Real Estate – “Proceeding in Good Faith”

Real Estate Transactions have long depended on the underlying principle of “Proceeding in Good Faith”. It’s not something that we talk about much, as it is something we pretty much take for granted.

I raise this issue today as Craig has mentioned it a few times this year in his posts and comments, and most recently the other day in his post regarding “Good Faith Home Inspection Negotiations”.

Before we can discuss how “Proceeding in Good Faith” applies to the Home Inspection specifically, we need to discuss how “Proceeding in Good Faith” applies to all real estate transactions, generally. When we are talking about this principle in real estate, we are talking about the Buyer and the Seller who are the “Parties To” the transaction. It is not about agents except to the extent that they represent someone who is acting and proceeding in good faith. Consequently the presence or absence of real estate agents in the transaction neither heightens nor diminishes the importance of the good faith process.

Good Faith BEGINS with a seller who wants to sell and a buyer who wants to buy. One would think this is always the case, but it is not. NO ONE can PROCEED “in good faith” if these two things are not present from the getgo.

While it may be hard for some to believe, not everyone who has their home listed for sale has the intent of actually selling it (at the price at which it will actually sell), and not everyone who makes a written offer actually has the intent of buying (that particular house). Who is and who is not Proceeding in Good Faith…well, that gets a little complicated.

Buyer Says: “What’s wrong with this seller? Is he REALLY going to Let This Sale Fall Apart over a $150 fix to a leak under the sink?”

Seller Says: “Well it’s a good thing that buyer DIDN”T buy my house, He oviously did NOT want it, if he was willing to walk away from it over a $150 fix to a leak under a sink! Anyone who is not willing to fix a leak under a sink shouldn’t be a Home OWNER Period!”

Craig, in his post linked in this one says: ” As a general rule, I think β€œgood faith

18 thoughts on “Real Estate – “Proceeding in Good Faith”

  1. One benefit of large commissions to brokers is that it allows brokers to spend out of their own pocket in order keep the deal on track and the parties happy — or at least not at each others’ throats! πŸ™‚ My model, in contrast, does not allow me to do so. I’ll leave it for another post as to which model is ultimately best for consumers. (Hint: market efficiencies are good.)

    On this topic, though, you’re absolutely right. “Good faith” is much easier to define in the abstract than it is to identify in any particular situation. In order to apply the principle to a specific buyer and seller, you need to measure the parties’ conduct against the ubiquitous “reasonable person.” I think a reasonable person would be more concerned with addressing a safety issue as part of the inspection resolution versus a cosmetic issue. Similarly, a reasonable person would be more concerned with fixing an expensive defect than one of minimal cost.

    Applying that to your hypothetical, I’d argue that the buyer is not acting in good faith (walking away from the deal over a simple, non-safety issue fix that will cost about .03% to repair). Don’t you agree?

  2. Craig,

    Actually I don’t agree, based on how I generally apply “logic” to good faith negotiations. πŸ™‚ In the instant case, a leak under a sink, I base the decision on the fact that a leak causes continuous further damage and must be repaired ASAP after it is discovered. What is it dripping on? Will mold grow if the leak is not fixed immediately and the area dried out?

    If the property is occupied by the seller, 99% of the time the seller fixes the leak immediately upon the inspector discovering the leak, as the owner would have fixed it had they known it was leaking, whether their home for for sale or not.

    As to the agent not having $150 to fix a leak, in the Goldilocks and the Three Bears method of determining “fair” commission amounts, I have run many different experiments. Fair AND effective is a good combination. When Redfin started out they thought they could do the job for less than they currently charge, and discovered that was not possible. My best guess is you will find that to be the case as well, at least in some if not all cases.

    I have considered a commission that has a “set aside” for inspection issues, which goes to the client if not needed for inspection issues. That can be done whether my client is the buyer or the seller. Not necessarily a good answer though.

    I do know that cutting it to where there is not even $150 worth of wiggle room is not likely a good scenario for anyone in the room. Not the buyer or the seller or the agents.

    When I started in real estate the home inspection contingency had a dollar amount minimum that the buyer could not cancel about, which would cover this $150 issue. It said the buy can cancel on inspection IF the cost to fix, in aggregate, exceeds $___________ Usually the amount in there was $500 or $1,000, depending on the contract price of the home.

