There's little doubt that one of the hottest topics in the world of real estate regulation concerns the matter of minimum service requirements for brokers: Do they protect the public or are they simply a way to hold down competition from low-priced firms and new business models?
During the past few years many states have seen the emergence of real estate brokers who provide minimal real estate services at minimal prices. Such brokers provide an option for consumers who prefer, for example, a menu-of-service option and lower costs.
But price is not the issue. No real estate regulator, no federal agency and no consumer group believes there should be any rule requiring a certain or minimum pricing level. As well, no regulator believes that new forms of competition should be dissuaded from entering the marketplace.
Instead the conflict is this: If you exclusively hire a real estate broker, someone who acts as your agent in the marketplace, should that individual be required to provide a minimum level of service? If so, what should you expect?
To untangle this matter we must first address regulatory absolutists who claim that no standards should be required, that "consumer choice" is paramount. They argue that with disclosures and waivers consumers should be able to refuse any brokerage service or obligation. In this way, absolutists assert, consumers would be able to better control and thus reduce costs.
This line of reasoning, such as it is, makes a wonderful debating point but offers no substance in the real world. We do not, for example, allow consumers to save money by hiring doctors who cut costs by not sterilizing surgical instruments or washing their hands. This may seem "paternalistic" to some, but whether patients like it or not as a society we require certain levels of cleanliness when someone removes your gall bladder or replaces your cornea.
Thus if the question is some regulation or no regulation, the absolutists lose. As a society we long ago agreed that some regulation is required.
Regulation, by its nature, restricts competition. There's a lot of money to be made removing kidneys, but even with disclosures and waivers we don't allow untrained and unqualified people to perform such operations. Before operating, society says you need a license, you need training and there are minimum standards of performance for physicians.
In real estate there are also standards. One is that a real estate broker who acts in an "agency" capacity has certain legal requirements which include care, accountability, loyalty, disclosure and confidentiality. If agency obligations are breached, regulators can fine the broker or suspend or revoke a license. In addition, a broker who does not meet minimum standards can be sued for malpractice by aggrieved clients.
Wayne J. Thorburn, the chief executive officer of the Texas Real Estate Commission, says that in his state the legislature has enacted legislation "whereby a broker who obtains an exclusive agreement to represent a party in a real estate transaction is that party's agent. Such a person must inform his client if he receives material information related to a transaction, must answer the client's questions and present any offer to or from the client and may not instruct another broker to negotiate directly with the first broker's client."
Amazingly enough, both the Federal Trade Commission and the Justice Department opposed the Texas standards and similar standards in other states. In the case of Texas, they argued "imposing new restrictions on the ability of Texas real estate professionals to offer flexibility in brokerage services. The agencies expressed concern that the proposed regulation would not only cause Texas consumers to pay more for real estate services, but also would reduce consumer choice by restricting the ability of real estate brokers to provide services tailored to customer needs."
The problem with the federal position -- which essentially was repeated at the Jacksonville meeting of the Association of Real Estate License Law Officials (ARELLO) last week -- is that it sets the consumer-protection bar too low.
Here's an example:
My wife and I bought a property last year. The sale agreement ran 10 pages. There were four pages of addenda. There was a separate financing appraisal contingency and a notice of our right to a property disclosure statement. There was a four-page property disclosure; a two-page HOA notice; a fee-sharing notice; another two-page HOA notice; still another HOA disclosure; six pages of HOA regulations and a farm disclosure ordinance. There was also a lead-based paint hazard notice and agreement; two pages of property disclosures; two more pages of lead paint disclosures; a list of fixtures; a survey; and an affiliated disclosure statement.
Previous to buying the property, there had been a three-page agency disclosure statement, a three-page exclusive buyer brokerage agreement and a page of addenda modifying the buyer brokerage agreement.
There was other paperwork as well. We have a file that's more than an inch thick documenting the transaction. Much of this paperwork is apparently written in legalese or Babylonian. It doesn't matter which, as they are both mutually indecipherable to most people.
My wife and I also sold a property last year. Same deal. A mound of paperwork. Another thick file. Maybe more pages than were required to purchase.
In each case you can bet that we asked our listing and buyer brokers many, many questions. We went over various documents at great length.
Now imagine being a seller and engaging a broker to represent you and then having a listing agreement under which the broker would not be obligated to review any offers, provide counsel or answer your questions. Or, imagine being a purchaser and making an offer with complex paperwork and without assistance from your buyer broker.
Does this make sense to anyone?
The key to real estate transactions, the absolute central matter, is what buyers and sellers have stipulated in writing. If a listing broker does not review such documents, then a seller may be signing away important rights, making needless concessions and getting far less than market value for a property. If a buyer broker is not required to answer questions or present offers, then a purchaser can lose important marketplace advantages -- the very reason to hire a buyer broker in the first place.
Those who philosophically oppose minimum service requirements need to consider the real-world realities of the marketplace: Consumers are plainly unable to navigate complex contractual waters and that's the central reason to hire a broker. If a broker screws up and fails to meet basic standards of practice, then to protect the public regulators should be able to fine that individual or suspend or revoke their license and the public should be able to sue.
If this seems unfair, call me the next time you need a kidney removed. I'm having a sale.