Buying Land

Real-estate deals may involve sticky ethical relationships

Buying real estate is an increasingly complicated process. As the degree of difficulty reaches Olympic levels, more business relationships attach to every deal, which leads to more opportunities for the appearance of the less appealing aspects of normal human behavior.

Here are a few to watch for.

Lawyers. I advise out-of-town property buyers to find a local real-estate lawyer as their first portal into a new community. Such a buyer needs an experienced lawyer’s knowledge and local expertise.

Problems can arise when a buyer’s lawyer has history or a business relationship with local lenders, brokers, appraisers, insurance companies, officials and, perhaps, the seller. The buyer needs advice that is not complicated by his lawyer’s past or present. The buyer, for example, may not be best served by a lawyer who recommends that his new client borrow from a local bank…on whose board he sits and whose stock he owns.

Buyers need to ask lawyers about their personal or professional relationships with every vendor recommended. Why, the buyer should ask, is this bank better for me than the other two on the same street?

The buyer’s lawyer may have represented the seller in various ways or been on the opposite side of a dispute.

Ethical lawyers will not be offended by straight-forward questions from a new client about possible complications.

Buyers need to ask this important ally for full disclosure.

Lenders. When a buyer’s first local contact is with a lender, loan officers may be asked to recommend lawyers, brokers, surveyors, appraisers, home inspectors and others. One bank I know always recommends an associate of the one lawyer on its board of directors, though others are available and equally competent.

A buyer might ask the loan officer who is available to provide a service, and why the lender prefers one over the others.

Institutional lenders require a borrower to choose an appraiser from their approved list. Being lender-approved contributes to an appraiser’s income, and some appraisers will factor a lender’s self-interest into their valuations. I’ve seen this work both ways—a lower-than-market appraisal, which forced the buyer to put more cash into the purchase; and an inflated appraisal to cover a deal whose mortgage the bank quickly sold.

Brokers and agents. When buying listed real estate, a buyer is often shown property by a broker/agent who is working for the seller’s interests. A broker/agent with the seller’s listing — the individual, for instance, who drives you around on a Saturday afternoon — is legally required to represent the seller’s interests.

An agent working for both buyer and seller is called a “dual agent.” This arrangement benefits the agent who gets more commission, but the interests of buyer or seller may be shorted if a dispute arises. A buyer (or seller) can refuse a dual-agency proposal.

Exclusive buyer’s agents (EBAs) never work for sellers, though their commission comes from the seller’s funds on the buyer’s behalf. Buyers can hire EBAs on an hourly basis. (www.naeba.com provides helpful information.)

A broker/agent who represents both buyers and sellers can adequately represent a seller in one deal and a buyer in another. Much depends on the individual. I advise buyers to use an agent who has represented many buyers–and ask for references.

Buyers may have cause for concern when an agent representing the seller and one representing the buyer work for the same brokerage. It may be hard for an agent to say no to a colleague with whom he has shared coffee cups for ten years.

Buyers should insist that agents show them all listings that fit their search criteria, not just those listed by the agent’s brokerage or company.

Brokers/agents should be asked to disclose to buyers and sellers anything that might adversely affect their ability to represent them.

Appraisers. An appraisal value should be the appraiser’s honest opinion of what a seller’s property is worth based on three nearby recent sales of comparable properties. Lenders require a property appraisal to determine how much they should lend.

Both buyer and seller want the appraiser’s opinion of value to at least equal their negotiated selling price. The lender often shares their interest in getting the deal done. Real-estate agents and mortgage brokers may also put their thumbs on the appraiser’s scale.

Pressure on the appraiser “to hit a number” is common, understandable and discouraging. Appraisers often find themselves in a James-Bond box where all sides are squeezing in toward the middle.

Buyers can hire an appraiser to give them an independent valuation of a property in advance of negotiating with a seller. In this case, some buyers may push for a low appraisal, the better to bargain with.

Sellers sometimes pay for an appraisal as a way of setting an asking price. Some sellers push for a high appraisal, the better to bargain with.

Appraisers are supposed to estimate property values, free of expectations and their own self interest in getting future business.

Mitch Weiss, a Pulitzer Prize-winning Associated Press reporter, revealed recently that the public agencies that are supposed to police real-estate appraisers don’t leave the donut shop very often, and when they do, they sit in the cruiser and don’t carry weapons. His six-month investigation prompted four appraiser groups to request additional federal money and reforms. (www.chron.com/disp/story.mpl/ap/business/5949179.html)

I think it’s impossible to insulate appraisers completely from pressure to hit a number and economic retaliation when they don’t. As long as some appraisers play along, the rest are penalized.

If you feel that an appraiser has not done a fair job for you, write a letter to the lender. You can also pay for a second appraisal.

Sellers. Despite state laws, sellers may or may not disclose to buyers known defects in their properties. Disclosure requirements differ from state to state, and some allow sellers to opt out of disclosure altogether.

Until full disclosure about everything is required, buyers must thoroughly research a property before they submit an offer.

Buyers may also want to include a full-disclosure requirement in their purchase contract.

Buyers. Buyers are expected to be able perform on the purchase contract they sign. To that extent, they disclose their financial ability to the seller.

Should buyers reveal their post-purchase intentions to sellers?  Sometimes they have to, and, generally, I think it’s the decent thing to do. If the buyer’s plan will upset the neighborhood, the seller should at least be informed of what will happen once he leaves.

Several trick clauses hang out on bad corners, looking for trouble. One, for instance, provides that if the seller doesn’t sign a proposed contract by the deadline, it comes into effect! This won’t stand in court, but I’ve seen it used. Other delinquents use language to disguise meaning.

Real-estate deals would be a lot easier if buyers would follow the same ethical standards they expect from sellers, and vice versa.

This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of LANDTHINK. Use of this content without permission is a violation of federal copyright law. The articles, posts, comments, opinions and information provided by LANDTHINK are for informational and research purposes only and DOES NOT substitute or coincide with the advice of an attorney, accountant, real estate broker or any other licensed real estate professional. LANDTHINK strongly advises visitors and readers to seek their own professional guidance and advice related to buying, investing in or selling real estate.

About the author

Curtis Seltzer

Curtis Seltzer is a land consultant, columnist and author of How To Be a DIRT-SMART Buyer of Country Property, available at Curtis-Seltzer.com where his columns are posted. He also does commentary for Virginia public radio. His new book, Land Matters: The “Country Real Estate” Columns, 2007-2009, which includes 14 commentaries on CD.

1 Comment

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  • Curtis this is a great article that provides helpful information about sticky ethical situations. In addition to the parties listed above, I have seen difficult situations with surveyors, foresters, forestry technicians, and logging companies. This year I had a forestry technician tell me that he was “going to try to help him get the numbers” for the agent who hired him to do a drive-through appraisal on a large piece of timberland. It is possible to find an agent to work with who can diminsh self-interest and perform their duties with integrity. Thanks again for the helpful article.

    Jonathan Goode
    AlaLandCo- Land Agent
    Marion, Alabama

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