RE Agent Vs RE Investor Conflict of Interest

14 Replies

How do you mitigate the conflict of interest between being an Investor AND a Broker?

On one hand you try and sell at market value, the other you're trying to buy from said person below market value. Where is the moral line?

What disclosure laws are there?

Do you ever run into an issue when doing your marketing mailers where the recipient thinks you want to list their house even though you clearly state you don't? If you're contacted as a Broker from your mailers, do you have certain obligations?

Sorry if my questions seem uninformed, but I have heard mixed responses and wanted to ask a broader audience.

> How do you mitigate the conflict of interest between being an Investor AND a Broker?

Disclosure and agency. You have to disclose that you are an agent. You can then explain the different types of agency. You inform them, and have them sign an agency agreement, stating the type of relationship you have. Either you're representing them as an agent (and therefore are going to sell their home at the best price possible), or you're not representing them and will be negotiating terms for yourself. 

> On one hand you try and sell at market value, the other you're trying to buy from said person below market value. Where is the moral line?

The moral line is really up to you to decide. The legal line is whether or not a court will decide you were taking advantage of your knowledge and skills to defraud another. 

> What disclosure laws are there?

As far as I know, every state has laws requiring that you identify yourself as an agent in your mailings. Most probably also have the same requirements regarding displaying broker info, HUD, and Equal Opportunity issues.

> Do you ever run into an issue when doing your marketing mailers where the recipient thinks you want to list their house even though you clearly state you don't? If you're contacted as a Broker from your mailers, do you have certain obligations?

Yes, actually most of the people I talk to from mailers have thought I was trying to list their homes, even when there was no agency information on the mailer. "Are you an agent?" tends to be one of the first questions I get in almost every call. Your obligations are to disclose that you're an agent and then to discuss agency properly. Depending on how safe you want to play it, you may also want to advise them, in writing, to seek their own agent or counsel. 

I am completely up front and honest with people when negotiating a deal for myself, or talking with people about their properties...I tell them directly that I am a real estate professional...I am a real estate broker, also an appraiser, investor, landlord, and problem solver...I don't want there to be an confusion on this matter...if and when I get to contracts then complete and full disclosure is warranted...at the end of the day its all about the math, the deal works or it doesn't...just my opinion !

Originally posted by @Michael Moikeha :

How do you mitigate the conflict of interest between being an Investor AND a Broker?

On one hand you try and sell at market value, the other you're trying to buy from said person below market value. Where is the moral line?

What disclosure laws are there?

Do you ever run into an issue when doing your marketing mailers where the recipient thinks you want to list their house even though you clearly state you don't? If you're contacted as a Broker from your mailers, do you have certain obligations?

Sorry if my questions seem uninformed, but I have heard mixed responses and wanted to ask a broader audience.

 Thank GOD someone asked this question!!!!

I have an entire blog about the subject of agents investing, plus a podcast. The short answer? DISCLOSE. The Code of Ethics (NAR) shows you how in Articles 2, 4, and 7.


I wrote three specific articles that may be of interest to you.  The first with respect to agents flipping homes or wholesaling is with respect to disclosure. 

Real Estate Agency for Realtors® who Wholesale!

Then of course there is the very important issue of Disclosure....

Why Disclosures are Killing You!

and finally 

Presentation Skills for Realtors® who Invest


I can assure you, as a licensed Broker/Realtor® who flips homes too, there ARE NO RESOURCES available that I have been able to find SPECIFICALLY on the topic of AGENTS who Flip property.

 Best wishes! 

k

It is an issue and one that can bite you.

I wouldn't use mailers as a broker, if you do and you're contacted in that vein then your obligation will always be as a broker. You can't switch horses in the middle of the stream, you need to ride that horse all the way.

As an investor, you should know, upon the first introduction to a person or property that there is an investing opportunity. Before you proceed, you need to decide which hat you'll put on, will you be an investor or a broker?

You should know early on, before you ever approach the public as to your interest in a property. Decide then what you game plan will be, then follow that course of action.

There will be times that you may act as broker and then become aware of other information that screams to become an investor. Like "Man, I had no idea you would accept that kind of offer Mr. Client!" I think it's fine to lean toward the best interest of your client over those of others, if you can actually buy at a higher price and you have your client counter to any other to beat your offer, that is fair game. You aren't cutting out the other party from the game, you're giving them an opportunity to beat a better offer, and there is no requirement to disclose that the offer to beat is yours. If they don't beat your offer, then you can change horses and disclose, if it's not already obvious, that you are buying under your own personal account as an investor. At the same time, you should divorce yourself as representing that client, you should be able to get another agent involved, at a reduced commission (since you're handing that agent a deal on a platter) and terminate your relationship upon appointment of the other agent.