    Can’t say that was better though, as it is difficult to pinpoint the price to fix. BUT it was better than a seller or buyer not closing over a $150 item. In the long term…over time…the answer became that SOMEONE had to be willing to spend $500 to $1,000 for most transactions to proceed “in good faith”. That can be the buyer or the seller or the agents or the cost being split 4 ways among them.

    What we do know is that NO allowance for inspection repairs by anyone…generally does not work out well.

    • Ardell — Interesting. I’ll table any further discussion of the costs and benefits of an “allowance” vis-a-vis the brokers and address that issue in a future post (if you’re going to crib my post ideas, I’m going to crib yours πŸ˜‰ )

      As for the topic at hand: Are you saying that both seller and buyer are acting reasonably and in good faith if they are honestly prepared to terminate the sale over a repair that costs .033% of the purchase price (assuming a $450k price)? That just doesn’t sound right to me. If both parties draw this “line in the sand,” then it seems to me that neither party really has a genuine interest in closing the deal. And that, in turn, means they are not acting in good faith by our agreed definition.

      Let’s tweak the hypothetical a little further: What if the repair is purely cosmetic? Say, a scratch in the granite countertop that will cost $150 to repair, and both buyer and seller demand that the other pay that cost. Are they negotiating in good faith?

      I look forward to your answer….

  3. Craig,

    First as to the LEAK:

    As an attorney, I think you would be obligated to push for your client to NOT be the one who pays the $150 and fixes the problem. Even if you thought your buyer should “proceed in good faith” by not raising the repair issue, the lawyer in you would have to ask for it to be fixed by someone other than your client.

    As an agent, I just get the darned thing fixed SOMEHOW and PRONTO!

    I just had this happen BTW. Seller fixed it. The leak was under the jacuzzi tub.

    I had it happen last year at this time of year and the buyer said “My Dad would disown me if he found out I bothered the seller over this little fix vs repairing it myself.”

    Everyone’s different.

    Neither of the above times did the leak create a formal inspection request.

    As to your 2nd question:

    1) Purely cosmetic issues are not part of the inspection conducted by most legitimate home inspectors

    2) In the grand arena of ridiculous requests, a scratch kit for a granite countertop costs $24.99

    I have one right now where we are drawing a line in the sand. It’s bank owned. IF the bank can’t get the water turned on for the inspection…my buyers do not want to buy the house. That’s a significant issue for these clients with regard to this house.

    Bottom line is no matter what you and I agree is generally within the realm of Proceeding in Good Faith, at the end of the day this issue is subjective and it depends on the house, the problem, and how the clients feel about the matter. Some days just getting the darned thing fixed is the best way to handle it.

    I remember many years ago an agent negotiating an $85 problem for EIGHT HOURS! At some point paying $85 is better than spending time negotiating. Eight Hours of my time has always been worth a whole lot more than $85 or $150. It’s a business decision that usually equals…just get the darned thing fixed.

    Last but clearly not least, the day my client wants to cancel the contract over a $150 fix is the day we have a long heart to heart talk about why they don’t want the house. I don’t want to pay the $150 if what the client is REALLY trying to say is they really don’t want the house at all.

  4. Thank you for conceding the point, Ardell! πŸ™‚ Your

    Last but clearly not least, the day
    my client wants to cancel the contract
    over a $150 fix is the day we have a
    long heart to heart talk about why
    they don’t want the house

    meshes perfectly with your own definition of “good faith”:

    Good Faith BEGINS with a seller who
    wants to sell and a buyer who wants to

    Thus, clearly the buyer who wants to cancel over a $150 fix — even the leaky sink, apparently — is not negotiating in good faith, by your own definition. That is, quite frankly, helpful to me as I continue learning how to work with other brokers.

    Now, as for your tangent regarding my role as a lawyer versus my — or your — role as a broker: Ardell, you must realize you are simply playing on a popular misconception! Surely you know the stereotype: the lawyer adopts an overly aggressive negotiating stance — he’s making a stink over $150!! — that ultimately torpedos the deal, doing neither buyer nor selller any good. The truth is, Ardell — and I think you know this — that some lawyers fit this stereotype, and others do not. Those other lawyers understand that their clients’ larger interests are the goal, not the micro mini-stuff. So no, I disagree heartily with your contention that a lawyer should make an issue out of a $150 fix. That’s what a bad lawyer might do, not a good one.

  5. Actually Craig, I don’t think it is fair at all for the buyer to have to take a house with a plumbing leak, unless it’s a screaming deal, bank-owned “as-is” house. I would just make sure that they weren’t using that as an excuse, because they really didn’t want the house, before I would have it fixed.

