or moral, IMO) to bring that higher offer to the seller. (Real estate law and practices are hyper local; around here [MA, USA], a "buyer's agent" owes a fiduciary obligation only to the buyer and is allowed (and in fact would be required) to not disclose the presence of this other potential offer as by the "undivided loyalty" clause, they are "prohibited from advancing any interests adverse to the principal's [read: buyer's] interest or conducting the principal's business in such a way as to benefit a customer, a subagent, the agent or any other party to the detriment of the principal's interest." In other areas, that might not be the case.)
In that case, it is the listing/selling agent's responsibility to advise their client (the seller) that the offer is too low and they should wait longer.
This story is very relevant to tech. As much as I would love to, I wouldn't even think about locating a new business or office in BC today. And I'm sure I'm not alone. Attracting and retaining good employees is just too difficult when housing is more expensive than San Francisco - in a city where pay and buying power is much, much lower.
Their incentives are not aligned with the seller or buyer of the home but with their ability to generate a commission per hour of labor.
Selling your house at $180,000 in 30 hours is far more lucrative than selling your house at $200,000 [fair market value] in 90 hours.
A substantial number of them will opt for the former rather than properly advising the seller.
The buyer's agent will do the reverse as their commission size is based on making the sale and the larger the dollar figure, the greater their commission. [e.g. Nudge you in the direction they think will maximize their reward for effort, such as encouraging you to pay $205,000 on a $200,000 property so there isn't any real negotiation.]
I do think there's some confusion in these comments about buyer vs seller agent, but that goes back to the fact that traditional real estate deals are often murky and intentionally obfuscated to benefit the brokers.
What's happening here is that agents involved in the sale of Alice's property provide Alice with a price of (for example) $1M, which Alice accepts under the assumption that her agent is representing her interests fairly and objectively. After Alice accepts this price, the purchase is delayed. While Alice waits to receive $1M for the sale, Eve (another agent) is assigned the property and sells the assignment to Bob for $1.25M. Bob then sells his assignment to Charlie for $1.5M. Charlie then completes the purchase, and only then is the property transferred from Alice to Charlie. Charlie pays $1.5M, but Alice receives only $1M. Eve and Bob both profit $250K each, never having taken possession of the property themselves.
[0] The tax is charged at a rate of 1% for the first $200,000 and 2% for the portion of the fair market value that is greater than $200,000. Source: http://www2.gov.bc.ca/gov/content/taxes/property-taxes/prope...
One part of that article that stands out is that this is possible because the seller is generally not getting market value, which implies that the seller's agent isn't doing a great job of representing them:
"This practice is often frowned upon in the real estate
community since it seems unethical or illegal. In practice
there is nothing illegal about wholesaling or assigning
rights to a purchase contract even if it is multiple times.
It is important to understand that the reason there is an
opportunity to wholesale is because the original seller is
selling the property for substantially less than market
value."