A novel legal theory aimed at making real estate agents take their
fiduciary duties more
seriously is making its way through the California courts. The plaintiff,
Ms. Marty Ummel, sued her real estate agent, Mike Little, a veteran with
ReMaxAssociates in
San Diego. Ms. Ummel alleges Mr. Little failed to disclose the real appraised value of the home she bought. Mr.
Little served as buyer's broker and mortgage broker in the transaction. Ms.
Ummel further alleges that Mr. Little knew, or should have known, that other
nearby houses, just like the one she purchased, were selling for almost $200,000
less than the one she bought.
This case provides more evidence in line with Steven Levitt's findings in his book
Freakonomics. Levitt used complex econometrics models to uncover real estate agents' behavior and advice in real estate transactions where they were just agents versus when they were real estate sellers, who just happened to be real estate agents. He found that real estate agents will not work hard to get their seller's price because once a buyer's offer was within reach, the economic incentives work perversely to get the agent to close the deal at almost any cost. That
is unless they are selling their own piece of real estate,
in which case, they'll hold out for top dollar. Fiduciary
duties be damned!
Think about how the incentives were lined up for Mr. Little. The more he got his client to pay, the more money he made, both through his buyer's agent commission and as buyer's mortgage broker. Jeez, Ms. Ummel didn't stand a chance against those powerful economic incentives. Real estate agents are a fraud and a joke. Unfortunately, the joke is on the buyers and sellers in the real estate transaction, never the brokers. See
the full copy of the January 22nd, 2008 article in the New
York Times below:
Feeling Misled on Home Price, Buyers Sue Agent
Published: January 22, 2008
CARLSBAD, Calif. — Marty Ummel feels she paid too much
for her house. So do millions of other people who bought
at the peak of the housing boom.
Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.
Real estate lawyers and brokers say the case, which goes to trial in North County Superior Court on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from the agents who found them a home and arranged its purchase.
“When your house appreciates $100,000 in the first six months, you’re not quite as concerned that maybe the valuation was $25,000 or $50,000 off,” said Clifford Horner of the law firm Horner & Singer. “But when your house goes down, you ask: ‘Who might have led me astray here?’ ”
Agents representing buyers rarely had the opportunity to make mistakes during the last real estate boom, in the late 1980s, because the job hardly existed then. For decades, residential transactions almost always involved brokers who, whatever assistance they gave the buyer, legally represented only the seller.
The long boom that began in the late 1990s put an end to
that one-sided world. As prices spiked, buyer’s agents
and brokers became popular as sounding boards, advisers and
negotiators. The National Association of Realtors estimates they are now involved in two-thirds of all residential purchases.
That makes this the first housing collapse in which large
numbers of buyers had a real estate professional explicitly
looking after their interests. The Ummel case poses the question:
In a relationship built on trust, where promises are rarely
written down and where — as in this case — there
is no signed contract, what are the exact obligations of
these representatives in guiding their clients through a
sizzling market?
“Agents have a lot of fiduciary duties, but they don’t make money unless they close the sale,” said Joel Ruben, a real estate lawyer in Manhattan Beach, Calif. “In
an inflated market, there are built-in temptations to cut
corners.”
The defendant in the Ummel case is Mike Little, a veteran
agent with ReMax Associates. He will argue that Marty Ummel,
who brought the case with her husband, Vernon, is trying
to shift the blame for the couple’s own failures of
research and due diligence.
“They simply didn’t do what is expected of a knowledgeable, sophisticated buyer, and are now looking for someone other than themselves to take responsibility,” Roger
Holtsclaw, an agent who was hired by Mr. Little as an expert
witness, said in a court deposition.
Ms. Ummel is 60; Mr. Ummel, 71. With retirement on the horizon, they decided in late 2004 to move from the San Francisco Bay area to San Diego, where they would be near their grown children.
Since they were not making the move for job reasons, they decided to take their time and focus on finding a house that was a good value. In a boom, that is no simple task for buyer or agent.
It is clear the Ummels did not rush into a decision: They dismissed one agent and canceled deals on two houses before Mr. Little found them a prospect on a cul-de-sac in a five-year-old luxury development. A deal was struck with the owner, herself a real estate agent, for $1.2 million.
Mr. Little also worked as a mortgage broker. The Ummels say
he encouraged them to get their loan through him. Mr. Little
ordered an appraisal of the house but did not respond to
the couple’s requests to see it, the suit charges.