  6. Ardell, I thought the post was about what constitutes “good faith”! Now you’re discussing what is “fair” for a buyer and the role of the broker (including spending the broker’s money) to make sure its “fair.” That is another topic, but since you raised it…

    You sure heap an awful lot onto a broker’s plate when it comes to providing professional services. While I completely agreee that a broker — or lawyer — should counsel the client as to what is “reasonable” and “fair” (recognizing the difficulty in defining those terms), I completely DISAGREE that the broker has some obligation to expend the broker’s own money making sure its fair. That goes way beyond any reasonable professional obligation.

    If you think RE brokers have this obligation, then you really do put brokers WAY up on a giant pedestal that rises far above any other professional service provider. And, ironically, it all flows from the fact that brokers are paid a LOT of money in any one transaction. Not to tip my hand here for any future post, but it sure seems more efficient to me if brokers are paid less and then clients get to use their money as they see fit — for example, by fixing that pesky leak under the sink…….

  7. Craig,

    The National Association of Realtors removed the word “fair” from the Code of Ethics back in…I think 1996. Since that time, YES! …the need to “fair things out” has become (even more than in the past) the burden of the client’s representative.

    The World is not FAIR. We have to rely on those entrusted to provide us with “a fair result” to have our backs on that.

    I can think of several examples in the last 18 months alone, of the 20 years I have been in this business, when the buyer was not being fair to the seller or the seller was not being fair to the buyer. It is not always about money either. At the end of the day, my client getting treated fairly is my obligation, regardless of whom provides that fair result.

    Funny thing is…it was a seller’s and a seller’s agent’s OBLIGATION to be FAIR to all buyers, prior to Buyer Agency! Once Buyers had the right to their own separate and equal representation in a real estate transaction, the word “fair” was removed. To me, that means, that if you have a Buyer’s Agent, it has become that Buyer’s Agent’s JOB to produce a fair result for their client.

    Am I heaping too much on a Buyer Agent’s plate? I hope so, Craig. I seriously hope so…and I hope they eat everything on their plate.

    One example that comes to mind from last year was a seller who decided about 5 hours after he accepted my buyer clients’ offer, that he could have sold the house for more. He did everything in his power to negate the sale, including announcing in advance of the Home Inspection that he wasn’t going to agree to anything! He wanted his agent to cancel the sale, by any means available.

    Even though the client got a good price, it wasn’t a “screaming deal, as-is” price. So no, it wasn’t fair for them to suck up any and all problems from the inspection, because the seller felt the buyer got the better deal on price. So yes, I had things fixed for them that are not generally the agent’s obligation.

    At the end of the day my total commission was clearly NOT a fair price for my services rendered. But in the long line of being treated fairly, I never put myself in front of my client.

    One thing you learn in life, Craig, is you are not doing a client a favor by charging them less for a service, and then providing a lesser service than what the client needs. One day Alternative Business Models will understand that they do NOT give FULL SERVICE for a lesser fee. They just never knew what FULL SERVICE was in the first place.

    • Two final thoughts, Ardell:

      1) I’m quite sure that any economist would agree: Your preferred system — where client pays a lot in professional fees, but the professional then spends some of those funds for the client’s benefit, at the professional’s sole discretion — is remarkably inefficient. Sure it works in your case, Ardell, but you’re special. πŸ˜‰ There’s no way this works well sytemically.

      2) You better believe I provide ALL services required by my client, whether or not that impacts my bottom line. Unlike you, I have an ethical/legal obligation to do so under the Attorney Rules of Professional Conduct. Moreover, when it comes to protecting our clients’ interests, I’m confident that we provide much more of a “full service” than any non-lawyer real estate broker. Now when it comes to arbitrarily rebating my fee to my client based on what I think “fairness” requires — well, you’re right. If that’s your definition of “full service” then I don’t provide it.

      Your post, you get last word. Merry Christmas!

      • 1) Yours doesn’t work systemically either Craig. I’m not sure ANY would work “systemically”.

        2) You don’t, Craig. You can’t. That said, you provide a valued and valuable service to the % of people who need THAT, and I wish you the best of luck with it. You know I do.

        Last I looked your fee for service was less than $2,000. But then, I haven’t looked lately. Two of my clients this year who needed full service needed my full and undivided attention for long periods, months even. There’s no way I could do that for less than $2,000.

