Agent/Investor How to Avoid a Conflict of Interest

[Andrew B.]

Hey BP.  I heard on a BiggerPockets podcast (can't remember which one) that as a Real Estate Agent who is also a Real Estate Investor there is the potential for conflicts of interest with sellers when looking at investment property.

Essentially, the speaker gave a scenario of an agent/investor making an offer on a property which the seller accepts.  The seller later claims the sale was unethical because the agent led them to believe the below market price of the sale was what the home was actually worth.

As an investor you're obviously looking to negotiate a price on investment properties which is below market value after analyzing what rehab is needed in the case of a value-add play.  My question is how can you ensure all potential conflicts of interest are avoided while doing this?

I am in the process of becoming a licensed agent and looking for my first deal.

[Matthew Irish-Jones]

@Andrew B. If you buy off the MLS this will never beam issue since the seller has their own representation.

If you are buying off market you can get in hot water. And frankly as a licensed agent buying a home for

Below market value IS misleading a potential client.

[Ryan Howell]

@Andrew B. - In NC we are required to disclose if we are licensed.  I always disclose and just have an honest conversation, that here is what I could offer (cash deal, no hassle, leave tenant in place, etc) and here is what I could list it for (as is, or fixed up, etc).  There may be an occasion you lose a deal for that reason, but in my experience the seller has a reasonable knowledge of what it is worth anyway and transparency tends to build trust.  This way, if I do buy it, I can sleep at night knowing I didn't mislead anyone or take advantage of them.

[Jonathan Greene]

It is not unethical in any way to be licensed and buy off-market for under value as long as you disclose your license status and explain why you are making this offer vs. another. The perception and case study is for unscrupulous actors, but as an agent/investor you are certainly allowed to buy properties for yourself and get a good deal. I explain to them all of their options (cash, wholesale, iBuyer, pocket, listing) and help them do calculations to decide which is best. Our goal is to list and is usually in their best interest because the market is so hot, but lots of sellers do not want to be doing Open Houses and showings and have a lockbox and a sign. As long as you are transparent, you will avoid any problems, but depending on your state and your brokerage you want to make clear what they expect.

[Andrew B.]

Thank you @Matthew Irish-Jones and @Ryan Howell for the feed back so far.  I like the idea of transparency where this is concerned.  As an investor there is little incentive to pay market value for a property as the goal is immediate equity and cash flow.

However, an investor does provide real benefit to the off-market seller (especially one experiencing personal or property distress) in terms of an all cash offer, closing without contingencies, taking care of the rehab, eliminating the need to list the property, etc.

A seller who is in financial distress may not have the time or desire to list the property and wait for offers as their timeline for losing the home may be short.  In addition, if the property is in distress and the homeowner isn't willing or able to rehab it they should expect the person who is willing will want to be compensated for their time.

I could still see a rare scenario where the seller could come back after the fact regretting the decision and try to misrepresent what conversations actually took place.  Even though you were transparent and laid out all of their options for them I think you would have to find some way to get an independent 3rd party involved in the dialogue in order to more fully protect yourself against this.

[Ryan Howell]

@Andrew B. - You are right, that's why its best to get something documented in writing to protect yourself.

[Marcus Auerbach]

The last off market property I bought was a potential listing lead I was working on as an agent. After I walked the owner through what it would take to list it, he said he'd rather sell it to those "We buy houses cash guys" for half the price, so I wrote him a check.

You have to disclose your status, so my offer states I am licensed and I am buying the property as an investment with the intent of making a large(!) profit. Talk to your broker about the correct language in your State.

[Andrew B.]

This is awesome stuff guys thanks!!

[Jon Schwartz]

@Andrew B. and everybody else,

I’m also getting licensed now, and my understanding of the law (here in CA, at least) is that your obligation to a party who is not the principal in the agency relationship is basically just full disclosure.

If you disclose that you are an agent and give your honest opinion (backed by documented comps) of what a house would likely sell for if listed, shouldn’t that be enough?

Conflict of interest exists when you, acting as an agent, have an interest that conflicts with that of your principal.

For example, if you list a property, you have a fiduciary responsibility to the seller, but not to a buyer (so long as you don’t represent the buyer in a dual agency). CA requires full disclosure of material facts to the buyer and buyer’s agent. And you and the buyer have an obvious conflict of interest: you want to sell high and he/she wants to buy low. It’s not regarded as a conflict of interest, though, because the buyer is not your principal.

So if you make an honest listing presentation to a potential principal and also offer to buy the house for a price less than you suggest for listing or market value, since you’re not yet in an agency relationship, the conflict of interest can’t yet exist, right?

I’m probably being too black-or-white in this assessment. Anyway, I’d love to hear anybody’s reaction.

Best!

Jon