Real Estate Industry Dishonesty
By Steve Gillman - December 4, 2012
The whole real estate industry is full of deception that shows
up in small and large ways. Many of the tricks used by real estate
agents, lenders and associated characters are legal, but not
ethical. Other tactics used to sell homes and loans are just
annoying to say the least, even if they might not be called dishonest.
Yes, there are good agents and honest bankers, but as whole the
industry has not found a way to clean up its act, despite the
reams of new paperwork, disclosures and other things which are
supposed to protect buyers and sellers.
Let's look at some of the all-too-common problems and practices,
and some specific examples from my own experiences. Today, for
example, I was interested in a condo that was for sale for $38,000
near us here in Naples, Florida. I thought it might make a good
investment if it was shined up and sold. I was less interested
when I saw that others within a few blocks had recently sold
for no more than $35,000 and $45,000, but I still wanted to see
the place, so I sent an email to the agent we work with.
Our agent does a good job, by the way, and so I cannot claim
that everyone in the industry is akin to the stereotypical sleazy
used car salesman in how they operate (although I suspect half
of fitting that description). She quickly gathered information
from the listing agent and emailed me back. She copied and pasted
a section of the "confidential remarks" that only the
agents see. By itself it seems like a questionable idea to have
confidential information withheld from potential buyers, but
maybe there are some good reasons for that.
There is no justification for the hiding the information in
this case, however. In part the remarks read, "There are
also past association fees of $16,000 that will need to be paid
by buyer on top of condo price; association will not reduce."
Now, by what argument can an agent possibly justify withholding
such crucial information from buyers? This is beyond unfair,
even if he argues that the buyer would learn this upon looking
at the property. How could it be fair to waste people's time
with such misleading cost information? The cost is not $38,000,
but $54,000 when the required back dues are included. That's
relevant to any buyer.
This withholding of relevant information is the most common
way that agents effectively deceive potential buyers. For example,
we often find condo listings that are interesting, and then we
have to waste our time digging around the internet to find out
the cost of the regular association dues, because the agent did
not include this information. Laziness could be the reason for
this omission, but so could the fact that they want to attract
buyers under false pretenses.
What they cannot argue is that this information is not relevant.
It is always relevant. Dues of $1,400 per quarter (and they get
higher than that around here) versus $800 per quarter mean a
cost of $200 more per month. At today's interest rates you could
borrow $50,000 more to buy a more expensive condo with dues of
$800 per quarter and still have lower monthly housing costs than
with the condos that have the $1,400 dues. That's relevant. To
the retirees that make up a regular part of the market down here,
monthly costs are one of the most relevant bits of information.
Another trick used to attract buyers who would have no interest
if they had the relevant information is the imagined prices listed
for short sales. A short sale is when the lender agrees to take
a lesser amount than is owed as payment in full, in order to
facilitate a sale. As an example, a family might have no way
to pay the $180,000 they owe, so the bank allows them to sell
at $100,000 and then takes most of the proceeds as payment for
the amount owed. This avoids foreclosure and the resulting credit
problems, and can net a higher payback for the bank than if they
wait to foreclose on the loan and sell the home.
The problem at the moment is that agents are guessing at what
the bank might agree to, and listing the properties at that imagined
price. Then, when a buyer comes along he or she discovers that
they can make an offer, but the bank may want the sale to happen
at $20,000 or $30,000 more and there never really was any chance
to buy at the price listed. We have tried to buy a couple of
these short sales, and it seems that they all go for a price
higher than the asking price (if they sell at all), suggesting
that this is nothing more than a trick to bring in potential
My suggestion is that agents not be allowed to list a property
as a short sale at any price other than one which the bank has
already agreed to in writing. It is dishonest to list a price
when the house is not actually for sale at that price. This sleazy
practice should be stopped by law if the industry cannot police
Real estate agents are not the only ones perpetrating the
deceptions in the industry. Lenders routinely withhold information
about the true costs of getting a loan until a buyer is so far
into the process that it costs more to back out of the deal.
We asked about a home equity loan recently and after two weeks
of trying to get a quote for the costs involved, all Wells Fargo
could offer was a range that went from too high to much to high.
As to which end of that spectrum we would be at on closing day,
we just had to wait and see--after non-refundable charges applied,
Appraisers are in on the scams as well. When selling our last
couple homes we noted how the appraisals came in suspiciously
close to the price our buyers offered. When we asked two different
banker friends about this they both had the same response. They
said this was normal because the price offered is considered
the biggest factor in determining what a property is worth. Really?
Now, I would have thought that what other similar properties
are selling for would be the most relevant factor. And if the
point of burdening buyers with the cost of an appraisal is to
protect the lender, this is especially true. After all, if the
bank has to foreclose and sell the home, the current borrower
is the one person whose estimate of the value is least relevant,
since he or she is just about the only one in the world we know
cannot buy it. A bank should want to know what other people
would pay, and appraisers should not even be allowed to know
what the offering price is if we want the process to be honest.