  8. Whoa on that last one.

    I am a client of Craig’s and the only significant thing I see that I do not get is unlimited lookie loo rights for property tours. I have to locate candidate properties, and then request tours of them. A set amount of tour time is included in their fee and anything over that is charged at an hourly rate. So I have to do my own homework.

    I have been working with Craig and Marc since May, and in terms of representation in the purchase process, I think they do a superb job. I am absolutely confident they are representing my interests, and they have proven that, for example, by encouraging me to walk on a house that had a bad inspection (much more than a leaky sink) that I was considering proposing the seller make the major repairs needed. Their advice was that with those problems, there were reasons I shouldn’t take the house even with the fixes, and if the seller agreed to the fixes, I would be stuck with it. I am not sure that a conventional agent would have actively advised me to walk, seeing the deal about to go completely up in smoke. My experience with conventional agents has not been good, and with Craig and Marc, I can be completely confident they are representing me, and not “the deal”

    So what is FULL SERVICE anyway? Craig and Marc define what they do and do not do, and I know what I can expect from them. If I don’t know what FULL SERVICE consists of, how can I know what I am missing and whether I want it or not? So I think it is incumbent on traditional real estate agents to enlighten me if they want my business in an environment where there are now alternative models, not just assert that “there’s stuff you won’t get.”

  9. Curt,

    “Full Service” is not necessarily something you “want” or not. It’s something you “need” or not. Clearly not all of my clients need it.

    Full Service begins when you choose the wrong house for you. Not because of the house necessarily, but because there is a better choice for you. Most often that happens with a couple vs a single individual buyer…but not always.

    Full Service can land you in a completely different location than what you were thinking. Full Service can land you in a completely different neighborhood than what you were thinking. Full Service can equal “yes that is the best house for you to buy today, but only because inventory sucks and you should wait for better inventory.”

    Not everyone needs full service for sure.

    You said: “I am not sure that a conventional agent would have actively advised me to walk, seeing the deal about to go completely up in smoke.” Well if you believe that, then you choose to believe that. But clearly many agents do that all the time and every good agent does that when necessary. More often we don’t make the offer in the first place because we anticipated that was bound to happen.

    I have referred a person or two to Craig myself and agree that the service provided IS ABSOLUTELY the best service for some poeple. It’s just not “full”.

    – Full is when a client comes to me to by X house in Y City and they end up buying B house in A City.

    – Full Service is when a client comes to me with 6 ideas of where and what they may want to buy and we work through all of the options for a year or so until they know exactly what they want and where.

    – Full Service is sometimes telling someone not to buy anything at all right now

    – Full Service is finding exactly what someone thought they wanted and then showing them what they should have wanted, so they can see the comparison difference.

    Full Service is many things, but never starts at the buyer having a house they want to buy, and not everyone needs full service even from someone who can provide it.

    Someone called me last year and said I want to buy X condo in X building at X price. I said if you are sure about all that, then call Craig. If you don’t want anyone second guessing you on any of that, if you are at the END of the road, call Craig.

  10. Ardell,
    I see that most of if not all of points regarding full service are about choosing the property, and I certainly understand the advantage that the traditional model has there.

    With that said, I have to say if I were moving to a new area I did not know well, I would almost certainly go with a traditional agent, and I do agree that Craig’s services are not for everybody.

    While I did not have a house I wanted to buy, I knew the areas I wanted to look and what kind of property I wanted. I am dealing with an area I have lived in and around for 20 years and was familiar with the neighborhoods, schools, etc. I did not want to spend thousands of extra dollars for expertise I did not feel I needed. That may or may not have been the right choice, but it is certainly my choice and I appreciated having the option to make it. And, having been badly burnt in the past, I wanted a real estate lawyer involved in any case, so Craig’s value proposition was compelling, especially considering the heightened level of duty to me as my attorney, and the fact had he no financial stake in any transaction. I am paying him for his professional services, and he is paid regardless.

    With regard to agents, some are good and some are bad and it is very hard for consumers to know who is who. I am sure that you, personally, Ardell, would have given the same advice that Marc did regarding the bad inspection (house looked great, it had major problems in the crawlspace, and it was a new listing that hadn’t been around long). However, from personal experience I know that not agents are as ethical. In my case, my real estate on another purchase advised me that I didn’t need an inspection because it was a new house. I liked and trusted that agent. I was naive at the time and believed her and purchased a new home that had a bad rat infestation. I had other less than positive experiences on the selling side, too.

