The agent who deceives for profit, not just a fee

Now consider a broker who, while employed under a listing agreement to locate a buyer for the seller’s property, prepares a purchase agreement naming himself as the buyer and submits it to the seller. The employment under the listing is not cancelled, and the purchase agreement calls for the broker to be paid a fee for acting as the seller’s agent while at the same time being the named buyer.

Escrow is opened, and prior to closing, the broker locates a substitute buyer who agrees to acquire the broker’s rights to buy the property. The broker’s right to buy the property under the purchase agreement will be assigned to the buyer and the buyer will become the substitute buyer of the property in escrow.  [For more information on the flipping process, see the April 2010 first tuesday article, Flipping: contracting to assign or double escrow the resale transaction.]

The substitute buyer pays the broker a “transfer fee” for the assignment equal to 10% of the price paid to the seller.

The seller agrees to the assignment of the broker’s contract rights to the substitute buyer after the broker reiterates that the property’s value does not exceed the price set by the purchase agreement entered into by the seller and the broker.

At closing, the broker tells the seller he is to receive an assignment fee for the transfer of his right to buy, but does not disclose the dollar amount of the fee. After escrow closes, the seller discovers that, in addition to the fee he paid the broker, the substitute buyer paid the broker 10% of the purchase price for the assignment.

The seller makes a demand on the broker for the assignment fee and the return of the brokerage fee. The seller claims  the broker breached his fiduciary duty owed him and did so deceptively since the broker failed to disclose the dollar amount of the benefits he received while acting as the listing agent, depriving the seller of his ability to sell his property for its highest possible price.

The broker claimed he had no duty to disclose the price paid by the substitute buyer for the assignment since the broker’s status under the purchase agreement as a buyer was that of a principal with an interest in the property he could sell at whatever price he may set.

A broker is bound by his fiduciary duty to voluntarily disclose any and all benefits of monetary value he receives as a result of a transaction in which he represents a principal, especially when the benefits are not stated in other documents signed by his client.

Did the broker breach his fiduciary duty owed to the seller as the listing agent by failing to disclose the dollar amount of the benefits he received on his flip of the property to the substitute buyer?

Yes!  The broker’s fiduciary duty created by the listing agreement was never terminated.  Accordingly, the broker was required to disclose the dollar amount of all earnings resulting from the transaction. The broker did not extinguish his agency duties before entering into the purchase agreement to buy the listed property and act solely as a principal. [Roberts v. Lomanto (2003) 112 CA4th 1553]

In this case, the broker’s blatant deception of the seller while he was in an agency position netted the broker a broker fee, the assignment fee paid by the substitute buyer and all the charges he did not have to pay on the resale of the property (title fees, escrow charges, etc.) — all profit and undisclosed benefits of his agency relationship with the seller; all of which he had to return to the seller.

Just because the dollar amount of the benefits a broker receives in a transaction while representing a client do not appear in any of the formal documents signed by the client (e.g., listing agreements, purchase agreements), doesn’t mean a broker may simply keep silent about them. A broker is bound by his fiduciary duty to voluntarily disclose any and all benefits of monetary value he receives as a result of a transaction in which he represents a principal, especially when the benefits are not stated in other documents signed by his client. [See first tuesday Form 119]

Advising the seller of a buyer’s use of the property

In addition to disclosing benefits received while under an agency relationship, a listing agent must re-address the price of the property with the seller when it is known that the use of the property will be altered or different from its current use when it passes to the buyer.

When setting the listing price for a single family residence (SFR), a listing agent and his seller look at recent sales prices for properties comparable in use and amenities to the seller’s property. Additionally, a potential beneficial change in zoning may create other uses for the property — such as office space, horse property or retail space.

With all these factors in mind, the seller and his listing agent set the price for the property — taking it for granted, unless advised to the contrary, that the property will be bought by a buyer who will use the property as the seller did — as a principal residence.

However, as evidenced by the scenarios above, a buyer’s intended use of a property as a speculator introduces new information to be considered by the seller when making his decision to sell or setting the price he accepts for his property. This information becomes a material fact which the listing agent, as a fiduciary, must discuss with his client, the seller, since it is implicit that the price offered by a speculator is “back of” (below) the current market value of the property (or the speculator has no room to earn a profit).

When a change in use by a prospective buyer is an issue, two key factors must be considered:

  • the urgency of the seller’s need to liquidate the property and receive cash now; and/versus
  • the ability to take the time needed to realize the highest possible sales price.

While a speculator will have cash on hand for a quick sale and submit a purchase agreement offer with fewer contingencies than an owner-occupant would, the purchase price offered by a speculator will not reflect the value of the property’s present highest and best use as a principal residence or any other better use. A speculator’s price is lower since it reflects the speculator’s inefficient use of the property, the speculator’s below-market pricing to make room for a profit and the speculator’s willingness to hold the property and wait for a buyer to come along to pay full price to put the property to its highest and best use.

Thus, if the listing agent becomes aware of the prospective buyer’s identity as a speculator, he should discuss with his seller whether the seller is willing to forego the optimum purchase price for the quick cash sale offered by the speculator. A seller experiencing liquidity issues or who is looking to quickly relocate will be more amenable to a speculator’s lower-priced offer as it meets the seller’s need to swiftly liquidate.

Editor’s note —The discussion of whether a seller will accept a lower offer must first occur between the listing agent and the seller, not the listing agent and the speculator sniffing for an easy score. The listing agent should be careful not to give away too much of the seller’s personal information to such a speculator, lest it weaken to the seller’s bargaining position. [For more information regarding the confidentiality of seller information, see the January 2009 first tuesday article, Confidentiality of information: by agency or by agreement.]

Conversely, if a seller is not in urgent need of selling his home and can afford the time to wait for the listing agent to locate an owner-occupant buyer who will pay for the right to occupy the property (it’s highest and best use), he is less likely to accept a speculator’s offer.

In cases where the listing agent receives information that the buyer’s intended use will be other than the use made of the property by the seller, the listing agent must be especially diligent in inquiring into that use and relaying his findings if he is to protect his seller from accepting an offer that is less than could be had for the property.

The flipping solution: just say no

As always, first tuesday’s stance on flipping is one of wary resignation:  we are against it as a policy in the real estate SFR market, though we know it exists. Aside from its degrading effect on the multiple listing service (MLS) real estate market by taking the wealth out of the hands of sellers and homebuyers (even though it delivers two fees to the brokers), its effects are far worse when the failure involves the breach of duties owed by the gatekeepers to real estate: the MLS brokers and agents licensed to represent the buying and selling public.

As brokers and agents of repute, this is a reminder: if you must flip when acting as a principal, or acting as the listing agent, or both the listing agent and selling agent, disclose the intentions of the transaction’s participants and their objectives for buying or selling the property. Be as transparent about releasing information known to you about the participants’ intended use of the property as you are about all material information you possess about the property itself. As evidenced above, the benefits of remaining silent — an omission of known facts — to garner ill-gotten gains are fleeting, at best.