A few days after the couple moved in, in August 2005, they got a flier on their door from another realty agent. It showed a house up the street had just sold for $105,000 less than theirs, even though it was the same size.
Then they finally got their appraisal, which told them the
house up the street was not only cheaper but had a pool.
Another flier in early October mentioned a house down the
street that was the same size and closed the same day as
the Ummels’ but went for $175,000 less.
The Ummels accuse Mr. Little not only of withholding information but of exaggerating the virtues of their house to push them into a deal.
Ms. Ummel said in her deposition that Mr. Little had told
them “many times that it was a very good buy.”
“And you believed that?” asked David Bright,
the lawyer who represents both Mr. Little and ReMax Associates,
which was also named in the suit.
“Yes, we trusted Mike Little,” Ms. Ummel replied.
Mr. Horner, the lawyer, said valuation is a tricky area for brokers.
“Brokers aren’t appraisers,” said Mr. Horner, one of the writers of a guide to suing brokers. “They have no obligation to opine about value. But once they do, it becomes a gray area whether it’s
puffery or a misstatement of a known fact.”
Most people who made a bad real estate deal might wince and move on, but people who know Ms. Ummel describe her as unusually determined. She spent a year picketing ReMax offices on weekends.
Mr. Ummel, an administrator at Dominican University, gave
her his permission to pursue the case, on one condition: “Don’t tell me how much the legal fees are.” So far, the bills come to $75,000, more than Ms. Ummel’s
annual salary as a fund-raiser at California State University
in San Marcos.
“I do not think I’m obsessive-compulsive, but I am 114 pounds of absolute perseverance,” Ms.
Ummel said.
That persistence has put the Ummels at the forefront of a developing legal question. When buyers have sued their agents in the past, the cases focused on problems with the property itself, often alleging failure by the broker to disclose a known hazard or maintenance issue. After reviewing litigation records for the last five years, the National Association of Realtors could find no cases that revolved solely around the question of valuation.
Ms. Ummel’s original suit included the appraiser, who was accused of skewing his report to make the Ummel’s
house seem worth the purchase price, and the mortgage broker.
Modest settlements have been reached with both.
In a brief phone interview, Mr. Little called the case “ridiculous,” adding: “The lady’s a nut job. I didn’t
do anything wrong.”
Mr. Little said that contrary to Ms. Ummel’s claims, the suit was motivated mainly by the declining market. “When people see their home values and assets declining, they always feel there’s someone to blame,” he said. “This
is a dangerous time for all of us in the industry.”
The agent declined several requests to expand on his remarks. His lawyer declined to be interviewed. So did Geoff Mountain, a co-owner of ReMax Associates, which owns the office that the Ummels were dealing with.
Both sides have hired appraisers who have combed the surrounding
development. Mr. Little’s appraiser concluded the four-bedroom, 3.5-bath house was worth $1,150,000 to $1.2 million in the summer of 2005. The Ummels’ appraiser
said it was worth $1,050,000.
The outlines of Mr. Little’s defense can be seen in his lawyer’s lengthy deposition of the Ummels. Even in a relatively new development, Mr. Bright said, no two houses and no two deals can be seen as identical. For instance, a pool does not necessarily add value because “some buyers like it, some don’t.”
Mr. Little never showed the Ummels the house down the street because the backyard could be viewed from other houses, the lawyer said, and the couple had said they valued their privacy. Ms. Ummel disputes saying this.
The agent who left the flier that led to the case, Margaret Hokkanen, is sympathetic to Mr. Little.
“People are responsible for their own decisions,” said
Ms. Hokkanen, who has been subpoenaed as a defense witness.
Her husband and partner, John Hokkanen, is more ambivalent.
“We have seen so much misrepresentation over the last five years,” he said. “So I appreciate where these buyers might be coming from: ‘I’m a lowly consumer, you’re
certified by the state of California,
you didn’t do X, you didn’t do Y, and I got hurt.’ ”
The Ummels may be on the leading edge of the law, but they are unlikely to be alone for long. With the market falling, many homeowners owe more on their mortgages than their houses are worth. And many of those deals involved brokers who are required to carry professional liability insurance, presenting a tempting target for angry buyers.
“If you put someone into a property at the top of the market, you look
really bad if it goes down,” said K. P. Dean Harper, a real estate lawyer
in Walnut Creek, Calif. “There are a lot of letters going out from lawyers
to real estate agents saying, ‘My client would never have purchased if
you had properly evaluated the market conditions and the value of the property.”
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