If you don't divorce yourself as that client's agent, then you are violating your duty as an agent, regardless of what price you may strike, it's a conflict of interest.

On a listing side, that can be accomplished. As a buyer's agent, you can't go there, you can never compete with your buyer, you can't divorce yourself from a buyer and then act as a buyer. Clearly a conflict of interest.

If you enter a deal as an investor, then find that the deal isn't what you would actually take, then you could change and accept an appointment as an agent for that buyer or seller. but at that point you can't move back, if you accept an agency appointment then you can't change horses later on, your duty to that client is paramount.

You should know if the situation or the property is something you'd be interested in as an investor, while you disclose your license status, you may proceed to act on your behalf personally. If at the first contact you are understood to be a broker, then your first responsibility will be to act as a broker.

An example; An owner contacts you saying the hold an undivided interest in a property with a sibling who refuses to sell, they want to sell and they are willing to take a lower than market value. As a broker, you are required by law to disclose your knowledge as well as your license status, your knowledge disclosed as a duty if you are hired, under the Code of Ethics you disclose, which can be a violation of law under licensing requirements, to some degree even if you are not hired. Gray area. As an investor, contrary to the shister thinking, you disclose your ability to cure that issue and the value that might be had if the issue was cured.

In that case, as a broker I would explain that a property can be partitioned by the court and a sale ordered, that if push comes to shove, the owner having an interest will need to bring suit. If that owner says "make it happen" then you're a broker. If the reply is "I'm not suing my brother" then you could move to being an investor. You could say, "I'll buy your undivided half interest and I'll deal with your brother". If they agree, you're an investor.

Either way, you disclose what the property might bring, you justify your offer with the brain damage and expenses of curing the problem and making a reasonable profit. Owners don't have an issue with honesty or your profits if you are solving their problem.

As a broker, where you get in trouble is when you will be seen as having greater knowledge than the general public and if you used that knowledge in a predatory manner to gain an unfair advantage, unethical conduct.

Actually, experienced investors may well be held to the same standard in some cases, knowledge of the parties is a factor in all business dealings, not just real estate. Courts generally favor property owners over buyers, tenants over landlords, buyers over sellers, lenders over borrowers, senior lien holders over minority lien holders or owners in interest. Use your expertise to level this playing field from your position, going further is negotiation, going even further can become unethical or predatory.

Best advice, just be upfront! :)      

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Marc Freislinger  

Thanks for the detailed breakdown of my question. My business partner and I have been discussing the next step in taking our business to the next level and one of the considerations was in getting licensed as a broker.

The conflict of interest and disclosure was the main area where we lacked the knowledge. Thanks for explaining the process of having them sign an agency agreement and then possibly seeking out another agent or council. 

Last thing we want is to get ourselves tied up in a lawsuit!

@Bill Fennelly  

Thanks for your input!

I agree the being upfront and honest is key, and I am all about keeping things honest and clear. My biggest concern was the issue when it came from switching hats, and from what some of the other people have said, sometimes that can be an issue.

Either way though, like you said: honest, upfront, and direct!

@Karl Krentzel  

Wow, looks like I could spend forever reading/listening up on this topic!

Thanks for your input. I just read through the post where you examine the code of ethics and that is the aspect that I was most worried about. I didn't want to hinder us in conversations by putting ourselves in a situation where we are obligated to treat them as a client.

I will continue to check out your website.

@Bill Gulley  

Thanks for your clear examination of the issue. My biggest takeaway (as it was one of the considerations in the issue) was that if you are contacted as a broker even though your marketing emailer said "I am not contacting you as a Broker, though I am a Broker", then your obligation is still as a Broker. I do see how you can jump from that to an investor, but it seems like a harder sell.

I'll be re-reading this post as it does a good job of explaining the issues of which hat is worn and when it can and can not switch back and forth.

Thanks!

Originally posted by @Michael Moikeha :

@Bill G. 

Thanks for your clear examination of the issue. My biggest takeaway (as it was one of the considerations in the issue) was that if you are contacted as a broker even though your marketing emailer said "I am not contacting you as a Broker, though I am a Broker", then your obligation is still as a Broker. I do see how you can jump from that to an investor, but it seems like a harder sell.

I'll be re-reading this post as it does a good job of explaining the issues of which hat is worn and when it can and can not switch back and forth.

Thanks!

Language in state laws varies, the law generally requires a licensee to disclose to the public, usually at the first opportunity when real estate is or becomes the subject of any meeting or contact.

