Right now, speculators are building a huge shadow inventory they intend on flipping – when the time is right. As they scoop up properties at perceived “cheap” prices, they place these properties in rental “bimbo limbo,” in hopes of reselling for a tidy profit when prices rise. (Speculators always expect prices will — until they don’t.)
Today’s speculators include licensees. Acting as principals, they hope to reap the benefits of flipping property for a quick profit. They intend to temporarily horde a product that was created to be sold to buyer-occupants.
As a Bureau of Real Estate (BRE) licensee acting solely for your own account to rent-and-flip, you owe no agency duties to anyone (unless you are foolish and receive a fee). Thus you are not required to voluntarily inform any party that you hold a BRE license (or any other license, for that matter).
However, when you act as a seller’s listing broker (or an agent of the seller’s broker), a significant conflict of interest exists when you also:
- represent, or make arrangements to represent the buyer of the property who intends to flip it for a profit;
- purchase the property, with or without the intent to flip it yourself; or
- know the buyer is a speculator who intends to rent-and-flip the property for a profit.
To manage this conflict, you need to keep your fiduciary duties to your seller at the fore. Ask yourself: might this information influence a prudent seller’s decisions about the price, terms or the timing of the sale? If so, err on the side of caution and disclose!
In addition, if you buy a property to rent-and-flip which you or your broker have listed, you are required to disclose all types of compensation or benefits you receive as a result of the representation, including the benefits of the future anticipated flip. You violate your fiduciary duties owed to the seller when you fail to disclose:
- by withholding material information, called misrepresentation; or
- through deceit – blatant deception.
Concealing the flip intended
Consider a broker, or their agent, who lists a property for sale. While employed as the seller’s agent, the broker becomes acquainted with a real estate speculator who inquires about the listed property. The broker enters into an oral agreement to locate properties for the speculator.
The broker presents information about the seller’s property to the speculator. The broker promptly discloses their dual agency to the seller, and negotiations commence. However, the broker does not inform the seller that the prospective buyer is a speculator intent on flipping the property for a profit.
The broker prepares the speculator’s offer on the property at a price lower than the seller’s asking price. When the seller, aware of the dual agency, discusses their desire to counter at a higher price, the broker advises the seller that the prospective buyer may “walk away from the deal” if asked to pay a higher price. The seller accepts the speculator’s offer.
Before escrow closes on the sale, the broker enters into a listing agreement with the speculator to resell the property. The new sales price is higher than the speculator is paying the seller.
Escrow closes as agreed. Immediately, the broker markets the property for sale by the speculator. A homebuyer purchases the property at the newly listed price – at a profit for the speculator.
The seller learns of their broker’s assistance in the resale of their property by the speculator, and makes a demand on the broker for:
- a return of the fee the seller paid to broker; and
- payment of the difference between their sales price and the speculator’s resale price.
The seller claims the broker violated their fiduciary duty owed to the seller since the broker failed to disclose their knowledge the buyer was a speculator intending to employ the broker to list the property in a flip This information was a material fact since the seller would not have accepted the offer at the price offered for their property had they been aware of the speculator’s intentions.
The broker claims he had no duty to disclose the buyer was a speculator intent on flipping the property at a higher price.
Nevertheless, the broker in this scenario did owe the seller a fiduciary duty to disclose all material facts affecting the sales price. Here, the broker knew the buyer was a speculator who was going to retain the broker to “flip” the property at a greater price when the seller accepted their offer. The broker knew the speculator would re-list the property with them and they would receive a second fee for being the speculator’s agent on a flip.
The broker failed to relay any of this information to the seller prior to advising them to accept the speculator’s offer. The seller might have considered a higher price and different terms had they known the buyer was a speculator intent on flipping at a higher price, rather than an owner-occupant homebuyer.
Thus, the broker’s breach of this duty by failing to fully disclose imposes liability on the broker for the seller’s lost price. [Jorgensen v. Beach ‘N’ Bay Realty, Inc. (1981) 125 CA3d 155]
Speculator interference in the 2012-2013 market is exactly parallel to the previous example. This case study illustrates the height of a most comparable flipping binge in the late ’70s.
Today, as in the ‘70s, wealth is being sucked out of the hands of sellers whose brokers and agents fail to tell them about the evolving market conditions brought on by speculators. That wealth is then diverted into the hands of speculators who add no value to the property prior to the flip. All this is accomplished by deceptive listing agents bent on double- ending the seller’s transaction with a controlled buyer, usually in the form of a pocket listing. Two sets of fees, okay; but fraud in the handling.