    With sad experience, I have learned not to trust real estate agents as a group, and I do not think I am alone in that. It is truly a case of a few bad apples spoiling the barrel, but it is difficult for the consumer to know the rotten apples from the good ones. I appreciated being able to go to a different barrel entirely.

    At the end of the day, your profession’s response to the challenges of these alternative models must be something more than “You are making a mistake. I am an expert!” A good start would be an enforcement mechanism with teeth against less than ethical agents. Ultimately, though, the way buyer’s agents are compensated needs to changed. That is a hard one. Craig has a solution, payment for services rendered, but for wide adoption that would be a sea change that could not happen quickly or easily. I will admit that when making the final decision, committing to his fee regardless made me stop and think in a way I probably would not have in starting to work with a traditional agent. At the end of the day I realized my hesitation was really hesitation about buying property entirely. So, speaking of “good faith” I felt I was committing to buying SOMETHING when I signed a contract with Craig, because otherwise I would be paying him a goodly chunk of change and not ending up with anything.

    Finally, currently being under contract for a short sale, and having had a bank-owned sale fall through, even I think real estate agents are looking pretty good compared to banks. The banks are completely insane.

  11. Curt,

    As to Butchers, Bakers and Candlestickmakers, some are good and some are bad. I don’t think some are good and some are bad is limited to any specific field of endeavor. It even applies to lawyers πŸ™‚

    As to choices and options, the more the merrier.

    I do object to the new choices acting like other choices are bad. Every time a new choice comes up in real estate, which I welcome and wish their were more, they seem to feel the need to point fingers at everyone else being “bad” and theirs being the only way or best way. I objected to that long before Craig came along. The truth is if Craig’s model were the ONLY choice available in the market place, that would not be a good thing. That his model exists along with others is a very good thing. But even if you think chocolate ice cream is the best, it would not be best for it to be the only choice available.

    Why can’t someone simply be very good at what they offer, without suggesting other services are then as a result “bad”. It is just not true, and also not good form. Again, I have seen this happen again and again in “my” industry, and is the reason why there are few choices. Everyone wants to draw a line in the sand and create a huge mission against…vs simply being an alternative choice. Frankly, that eventually, historically, leads to their demise. Maybe it’s the bad karma of it. I don’t know. Just is how it has been for at least 25 years, and I would love to see these alternative models stick around vs starting a war of who is best and better. It is best and better for some and not others, and that’s the God’s honest truth. More and many choices is best, available side by side.

    I guess I am a “traditional” agent, though I’m not 100% sure what that means. I resent the fact that you seem to associate that with a set cost of some kind. In 20 years I have never had a client who felt my charge was unfair, nor have I charged an unfair amount. I do not have a set charge for all people or a set % for all people. I have had clients who know exactly where they want to live, and I agree with that choice, and they do not pay the same price as someone who needs me to show them why that is not a good choice for them.

    Real Estate is changing. What people think all agents charge is a misnomer to a large degree. What really happens is some people pay more and some people pay less. Some people want a cup of coffee and pay for a cup of coffee and some want a seven course meal and pay for that. More to the point, it is not always about what they want, but what they do or do not need. I have had clients who needed full service the first time, and very little service the second time because of what I taught them the first time, and they were charged accordingly.

    Banks are not insane, nor are they rational beings. They are inanimate entities incapable of either. Having worked at a bank for 20 years prior to being a real estate agent for 20 years, I seem to understand how to deal with them better than most. Bottom line is the price you are paying has to be worth the challenges. If not, then you are overpaying, as the discount should equal the “insanity”. πŸ™‚

    Craig may be best at what he does, as I am best at what I do. What we “do” are worlds apart.

    • “Best at what I do”? Very good, absolutely, but I’m not comfortable claiming the mantle of “best.” Its a big world out there with an awful lot of very smart people.

      “Worlds apart”? Hardly, Ardell! Obviously we provide many of the same services to our respective clients. Differences, sure, but the similarities — right down to the quality of our services! πŸ™‚ — are many. We both work diligently to protect and advance the interests of our clients in transactions involving residential real estate.

  12. Honestly Craig, I really can’t picture you telling someone they won’t be happy in a place they have chosen to live. In that regard I’m pretty sure I’m a dying breed and quite possibly, rightly so. You don’t call me “an old war horse” for nothing. πŸ™‚

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