March 27, 1998

When brokers become buyers

By TOM KELLY
The Real Estate Advisor

Everybody should be able to make a buck. It's the right of the free-enterprise system. There's nothing wrong with folks being rewarded for creativity, hard work, timing and acquired exper-tise. However, I sometimes question the methods by which professional people benefit from within their industry. For example, should real estate agents be permitted to buy and sell property listed with their agency for personal gain?

If so, should there be a specific time period a property be exposed to the market before an agent can submit a purchase offer?

The topic surfaced again last week when I was mulling over the court papers of Sing v. John L. Scott, a case involving a Bainbridge Island property that has taken nearly a decade to resolve. In a capsule, here's what happened, according to the published court papers:

A potential purchaser, Peter Sing, sought damages under the Consumer Protection Act from John L. Scott after a Scott agent's bid to purchase a property was accepted by the seller. Sing, who had made an offer that was countered by the seller, said he would sign the counter when he returned from a weekend trip.

Sing alleged he was damaged because an agent successfully negotiated an independent purchase agreement with sellers while he was gone and his deal was still on the table, even though Sing said he would sign the counter. While Sing was gone, the sellers withdrew their counter to Sing.

Sing alleged the purchasing agent had access to the file containing his offer and the seller's counter. The property was resold four months later for a sizeable profit, according to court documents.

In 1994, the Superior Court of Kitsap County ruled in favor of Sing and the Court of Appeals affirmed the decision in 1996. However, late last year, the Washington State Supreme Court reversed the decision, holding that the agency practice of allowing its agents access to files containing third-party purchase offers did not constitute an unfair or deceptive act or practice for purposes of the Consumer Protection Act.

"The law isn't always a perfect fit for all cases," said Bainbridge Island's Rob Crichton, a partner in the Seattle law firm of Keller Rohrback. "There's no question that the conduct in this case raises eyebrows and could be considered unseemly. However, the Supreme Court ruled that under the Consumer Protection Act the conduct was not unfair or a deceptive act."

I obviously do not wish to prohibit people from buying property just because they have a salesperson's license, but I definitely think there needs to be more distance here between agent the seller. Isn't that the goal of all the new agency guidelines?

Russ Cofano, Bellevue real estate attorney, said the Supreme Court would not have overturned the Sing case if it had occurred in today's buyer-agency environment.

"I think the outgrowth of the Sing case is that it is very, very prudent to have a specific office policy on how confidential information is to be handled," Cofano said. "I tell agents that if one of their fellow agents makes an offer they are dealing with, they should treat that purchasing agent as if he or she is a member of another company."

When asked if the case should send a message to brokers and agents to be extra careful when purchasing property, Doug Tingvall, attorney who serves as John L. Scott's legal counsel, wrote:

"Real estate brokers and salespersons have always needed to be extra careful when purchasing property from clients. Purchasing property from a client is among the transactions most closely scrutinized by the Department of Licensing, as well as the courts, due to the inherent conflict of interest and potential for overreaching.

"In this case, however, the agent did nothing wrong, as was determined by the Supreme Court." The property involved in the Sing case had been for sale for two years, according to court papers. Four offers had been made during that time, but all of the deals fell apart when feasibility studies failed to be acceptable to the buyers.

A few years ago, I looked at a very attractive piece of property that had sold within the past 12 months and was then re-listed at nearly double the purchase price. When I mentioned it would be a considerable profit for the owner if and when the property sold, I discovered the property was now owned by a real estate agent.

I felt a distinct, and absolutely unjustified, negative wonderment about the entire industry: Was the seller a client of the agent-buyer? Was the property ever actually listed for sale? Would the agent-buyer market his other listings with the same energy? Did the agent-buyer have clients who would have been interested in buying the property?

Some companies permit agents to buy a property for their personal residence as soon as the property is listed for sale. However, if an agent wants the property for investment purposes, the agents often must wait 72 hours after the property is listed to make an offer.

The Sing case did not involve an agent "jumping the gun" to purchase a listing. However, it did raise questions of how offers are handled when a salesperson is a primary purchasing player.

"It continues to be John L. Scott's policy in dealing with multiple offers to present all written offers to the seller for the seller's consideration, counsel the seller as to his or her options, and let the seller decide which offer to accept or counter," Tingvall wrote. "The client's interest is paramount. We handle the situation no differently when one of the offers happens to be from one of our Sales Associates.

"The only additional legal requirement of a licensee buying or selling on his or her own account is to disclose in writing the fact that he or she is licensed."

Still, even with that type of disclosure, why gamble with any transaction that could even faintly tarnish your reputation or your firm's reputation?

Previous columns:

• HomeShark gobbles up Seattle-based HomeScout firm, 03-20-1998
• Mortgage scams can leave you homeless, 03-13-1998
• How is technology going to change the real estate business?, 03-06-1998
• Big changes area coming to Puget Sound housing, 02-27-1998
• Ads in the age of spam, 02-20-1998
• Be wary of refinancing and home equity loans, 02-13-1998
• 'Phantom' agents are the focus of new rule, 02-06-1998
• Using IRA for down payment not a good idea, 01-30-1998