Cheap Homes for Sale
House Buying Tips

Home Inspection Checklist
Mortgage Refinancing

Investing in Real Estate
Alternative Housing

Site Map
Profit from Real Estate

Real Estate Industry Dishonesty

By - 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 buyers.

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 itself.

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, of course.

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 practice.

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 their clients.

If those in the industry want to actually serve their sellers and buyers decently, they should consider some of the following.

Pricing

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.

Other Information

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.

Borrowing

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.

Appraising

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

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.


If you found this useful or interesting, please share:


Houses Under Fifty Thousand | Real Estate Dishonesty