Real Estate Ethics Question

[carmine]

Let's say a real estate agent is granted the exclusive right to sell vacant lots for a municipality. One of the conditions for sale of the property is that a new home must be constructed within one (1) year. The new homes are built and in each case, the same agent is now the selling agent for the new home. Ethical?

I would say "no" for these reasons:

1) Buyer and selling agent have a business relationship. The relationship was not evident or disclosed at the time of the sale.

2) The (accepted) offer made on each property was well below the asking price.

If you're a professional in this field and you agree with me, is there some kind of professional rule, law, code, etc. that you could refer me to for making the argument? I'm not looking to sue anyone or attempt to recover damages... My goal is simply to have a third-party referrence as a basis to exclude this agent from further dealings with the municipality. (I am an elected official in this city) my arguments will be challenged by those who will label me "anti-business", which is laughable, but none the less must be countered.

I can find much about "arm's length" transactions in regard to short-sales, but nothing that deals with the selling agent soon acting as the selling agent for the same buyer within such a short timeframe.

------

As a further note, I'd like to mention that the same agent has been acting as a general contractor in the same city, on new-home constuction jobs where he was not selling agent of the vacant land. Surely many of the same contractors are involved, but this is a little harder to prove.

 

[rp2813]

Alas, "real estate" and "ethics" are all too often mutually exclusive terms.

 

I don't know that you have a case.  It doesn't seem like there's anything illegal about the arrangement.  The agent could have advised the buyer/developer that he/she would handle the sale of the newly built home once it was completed.   If there's more to it than that, it may not pass the smell test.

 

But -- wouldn't the municipality have been the entity to have accepted the offers that were below asking price?  If not, why not?  That's where I'd start.  It sounds like the municipality was short-changed in the sale of the lots, unless a magic figure involving potential property tax revenue was part of the equation and the agent was advised up front of the lowest offer that the municipality would accept.

 

If the vacant parcels were considered blighted or an attractive nuisance, selling the lots below asking price or fair market value in exchange for new construction and resulting tax revenues would likely be considered an investment, providing a long term financial benefit far exceeding the amount below asking price.  That sort of thing happens all the time in the world of redevelopment, and everybody wants a piece of that action.

 

 

 

 

 

[carmine]

"It sounds like the municipality was short-changed in the sale of the lots,"

That's exactly the issue. How can the city be sure the highest and best offer was made when the buyer and selling agent do business together after the sale? By all definitions of "arms length" I can find, they prohibit sellers (and their agents) from having a business relationship with the buyer... But I would prefer to find something industry-specific.

For the record, I voted against the sale of these properties because I felt the offers were too low. They had not been on the market long. There is not any blight/distress/tax issue. However many of my peers often act as if the city must take the first offer it gets.

While I don't think anything illegal has occured, I do believe the agent likely promised to get a deal done (knowing the council body would bite at anything) in exchange for selling the new homes. Add to this that the agent is also a "builder" and the possibilities for favors are endless.

 

[polkanut]

My suggestion is to consult an independent real estate attorney without disclosing you are an elected official.

 

[perc-o-prince]

I'm a member of our town's Local Emergency Planning Committee (LEPC) which is the Southborough Emergency Planning Committee (SEPC). It's a purely volunteer position, but each year, I have to review and agree to the State Ethics Commission's "Conflict of Interest Law for Municipal Employees." Why? It explains it so:

"I. Are you a municipal employee for conflict of interest law purposes?
You do not have to be a full-time, paid municipal employee to be considered a municipal employee for conflict of interest purposes. Anyone performing services for a city or town or holding a municipal position, whether paid or unpaid, including full- and part-time municipal employees, elected officials, volunteers, and consultants, is a municipal employee under the conflict of interest law."

If you have a similar commission/law, I would expect that the realtor would fall under it. As far as whether or not they did anything against it, you'd have to look at your commission/law. It appears that if this was in MA, it might be a COI as the realtor has a direct financial gain.

