Author Archives: Craig Blackmon

About Craig Blackmon

I am an attorney in Seattle, where I have practiced real estate law for over a decade. I own and operate my law firm, Seattle Property Lawyer, where I help people buy and sell homes without an agent (plus handle other legal issues relating to owning a home). I maintain the FSBO Law Center a web site for "for sale by owner" sellers and buyers. I am a licensed real estate broker and innovator in the real estate industry.

Further Analysis of a Real Estate Broker’s Ability to Represent Buyers*

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The method by which a real estate agent is compensated undermines the agent’s ability to represent his clients, particularly clients who are buying property. Before I get into the substance, though, I need to define the term “represent.”

Yes, the term is used in the “brokerage relationships” statute, RCW Chapter 18.86. However, I am unwilling to conclude that EVERY agent “represents” his clients simply because that’s what the statute says. In my book, “representation” requires more than the legislature’s decision to use that term in the statute as shorthand for acting as a real estate agent. Rather, I use the term to mean “to manage the legal and business affairs” of the client.

With that preliminary matter out of the way… Representation requires a high degree of loyalty to the client. Loyalty to the client is undermined by any interest that competes with the client’s interest, including self-interest of the person providing the representation (i.e., a conflict of intererst). Agents are paid by a seller, not by the client/buyer, and clearly there is a conflict of interest between the seller and the buyer. Moreover, the agent has no obligation to inform the buyer/client of the compensation paid by any particular seller. This system creates a serious conflict of interest that undermines an agent’s ability to represent a buyer.

Want proof? There is a general consensus that a seller should offer the “full” SOC of 3%. Correct me if I’m wrong in that regard. Assuming I am correct, this “general consensus” is de facto recognition of the reality that a substantial portion of agents put their own interests — getting paid a 3% commission versus something lower — above those of their client. If anybody believes otherwise I’d love to hear the argument, as this seems like a “slam dunk” point to me. There is simply no other explanation other than that an increased fee to a buyer’s agent will influence the agent to convince his client to buy the subject property versus some other. This influence over the buyer derives entirely from the agent’s self-interest to make as much money as possible, regardless of what may be best for the buyer.

The same logic is at work for a “bonus” SOC for a full-priced offer, which is permissible and not that uncommon. How on earth is it in the buyer’s interest to make a full price offer in this market? And in a situation where a full price offer is merited, it is merited because of the needs of the buyer, not the interests of the agent — or at least it should be if the agent is providing “representation.”

Want more proof? It is common for some listing brokerages to send a letter to the Selling Agent when a property is placed under contract. I recently received such a letter that reads as follows:

Knowing that selling a house at competitive market value can be a challenging process, I want to take this opportunity for professionally selling the subject property.

Wow! What an emphasis on “selling”! If an agent is truly “representing” a buyer, how is that agent “selling” the home? Those two terms are mutually inconsistent. A “salesperson” does NOT look out for the interests of the buyer. To the extent a “salesperson” claims to do so, it is — to a degree at a minimum, if not entirely — subterfuge to build a relationship of trust between the buyer and the salesperson, which in turn facilitates the sale. Does anyone really believe a salesperson when they say, “As a favor to you, I’ll…”. Salespeople sell, they don’t represent. Representatives in contrast look out for the interests of the client, they don’t work to convince the buyer to buy. Any decision to spend several hundred thousand dollars should be made by the client uninfluenced by the representative.

These are built-in conflicts of interest that undermine an agent’s ability to represent buyers. But even worse, these conflicts of interest are concealed from the client! The MLS refuses to reveal to consumers the SOC being offered on any property. Thus the buyer has no way of knowing that his “representative” may have a powerful self-intererst that is counter to the buyer’s.

Finally, I must note again one other example of how the system is inconsistent with an agent’s “representation” of a client. The client/buyer should have the right to select his/her own “representative.” After all, “representation” must arise out of a relationship built on trust. However, the seller’s SOC can be paid to ANYONE who sold the home, regardless of whether that person provided any representation at all. In other words, the fee paid is totally disconnected from the service ostensibly provided. Indeed, the fee is paid for a service — selling the home — that is INCONSISTENT with the service that the agent claims to provide.

