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A Conflict of Interest

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I asked a real estate colleague recently about how the industry had changed in recent times. I was particularly interested in the circumstances where the agent pays for all the marketing costs.  My viewpoint was that surely this would be a surefire winner in producing potential customer listings. Real estate marketing costs are not insubstantial and depending on the marketing campaign, they can run to a few thousand dollars   My colleague went to great pains to explain why this was not a good thing as far as the agent or the public was concerned.

real estate conflict of interestHe went on to explain that the word agent in real estate agent is greatly misunderstood. Purchasers often assume that agents are on their side. Agents invariably do their best to strike up relationships with buyers who they know are highly likely to also become potential vendors in the future. What should not be forgotten is that they are the agents of the vendor (unless they are buyers’ agents - a different concept altogether). Real estate agents get paid a commission by the vendor from the sale proceeds. They are unmistakably agents of the seller.

Coming back to the point of where the agent or agency pays for all the marketing costs, this presents an interesting dilemma. The agent or agency carrying upfront marketing costs will naturally spend the least amount it has to in advertising the property. This is usually by displaying the property on the smallest ad available on the internet with the resulting and correspondingly low levels of interest. Results of sales achieved by searching for property on the internet have been shown to be directly correlated to the cost, size and position of the advertisement on the relevant real estate search websites.

Furthermore, because the agent or agency has been put to an initial expense before the sale of the property, there is an imperative to sell the property as quickly as possible to recoup the advertising costs. What this means is that the agent is now not driven to achieve the highest possible price for the seller (with the concomitant danger of a buyer walking away) but to let the property go to any qualified buyer to recoup the advertising costs. Multiply this several times where there are many listings and the combined advertising outlay becomes a significant factor in closing every sale at any cost (i.e. it affects every vendor listed with that agency).

Importantly, this is never revealed to the vendor. The vendor is under the impression that he or she has managed to avoid any advertising costs and yet still benefiting from the services of a professional real estate agent. It is well established in the real estate industry, my colleague tells me, that a good agent motivated to negotiate the best price (i.e. without the distraction of having to recoup any prior costs) should be able to achieve $30,000 to $40,000 more for the seller.  It is understandably surprising to my colleague that sellers are still willing to list with these types of agents to save on the relatively modest advertising costs.

 If you have a similar real estate issue that you wish to raise, Forge legal provides a real estate hotline agents where our property lawyers can provide answers to such questions on a complimentary basis.

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