Chuck

 

[petek]

Non-disclosure of the buyer and seller agent relationship sounds a little dicey but whether it's illegal in Michigan is something else. Non disclosure laws in real estate can vary from jurisdiciton to jurisdiction as well as commercial vs personal.

 

[pulltostart]

My ears perked up at your opening statement:

 

Let's say a real estate agent is granted the exclusive right to sell vacant lots for a municipality

 

And I have to ask how did that happen?  How is it that someone/anyone in the municipality's structure has the authority to grant such a right and spend the taxpayers' money in such a manner?

 

I agree that the entire arrangement and process smells a bit not-right, but my suggestion is to start back at the beginning and see if there's not some kind of infraction there.

 

lawrence

 

[hydralique]

I’m not a real estate professional but as an architect know a bit about building and development and am also friends with a few realtors. A few thoughts that come to my mind:

-I’m wondering what the situation is where a city is selling residential lots; this is unusual. My first assumption would be that it is a large parcel the city purchased in the past for a municipal development or possibly to entice a commercial developer to build a shopping center or factory but those uses didn’t pan out so they subdivided the land to get rid of it. A city’s ability to rezone and subdivide land is very powerful although local community groups will usually scream their heads off to prevent this sort of thing.

-There is nothing unusual with giving one realtor an exclusive on a group of parcels, after all when someone sells a piece of real property it is customary to choose a realtor and give him a set period of time to market the property exclusively. The parcels could be divvied up among several realtors but that means much duplication of effort and each one will want a decent commission. Commissions for vacant land are usually higher than for improved land and can easily be 6-10% (split equally between the listing agent and buyer’s agent). By giving only one agent all the listings the city could and should demand a much reduced commission and thus save money.

-So long as the city is not trying to coerce a spec house developer to use the city’s choice of listing agent I wouldn’t automatically see anything wrong with the same realtor selling the finished houses provided that he is a big player in that neighborhood. I’ve seen some neighborhoods where no single realtor is dominant and others where one office is very dominant. A couple of years ago I did a major remodel and addition to a house in such a neighborhood. Since the new owners bought the house with the intent to renovate it I met the realtor and noted that virtually every other house for sale in that neighborhood was also listed by him. When I mentioned this to my clients they told me how happy they’d been with him, he had spent years targeting that neighborhood and was clearly a knowledgeable class act. Since my clients specifically wanted to buy in that area he was able to better represent them. OTOH if the agent is not prominent in that neighborhood then it would be reasonable to inquire why all of a sudden he’s getting so many listings there from both the city and developers.

-I find the requirement to build a house within one year to be peculiar and absurd. Even for a small remodel I quote a minimum of three months to do basic drawings and get a permit, for a whole house this can take much longer and only then can you start construction work. The city controls plancheck time through their own Building and Safety, Planning, and Public Works departments so it’s scary for them to require that the buyer perform in a certain timeframe when the city holds the cards. Construction time can be hugely affected by weather in a place like the upper Midwest which the buyer can’t control either. I've seen too many cases of construction hurried to meet an artificial timeframe and sometimes the results aren't good.

 

[carmine]

Just to answer some of the questions that have been raised:

The vacant lots are within a middle-class, fully-developed and established Detroit suburb. Each year, a city government has the first-right-of-refusal to purchased tax foreclosed properties within their city from the county for the back taxes owed. The only catch is that the city must buy all of the properties, no negotiations on number or price. My city does this for a number of reasons, the relevant one being to remove blighted/obsolete structures. A home of reasonable sq. footage and of solid construction will be re-habbed and sold. The homes which don't make that cut are torn down, thus creating vacant lots.

For both the re-habbed and vacant lots, the city needs real estate agents. It was decided years ago to choose agents with brick & mortar location inside the city. The names are put in a hat each year and the first name gets ALL of the vacant lots (to make up for the smaller commission). The next name gets house A, etc.

The problem lay, IMO, that last year the vacant lot agent began selling all his vacant lots to a builder who then used the same agent to market the new homes. The offers are always below asking price, and the majority of those on council simply jump at the offer. I have been told "on the sly" that others have made full-price offers and either never had calls returned, or were given a story about the lot already being under contract. This same agent also recently began his own construction company.