In the final analysis, this state managed to get halfway to “buyer representation.” RCW 18.86 was a big step forward for buyers because agents now have at least some limited legal duties to their buyer clients (in the “good old days” EVERY agent worked for and had a duty ONLY to the seller, even if they only worked with a buyer). But they didn’t fix the underlying system. And that system seriously undermines the ability of agents to “represent” buyers.

To address this shortcoming, I formed Quill Realty. Every Quill client gets both an agent AND an attorney (and Quill pays the attorney’s fee). So Quill clients are truly “represented” in the transaction.

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* Following “competing” posts by me and Ardell, Seattle Bubble asked its readers to weigh in, framing the issue as “Real Estate Agents: Advocates, or Dead Weight?” Both Ardell’s “rebuttal” and SB’s “poll” muddied my point significantly. I recognize that there are really great agents out there who do fantastic work for their clients and who hold themselves to an ethical standard that far exceeds what is required of them by law. My point is that there are substantial flaws in the system in which agents operate, and these flaws undercut an agent’s ability to truly “represent” his clients, particularly on the buyer side. Consumers should be able to rely on a fair SYSTEM and should not be charged with responsibility for finding one of the “good” agents. Similarly, its unfair and inaccurate — and overly inflammatory — to suggest that agents are EITHER an advocate or dead weight. That’s hyperbole, not a fair comparison, and serves only to inflame the passions of the audience, which again obscures my point. So from here on out, its “clinical” titles for me only.

Representation by RE Agents: Is That an Oxymoron?

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As we continue to build WaLaw Realty, I am frequently reminded of the tension between “buyer representation” and the realities of being a real estate agent. On the one hand, agents tout the importance and benefits of “representation.” A “representative” acts on behalf of another, the client, and protects the client’s interests. Needless to say, trust is an essential element of any representation.

On the other hand, agents are salespeople compensated by the seller for selling a home. These two roles are inconsistent with one another. A recent experience of mine illustrates the point. [Forgive my use of “s/he” as a gender neutral pronoun, but that’s a lot easier than avoiding the pronoun entirely.]

I was retained soley as an attorney to assist with a non-MLS purchase. As negotiations progressed, my clients realized that they might not reach agreement with the sellers as to the terms. Accordingly, to hedge their bets (they must move from their current residence) they began looking at homes listed on the MLS. To gain access to these homes, they contacted the number on the sign, the listing agent.

The listing agent indicated that s/he was busy but that s/he would send another agent to provide access. My clients assumed this was an associate of the listing agent, and the listing agent was taking steps to provide access as part of the job of selling the home. The clients were interested in two homes listed by the same agent, and the “associate” provided access to both, only one of which was suitable for my clients. Total time: Approximately one hour. At the end of the tour my clients informed the showing agent that they intended to use my services if they wanted to move forward. The showing agent did not mention that she was totally unrelated to the listing agent and would have a potential claim on the SOC if the clients purchased either home.

The negotiations collapsed on the first non-MLS transaction, and the clients decided to make an offer on the MLS-listed home. Accordingly, they then hired me as a real estate agent. As my web site makes clear, I rebate the SOC to my client in full (after payment of my flat fee and any additional fee incurred by client). Commission rebates to buyers are quite common and I am certainly not the only broker to offer it. Recognizing the possible claim, I contacted the “associate” who provided the initial tour of the home.

The “associate” was actually another agent working under a different broker in a different firm. The listing agent frequently refers new business to this “showing” agent. Because I cannot rebate a commission to which some other agent has a claim, I asked the showing agent if s/he was going to assert a claim on the commission (as the “procuring cause”). The answer? Yes I am! But as a compromise s/he offered to accept 30% of the commission, a typical referral fee. With a sale price of about $700k, s/he wanted $6k for the hour of work.

The story is still unfolding, so I can’t tell you how it ends. But I CAN point out that this claim on the commission is 100% inconsistent with any notion of “representation.” Again, that relationship is built on trust. At an absolute minimum, the showing agent should have explained the fact that, by opening the door, s/he may be entitled to the SOC. The failure to do so was not consistent — at all — with trust between an agent and a client.