But the system appears to be a collection of players who all
agree to make the sales happen in any way possible, regardless
of the questionable ethics and business sense of the practices
required. Seeing this attitude makes the real estate mess of
recent years more understandable. Our most recent home sales
were after the slump was well under way, so this use of appraisal
as a tool to make a sale happen is apparently still an acceptable
On the selling side of the matter, our experience shows that
agents routinely underestimate the closing costs, and FHA appraisers
routinely require costly nonsense repairs in order to look like
they are doing their jobs. When we sold one of our homes we had
to paint an old wood fence in order for the appraiser to qualify
the home for our buyers FHA loan. If the fence was not there
it would not have been an issue (we considered removing it instead),
he admitted. Meanwhile he completely missed the lack of a ventilation
fan in the bathroom. Call it buyer protection if you like, but
the buyer saw the home as it was, and peeling fence paint was
not a safety issue. This is about looking busy enough to earn
that appraisal fee.
When selling another home the closing company had more fees
than I ever remember. They charge extra for many things that
were once included, in order to hide the true cost of closing
from their clients. Is it really okay to hide crucial information
from your customers? Then they waited until a day or two before
closing to let me know that I had filled out some forms incorrectly,
and we almost had to reschedule the closing. The latter was just
sloppiness and not dishonesty, but the general level of service
indicated that there wasn't much concern for the interests of
If those in the industry want to actually serve their sellers
and buyers decently, they should consider some of the following.
Agents should list the price of every home every place they
advertise it. No matter what they might imagine, price is always
one of the most relevant factors for a buyer. Not listing the
price reduces the odds of selling a home. Myself and (I suspect)
many others do not always want to pick up the phone or getting
on a mailing list just to get a price, so when there are enough
priced homes we look at those. The reason agents leave the price
out even though it reduces their seller's chances of selling,
is that it increases the chance that they will get calls from
several buyers who can then be sold something else when they
discover that the advertised home is not in their price range.
They do not tell sellers this, of course.
Anything that substantially changes the true cost of buying
a home, whether that is past association dues, unpaid assessments
or anything else, should be clearly noted in the listing information
that is made public. The excuse (which I have heard) that there
is not room to include all information does not pass the smell
test for honesty. If all cannot be included, does it follow that
an agent has no idea which bits are most relevant? Not likely.
Short sales should not be allowed in the MLS listings at all
unless the bank has agreed to a given price. It is not honest
to advertise a property when it isn't actually for sale.
An agent should do his or her best to gather all relevant
information before listing a property for sale. We have had to
give up pursuing some condos listed when we were looking for
a home because after days of effort we could not even determine
if our cats would be allowed to live with us. That was inconvenient
for us, but especially unfair to the sellers who might have lost
a sale. This is a matter of laziness and sloppiness for the most
part, but some agents also seem to have the attitude that less
information is better because it forces buyers to call and then
they might buy something else that generates a commission.
Loans should be priced openly, and any information about possible
costs should be passed on to the borrowers. Once a quote is given
on paper, any other loan-related costs that the lender knew about
or should have reasonably known about should be paid by the lender.
For example, a busy lender deals with appraisals every day, and
know what they cost, so when they require one (almost always)
they should pay any difference between their estimate and the
actual cost if the latter is higher. The same is true for fees
for recording any documents related to the loan, and so on.
All of the cost information should be made clear before the
buyer is required to spend a cent. For example, a buyer should
not be informed of an additional charge for mortgage insurance
after he is on the hook for an appraisal.
Appraisals are required because they supposedly protect the
bank in the case of a default. As such, when done as a loan requirement
they should be based on what the likely sales price would be
after the mortgage loan is foreclosed on and the house is sold
by the bank. In other words, the most reasonable comparables
are other foreclosure sales, not homeowner sales. If a buyer
wants to know what he can sell for he can order his own appraisal.
Appraisers should never be allowed to see the sales contract
or know about any details in it, especially the price offered.
It is the appraisers job to determine value, after all, and not
the job of a potentially inexperienced buyer. If this rule was
followed we would see fewer closings and see just how little
science is involved in appraisals. But we would also have a market
that was safer for banks and buyers.
Closing companies should inform buyers and sellers of the
total costs involved before they are assigned to close a deal.
In the closing statement there should be a line that totals all
of the fees which specifically go to them, as opposed to government
agencies or others involved. For example, we noted filing fees
on one of our closing statements that were for their service
of doing the filings and were on top of those charged by the
county. It makes it difficult to compare closing companies when
it is unclear which costs are going to paid regardless of who
closes and which are unique to that company. that deception is
intentional in my opinion, and should be stopped.
Closing statements should be prepared and given to the buyer
and seller at least a week in advance of the closing date. I
understand that closing companies hesitated to do this in the
past because of the time required to recalculate everything should
the date be moved by a day or more, but this has changed with
the available computer programs. Now, I suspect, the tendency
to send closing statements right before closing (we have gotten
them as late as closing day) is an attempt to make it harder
for a buyer or seller to back out of a deal, which assures the
closing company (and real estate brokers and appraisers and bankers)
they'll get paid more often.
Let's hope some of the dishonesty inherent in the current
real estate industry can be corrected. Implementing the suggestions
here would be a good start.