That is the ethics issue I have. I mentioned this issue on another site and it was suggested the agents be required to sign a document that will prohibit them from any representation or other business with the owners of the property he represents as a selling agent for the city for a period of two years.

Hydralique: The one-year requirement is for ground breaking, not completion. It was put in to prevent people from just buying the lots and holding them in the hopes of a higher market... During which time the city would collect very little property tax revenue on the vacant land.

Hope that helps explain the issue.

 

[rp2813]

I think maybe someone needs to provide an anonymous tip to the DFP's investigative unit about this situation.   Print media are generally more thorough and have better follow-through than the sound-bite driven electronic media.

 

[firedome]

as a small time RE investor...

I wanted to know more about relevant laws and processes, so got a RE license in MD even though never actually had intent to work as a sales agent. RE Laws do vary between jurisdictions, however Exclusive Right to Sell is very common contract practice, as are time requirements for ground breaking to prevent quick profit-taking particularly in a sale by a public or quasi-public entity. However the arrangements here between the sellers, buyer, and potential builder IMO sound irregular and borderline, if not actually, unethical, and advice to consult an Attorney specializing in RE and Contract Law is spot on, and the very first place to start, as well as the state or local Board of Realtors, who can set and can also rule on ethical standards and violations for RE sales "professionals" (some are, some aren't!).

 

[travis]

I wonder why the city just doesn't allow the agent to list the lots for sale.  That way numerous offers may come in.  I realize the city doesn't want to hold land forever, but six months wouldn't hurt anything.  I dp understand the requirement to build a new structure, though one year is tight.  The city doesn't want people to sit on vacant land.  The city wants stability and growth, not vacant land.

 

[davey7]

I seem to remember that in time immemorial (the 1950's or earlier, iirc) there were court cases saying that municipalities could not profit from home building or property sales directly (i.e. they could not function as for profit landlords or developers). In your case, the reason behind these transactions is eliminating delinquent properties, blighted properties and to increase tax revenues (via property tax and other taxes, as well as providing construction employment). Assuming that the houses are well built, despite some, lets say shenanigans, wouldn't the net gain/benefit to the community be greater than a realtor making a few extra bucks and starting their own development/contracting company?

 

[hydralique]

Now I understand what’s going on and there are some red flags. The first question I’d ask is who sets the asking prices for the lots. Infill development is tricky because the value of a lot depends largely on the neighborhood and what sort of home is supported in that neighborhood. A good professional appraiser with lots of local knowledge should be hired to advise on pricing based on past sales and development costs. Assuming that prices are set correctly then the lots should sell for close to the appraised value.

A listing agent should bring any bona fide and reasonable offer to the owner’s attention, it is his obligation to do so. However, a bona fide offer must be in writing and formally submitted to the listing agent, anything else is just talk. It sounds like the current agent may be playing games to prevent interested parties other than his own buddies from writing offers so as to eliminate competition. This is a clearly unethical but hard to prove.

It might be worth carefully watching the MLS listings for these lots as the MLS has very strict rules for updating. If a property is under contract or in escrow the listing should note that and whether or not the owner will accept backup offers, and if the sale falls through the listing should be promptly changed again to indicate availability. If the city council must approve any sales then it should be possible to figure out the earliest date at which the sale process could have legally commenced, if the listing agent noted in the MLS that a lot was under contract and it couldn’t have been then that is a clear violation of his MLS agreement.

I can think of two ways to open up the issue to public viewing. One would be to discreetly tell a trusted council member that you think the methods used to price and sell the lots should be reviewed as the city may not be getting top dollar, being careful to leave out any suggestion as to why this is happening. From your explanation the practice of cities buying vacant or abandoned properties from the county and then reselling them is common in the Detroit area so there should be established methods in other cities for doing this, if your city’s methods are unusual then the council should be interested in at least a review of them. The other way would be an anonymous letter to a local newspaper suggesting collusion between the agent, builder and city officials.