I’m curious to hear some counter-argument. It seems to me that agents have been remarkably successful in having their cake and eating it too. They tout the importance of “representation” only to completely ignore basic principles of fairness to the client when its in their interest to do so. They’ve sold the public a bill of goods, because to agents “representation” is ultimately a means to an end, not an end unto itself. But then again, they’re salespersons, selling is what they do, and why they get paid in the first place. Its not about representation, its about sales. And the phrase “representation by a real estate agent” doesn’t make much sense at all.

Redfin Takes Another Step Backwards

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Well, that might be overstating it a bit. But I couldn’t help but notice that Redfin has once again tweaked its model — first in the Boston area, and if it works probably nationally — yet again. Apparently gone are the days of a “team” aproach to providing buyer representation, with field-based agents for the “grunt work” and office-based agents for the more complex tasks. Instead, a buyer gets to work with the same agent from start to finish — just like the traditional model. Goodbye efficiencies… And absent efficiencies, the fee has increased as well: the rebate has been further reduced to a mere 1/3rd of the commission.

What does this mean for alternative models? Well, its instructive at least. Redfin is almost certainly the biggest and most well-funded of the alternative brokerages, and they’ve apparently concluded that consumers want the “personal touch” and are willing to pay for it. Anyone trying to “change the world” should at least recognize that others are having a hard time doing so and should adjust their plans accordingly (whether by reducing the scope of the change, like Redfin, or by radically changing the model to in a way that differs from the path blazed by Redfin). Interesting times, indeed.

Real Estate Investing: It Can Be Lucrative, But So Are Ponzi Schemes

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Another day spent closely reading the real estate section, another gem… Sunday’s local Times included this piece from the Philadelphia Enquirer that noted the large number of bank-owned properties on the market and the likely buyers of those properties: investors. Its a hot topic, and this article makes some good — although hardly disputed — points. But here’s my favorite passage:

Nationally, investors gobble up more than half of the bank-repossessed properties. “Most are rehabbing and renting them quickly to obtain a positive cash flow, then refinancing the property and taking the cash to buy another one,” Sharga said. They are looking at three- to five-year investments, he said, “so the current short-term depreciation of real-estate values isn’t a big deal.”

Other investors are doing wholesale flipping, Sharga said, buying “the most absolutely discounted properties, doing minor repairs and flipping to another investor, buying 20 cents on the dollar of the last sale price and selling for 50 cents.”

I added the emphasis, needless to say.

This raises the following question in my mind: Was Mr. Sharga laughing when he said this? Or maybe wearing a clown suit? I mean, what investor in his right mind says that you don’t have to worry about short term depreciation of the asset at issue if you intend to sell WAY off in the future — like 3 years! Even stock brokers will tell you that a 3-5 year investment horizon is relatively short and does not lend itself to risk. A depreciating asset at the time of purchase, to be sold 3-5 years down the road, should be a MAJOR concern to any investor. And that ignores the reality that transactional costs for real estate (taxes, commissions, escrow fees, insurance fees) are much higher than equities. Its a pretty absurd comment — but it will likely entice somebody to “invest” in real estate.

And why would that be important to Mr. Sharga? He spills the beans in the very next paragraph. At first blush, it sounds like these investments are fantastic: Pay 20% of “true value” — whatever that means, its another pet peeve of mine I’ll address in a future post — invest a few bucks, and then sell for 50% of value. That’s greater than 100% profit, presumably in 3 years or so! But here’s the catch: you gotta sell to “another investor.”

So this profit relies on pulling new investors into the market all the time, presumably those that don’t appreciate the fact that they’ve already missed the boat on the easiest profit. As long as those new investors are there to buy, the investors further up the pyramid… er, I mean supply chain will make great money.

Thinking of becoming a real estate investor? Yes, it can be lucrative, but be careful. And don’t believe everything you read.

Springtime in Seattle — Its Beautiful! Its Magical! :-)

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I’ve recently become enamored with Realty Times, a rank booster site for the real estate market. I love it because, every once in a while, the enthusiastic cheerleading leads them to pull back the curtain a little more than they intend. The resulting insight can be delicious.

Naturally I assumed that the Seattle Times, while sharing the same moniker, did not share the same approach to “news.” I mean, they’re journalists, right? Devoted to an impartial uncovering of the “truth,” right?

