Real-estate agents: deceptive practices even in strong markets

Combine two ingredients:

1. Real estate business is not exactly known for transparency and integrity. In spite of strict regulations– such as legal obligations to disclose known defects and record all transactions in public records– deceptive advertising, distorted perception and Ponzi-scheme mentality remain the hallmarks of the industry. (Some of the subtle ways where an agent works against the interests of the client, pressuring sellers to bid higher and buyers to accept lower bids, was chronicled in Freakonomics.)

2. New York metropolitan area real-estate remains one of the few islands of stability and uninterrupted irrational exuberance in the midst of a sobering, country-wide correction after the unsustainable bubble in housing prices for a whole decade. Manhattan remains strictly a
seller’s market including in rentals.

It’s no surprise that brokers resort to questionable practices trying to move units. This also explains why Craigslist, that venerable free resource, has been rendered completely useless for Manhattan, flooded by hundreds of bogus listings for non-existent apartments meant for bait-and-switch scams and otherwise useless, content-free classifieds describing IN ALL CAPS why this apartment will not be on the market very long. Goes to prove that sometimes “free” is not a good thing: charging people to place ads would go a long way to assure quality control and improve signal/noise ratio.)

Consider the following blurb from a contract that must be signed before brokers are willing to show apartments:

“You understand that the commission charged by [brokerage firm] for the aforesaid services is 15% percent of the first year’s rent … payable to [firm] only if you rent in a building or complex shown to you by [firm] within 120 days of such showing.”

This contains an ambiguous case: broker Bob shows unit #123 in the building which does not work. Later broker Alice from a different firm shows apartment #456 which the customer decides to take. Is Bob owed any commission? From reading the above blurb, the answer seems to be in the affirmative. In this case “Bob” continued to insist that was not the case. In fact it is  very much in the interest of the brokerage firm to have this over-reaching clause. It’s perfectly fair game to insist that a customer utilizing the services of an agent should properly compensate the firm. On the other hand by extending the claim to include all units and effectively “tainting” the building for for months, the company achieves lock-in effect. But Bob would also insist this is not an exclusivity agreement which is strictly speaking correct. It does not rule out working with another broker only creates strong economic incentives against doing that for the same building.

The pragmatic solution which worked in this case: different brokers for each neighborhood. This makes sense anyway because real-estate remains a very old-fashioned business personal connections matter and it’s unlikely that the same person has developed strong networks in all areas.


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