Regardless of your intentions to act in any matter, if real estate becomes a topic of conversation at the coffee shop you need to mention that you are a broker.

I believe it was mentioned above that the purpose is to inform the public of your "expert" knowledge, yes, in the eyes of the law, by the virtue of passing that test, you are an expert compared to the general public. This tells a prudent person that you have expertise and they must assume consider if there is any uneven playing field for them in conducting business with you. In reality, this really isn't an issue, your opinion is usually welcomed and respected.

In your mailings, you could have whatever spiel you want, "I BUY TRASH PROPERTIES" thing is, on that mailing you need to have a disclosure, it might be in smaller print at the bottom. It might say " State law requires disclosure that I am a Real Estate Broker, however this is not a solicitation for brokerage services".

Another way, a large brokerage here simply advertised that "if we don't sell your home in 90 days, we can buy it". "CAN" being the operative word, they can buy it, doesn't mean they will buy it and there is no mention of buying at the listed price! This is in advertising as a brokerage capacity.

You can disclose a thousand ways, you see a FSBO sign and the guy is mowing the yard, you can walk up and say "Sure would be nice to have grass that didn't need cutting wouldn't it? I see you're wanting to sell the house, I'm a Real Estate Broker, but I'm not meeting you to list your house, I'm interested in buying your house for my own use."

That type of disclosure can be worked into your written materials as well.

Frankly, it's an advantage, IMO. After you disclose your interest, you can work into the conversation your personal opinion. "Mr. Owner, I can show you properties in the current sales in the market, very similar to this one that appraisers would likely pick up to use as would be required for any buyer obtaining a loan. I also noticed some deficiencies I'm sure you're aware with and they would likely be obvious to an appraiser, I can also show you the estimated costs that effect value"

You can use your expertise to inform an owner and at the same time negotiate with them. They can then rely on your expertise wearing one hat, they are then free to determine which hat you're wearing, you can give advice, then switch hats obviously by saying, "but for my purpose, I would need this or that" and begin negotiations.

My approach in dealing in anything about RE is always from a position as an advisor, informing the other party (considering their assumed expertise) such is used to guide us to a reasonable conclusion. The better the advice, the more accurate it is, the less they can object. I have to deal in reality, not wishful thinking.

My license expired, I still use the same approach, "I was a Broker here and......" I'm not required to disclose past license status, but it is 1. the ethical thing to do as another party may well learn I was a Broker and 2. it adds instant creditability to an opinion.

Don't ever try to hide your status. Before I was a licensee I had a property under contract with the city, they guy in charge, I guess, thought I knew a little too much and checked with the state and mixed things up with my father who held a license. He raised heck with the state saying I was a licensee and didn't disclose my status. My dad got a letter just days later. Well, I hit the roof, contacted the state and disclosed the facts, then got in touch with the city attorney and I was not pleasant. That guy was taken out of his position and moved to a inside job where he was to have no contact with the public dealing in any sales, which was my "request".  

If you don't have written disclosure prior to contracting, you could lose your license, so always disclose at the first reasonable opportunity. :)         

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Michael Moikeha  Simple language that states you are a licensed RE agent and that you are buying the property for your own use and/or profit.

I do know a company that has 3 pieces; one is construction; one is brokerage; one is marketing for direct purchase and wholesale. Different partners are different players but all under one roof.

Clear and complete disclosure. That said, I don't work under both hats at the same time. I'm either trying to buy the property under my investment firm or I'm seeking a listing...never both at the same time as it's much easier to have a conflict in that scenario. 

Guy Gimenez, Buying Texas Today | [email protected] | (512) 270‑7279 | http://www.BuyingTexasToday.com

Over disclosure is allways good.

In California a real estate broker or salesperson shall disclose their Bureau of Real Estate license number, "When engaging in acts for which a license is required".

You have to be careful here, but to open negotiations to buy someones house, you do not have to tell them that you are licensed. I always tell them and get it in writing. 

The point is, licensed persons are allowed to buy houses just like the general public and as long as we are not charging or receiving a commission we don't have to disclose we have a license.

However, if the Seller has Sellers remorse, after you bought their house, I still believe that we will be held to a higher standard as a real estate professional and had better have acted appropriately.

@Bill Gulley  Another well thought out and explained response! Thanks for bringing even more light to the issue. That totally makes sense. I know that learning the specifics for Oregon is important, but I really appreciate the general knowledge!

@Jeff S.  @Guy Gimenez  @Ron Drake  

Thank you guys for the advice! Super helpful. I do plan on being upfront and honest, but I didn't want to end up shooting myself in the foot by putting myself in a Broker client relationship when in reality I wanted to buy.

this information is helpful in deciding the next step for my business!