Maybe not. Yesterday’s Seattle Times had some good insight into the local housing market, but the title of the piece was a little, er, disingenuous: “More spring in local home sales, but too soon to call it a trend“. That headline paints a pretty bright picture, all things considered. But the body of the article strongly suggests otherwise.

Here are my cherry-picked excerpts from the article:

Buyers closed on 1,525 houses last month, according to statistics released Wednesday by the Northwest Multiple Listing Service. As expected, that number was lower than in March 2010. But the decline — 4.5 percent — was “less than you might have otherwise expected,” said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.

[T]he relatively small year-over-year sales decline is “a little bit surprising, considering we don’t have that deadline hanging over buyers’ heads,” said Tim Ellis, editor of the usually bearish Seattlebubble.com real-estate blog.

But both Ellis and Crellin said a steeper, 11 percent year-over-year drop in pending sales — offers that were accepted by sellers in March, but haven’t yet closed — could bode ill for the market as spring turns into summer. Fewer pending sales now should mean fewer closed sales later, they said.

So the decline was less than expected, and forward-looking data suggests further, steeper declines. I’m no meteorologist, but that doesn’t sound like any sort of “Spring” to me. Moreover, I was pretty adept at the ol’ pogo stick when I was a kid, so I know a “spring” when I see it — and this simply doesn’t qualify.

My “Huh?” moment was only heightened when I pointed my browser to my third favorite blog (until he adds me as a contributor, anyway), Seattle Bubble, the primary vehicle for Mr. Ellis’s insights. Given that he’s quoted in the article — an article noting that “spring” in the market — I assumed his post for the day would have a similar tone. The title of his post? “NWMLS: Sales start to tumble, inventory still sucks.”

That’s when it suddenly all made sense. Sure, its “Spring” in the housing market — just like in Seattle, where its cloudy, drippy, and about 50 degrees. Ah, the joys of Spring…..

How Brokers Protect Themselves at their Clients’ Expense

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When you hire a professional to represent you, your interests should be paramount. If your interests conflict with the interests of that professional, you should be informed of that conflict. Before the representation continues notwithstanding the conflict, you should provide your informed consent to that continued representation. These are some of the hallmarks of “representation.” In at least one regard, real estate brokers — or at least those that use the NWMLS forms — fall far short of this standard.

How, exactly? When a contract fails for pretty much any reason, escrow will typically not disburse the earnest money to either party absent consistent written instructions from both parties. Similarly, before the seller signs another contract for the sale of the same property, it is prudent and proper for the seller to confirm that the first contract truly is dead — selling the same home twice is a sure-fire way to subject yourself to a breach of contract claim. For these and other reasons, it is a near universal practice for the parties to a contract to sign an NWMLS Form 51, a “Rescission of Purchase and Sale Agreement,” when terminating the deal.

NWMLS Form 51 is deeply flawed and totally inconsistent with the notion that the broker “represents” the client, at least in regards to a conflict between the broker and the client. Specifically, the “release” portion of the rescission not only releases the other party to the contract from further liability, it also releases the brokers from all liability. Moreover, it is not too hard to imagine a scenario where the rescission was necessitated by the broker’s own negligence, making inclusion of the release particularly distasteful.

For example, what if the broker failed to timely rescind the contract based on the inspection, and the property has a huge and costly defect? In that circumstance, the buyer might decide to simply walk away, but because the broker blew the inspection deadline the buyer will lose the earnest money. The buyer would then have a good claim against the broker for the loss of the earnest money. But if that buyer signs the Form 51, the buyer releases his broker from this claim.

The irony is that the terms are completely unrelated. There is simply no reason to include the release of the broker in the rescission — other than to protect that broker from a potential claim asserted by the client. In other words, the standard form document used by brokers includes an unrelated and irrelevant term that protects the broker from any adverse claim asserted by the client, even where the adverse claim arose out of the very same facts that led to use of the form document.

So if you’re going to hire a broker for “representation,” be aware that the representation is seriously limited by the broker’s own self-interest. For proof, look no further than the form used by a broker when the deal heads south….

Research Paper Writing Service

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Research is a mandatory activity for virtually all students undertaking higher education in any professional field. This is at times a tedious evaluation exercise and it requires a combination of technical and authorship skills, because it entails different types of activities of both a physical and intellectual nature. Students are more often required to engage in research activities that may involve information gathering from both secondary and primary sources, analysis of the collected information and data as well as making inferential conclusions. Students usually encounter numerous challenges when it comes to research paper writing. The kind of challenges and difficulties encountered by these students are usually multi-faceted and they may include the actual gathering of information and data, the compilation of the gathered information and data, the analysis of the information, the making of inferences or the actual writing of the research papers. At times students may also lack enough time to engage in all these activities. The initial stages of initiating the actual research through the writing of the research proposal may also prove to be a challenge, because this section requires greater precision and focus based on the research goals and objectives.

All these challenges may bog you down and make your research activities and assignments a very complex and tedious process. But this may never be the case if you seek research paper services. There are a number of online firms that specialize in offering online research paper services. The research paper services offered by online research firms vary and they encompass all the research activities and stages involved in conducting an actual research. Research paper services may help even at the very first stage of the initiation of the research process. If you are facing difficulties determining the kind of research you are supposed to do you may get help by seeking online research paper services. Under such circumstances the offered research paper services may include the customization of your research proposal.

In this section research paper services providers try to help the research define his or her research questions and objectives in a more specific manner that helps focus his or her research activities in the right direction that will help his/her answer the questions posed by the researcher. These services may also be sought whenever the student is unable to collect specific information on any topic. Under such circumstances the research paper services providers go out into the field on behalf of the researcher to gather information either from primary or secondary sources. This may then be forwarded to the researcher who will analyze it and use it writing his or her own research. However, for clients that may be unable to conduct their own analysis and inference making, online research firms can offer services in analysis and interpretation of information which is then forwarded to the client who may undertake the final writing of the research paper. In cases where the client feels that s/he may be unable to attend to all her/his research exercises, the research paper services providers may take over the whole of the research process and conduct the whole research and finally deliver a completed draft of the research paper to the client. Research paper services are very essential in helping students that may be caught up with time and unable to attend to their academic activities well. As such research paper services are indispensable in today’s busy academic environment.

Miserable deadbeats? Or good people doing the best they can…

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UPDATE 2/16: This is a hot topic! KUOW‘s show The Conversation will be addressing this issue today at 12:20 p.m.! Call their listener feedback line now to share your opinion opinion at 206 221 3663 (the call in number during the program will be: 206 543 5869).

UPDATE 2/7: Polls closed 9am this morning. Final Tally: Decent folks 6, deadbeats 4, with several abstentions. Thank you all for participating! Even those of you who took the time to read the post and share a comment, even though your comment was “this is a waste of time!” I love irony…

In follow up to my post of a few days ago regarding “strategic defaults,” I thought I’d share this “hypothetical” that is in reality a description of some actual clients with whom I met recently. Several commentators to my post argued that people should repay their debts, period, regardless of the hardship or the absence of any adverse outcome if they failed to do so. Accordingly, I’m interested to know whether the people described below should be considered miserable deadbeats — stiffing their creditors for their own selfish purposes — or good people doing the best they can:

A young married couple, pre-kids, bought a one bedroom (650 sq ft) condo on Capitol Hill for $355k in 2007 with one mortgage, 100% financing interest only 30 year term. Couple tried twice to modify the mortgage, declined each time. Condo now worth about $250k. They are ready to have their first kid and, needless to say, would like a little more living space. Condo would rent for $1200 per month. Mortgage payments plus HOA dues $2600 per month.

Their options:
(1) Grit it out. Condo will not recover value for perhaps 9 years (assuming a 4% appreciation begining today, which is very optimistic). Over that period, couple will have paid an extra $150,000 towards the property (mortgage payments less rental value over 9 years). In the meantime, couple has two young kids in a 650 sq ft 1 BR apartment. Fun!
(2) Move on. They strategically default. Since they have one mortgage, realistically they can default on the loan with no personal liability. [NOTE: CONSULT YOUR OWN ATTORNEY AND DO NOT RELY ON THIS POST FOR LEGAL GUIDANCE.] They rent for a few years (since their credit score is shot) before buying again down the road. Given the passage of time, the market will more likely have bottomed and property will have resumed appreciation, thus increasing their chances of making money on the next house.

In summary, over the next nine years they can either spend $150,000 and subject themselves to a nearly intolerable living situation; or they can save the $150 grand, live normally, and probably make $10-20k in appreciation on their next house. Assume they walk. What say you? Deadbeats, or good people?

Should RE Professionals discourage strategic defaults?

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This post is not legal advice. For legal advice, consult an attorney, not a blog.

There was a very interesting piece in Sunday’s Seattle Times regarding “strategic defaults” (intentional abandonment of the debt, and eventually of the property, by the debtor/owner, due to depressed value far in excess of amount owed). The article was written by Brent White, a law professor. In my mind, this article implicitly raised a larger issue: As real estate professionals (i.e., anyone who makes a living in the real estate industry) do we owe some larger duty to the market itself that requires us to universally discourage these defaults?

To put the question into context, its apparent that some larger concern drives the passion of those who disagree with the author. I mean, threatening notes? What would drive somebody to threaten this guy? Besides, the counterargument is obvious and called out in the article:

[Mr. White] also rejects the argument that homeowners are wrong to strategically default because of the potential collateral damage to the economic stability of their neighborhoods. Some critics take their concerns further: that if walkaways occur in large enough numbers, there’s potential harm for the overall economy.

Mr. White discounts this argument, claiming that statistics have shown that an increased number of defaults will have no downward impact on the economy. While that may or may not be true, I imagine that regardless of the impact on the larger economy, additional defaults will lead to additional foreclosures which will lead to further downward price pressure in the housing market. In my prior post I off-handedly referenced a “collapse” in the housing market in places such as Flint, MI, and Las Vegas. The tone of my post was, in retrospect, inconsistent with the seriousness of the topic. The worst part of any bubble is of course the ensuing contraction, and a “collapse” is the worst case scenario that will inflict a lot — a LOT — of pain. Certainly some markets are at higher risk for this sort of catastrophic contraction, but EVERY bubble — and thus every local market, other than perhaps Texas — carries with it the risk of a very painful contraction.

So do we have some obligation to take steps to avoid this pain, specifically to encourage people to honor their mortgage debt regardless of the personal impact, in the interests of preventing harm to the larger society? I say, “No.” As professionals, we have an obligation to act in our client’s best interests. So when I meet with a client, its not appropriate for me to take into consideration anything other than what is best for my client, period. Concerns about “society” have no place in that conversation, other than — perhaps — confirming that the client is aware of this larger issue and can make her own decision about it.

And what about my comments to the public, i.e., non-clients? Unfortunately, I am simply not comfortable with a “public face” that is inconsistent with my private beliefs. I’m not willing to be known for one position in public — “You’re immoral and a lousy deadbeat if you stiff your lender!” — versus another in private — “Your mortgage is a black hole and there is relatively limited downside to foregoing that obligation.” So for good or ill, I find myself wholly on board with Mr. White’s message: It may be in your interests to walk away from that debt, and don’t let others influence your decision. While we’ll never know what imact this counsel will have on market values, time will tell the final cost of the housing bubble. But that cost is, in the final analysis, not my concern.

If you’re interested in my perspective on this specific issue raised — whether or not owners/debtors have some moral obligations to their creditors above and beyond the obvious legal duties — see my post on one of my own blogs.

Well, at least our market isn’t on the verge of collapsing…

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On this gray, dreary January Monday — where the weather isn’t even cold enough for snow in the mountains, at least not those elevations reachable by chair lift — I thought I’d pass along this “glass is half full” insight. First the bad news — which is no surprise at all: home values here in King County are now at 2005 levels, plus sales volume remains significantly depressed (by historical standards, putting aside the risk of a “new normal”). Not good. Sorta like the weather.

On the plus side, though, it could be worse. Much worse. Apparently, the hardest hit markets in the nation (Michigan, Nevada, perhaps others) appear to be heading towards total collapse. Yep, that’s right, values continue to depreciate until they reach… zero (or something in that neighborhood). OUCH! That’s neither a buyer’s nor a seller’s market. Rather, its a market from which everyone should extricate themselves as soon as possible. Run for the exits!

Obviously, this is just an opinion, and undoubtedly there are some rosier viewpoints. But I think this article makes a pretty compelling argument that some parts of the national housing market really will never, ever recover — at least not in the lifetime of a potential buyer or seller.