Real estate professionals may have the upper hand in the real estate market when it comes to buying and selling their own homes — but they can’t always exercise this advantage.
Real estate professionals can earn a commission when they buy a property for themselves, for example, which could give them a better deal than a typical consumer would receive. But they could run afoul of state licensing law if their personal real estate transactions conflict with their clients’ interests, or if they do not properly disclose their professional status.
It’s not uncommon for real estate licensees to represent themselves in the purchase and sale of property, though there are some ethical and legal guidelines that experts recommend. There are gray areas, too, and actual practices may vary by state, brokerage company and individual agent.
Tom Pool, a spokesman for the California Department of Real Estate, said that while state law doesn’t specifically mandate that real estate licensees disclose their licensed status when participating in real estate transactions, “they should go ahead and disclose that to avoid complications down the road. It would be a best practice to do that.”
Real estate licensees who pursue transactions on their own behalf that are counter to their clients’ best interests could potentially be violating the fiduciary duties that they owe to their clients, Pool said.
“If the licensee uses information that is not available to anyone else and uses it in a way to act in (his or her) own self interest versus the interest of a client,” that could constitute a violation of state licensing law and the licensee could be subject to disciplinary action, Pool said.
There is an “inherent conflict,” he said, when a licensee pursues a property that his or her client may also be interested in purchasing. In that example, “The agent really should let go of the client and let another agent represent them in the potential purchase,” Pool said.
An agent who steers a client away from a property because of his or her own interest in purchasing it could be breaching fiduciary duty, he said. “(If) a licensee took a look at the property and saw some potential for profit but didn’t disclose it to the client and then turns around and buys the property, maybe that was actionable because (the licensee) wasn’t acting in the best interest of the client.”
In a property sale involving real estate professionals, a home seller typically agrees to pay a commission that is a percentage of the home price to an agent. Studies have suggested that this negotiable commission rate typically ranges from about 5 percent to 6 percent of the purchase price, though it can be higher or lower.
The professional who represents the seller, often called the listing agent, will typically offer to share a portion of the commission — usually about half — to an agent who represents a buyer in the real estate transaction. Therefore, the buyer pays the entire commission to be split between both agents.
Real estate professionals who are parties in a real estate deal could potentially earn the same commission that a buyer would typically pay as a part of the purchase price — which would effectively discount the purchase price by the commission amount.
The National Association of Realtors, which has about 1.3 million members across the country, addresses potential conflicts in Realtors’ personal real estate transactions in its “Code of Ethics and Standards of Practice.”
The trade group’s Standards of Practice provide that Realtors “shall not acquire an interest in or buy or present offers from themselves, any member of their immediate families, their firms or any member thereof, or any entities in which they have any ownership interest, any real property without making their true position known to the owner or the owner’s agent or broker. In selling property they own, or in which they have any interest, Realtors shall reveal their ownership or interest in writing to the purchaser or the purchaser’s representative.”
Realtors should provide this disclosure in writing prior to any contract signing, according to NAR’s membership rules. Also, Realtors shall not provide professional services concerning a property or its value where they have a present or contemplated interest unless such interest is specifically disclosed to all affected parties, and they “shall not accept any commission, rebate, or profit on expenditures made for their client, without the client’s knowledge and consent,” according to NAR’s standards.
There are definitely red flags when a real estate professional representing a seller decides to purchase that seller’s home, said June Barlow, general counsel for the California Association of Realtors trade group. While such instances can be a win-win for the licensee and the home seller, Barlow said that it can be legally safer to involve another agent in the transaction.
“It’s usually better to get another agent to look at that transaction,” she said. “It’s a difficult situation to be in — that’s why it’s better to have someone without a direct financial interest to intervene.” Generally, if an agent is mingling personal and professional interests “you have to be extremely careful,” she said.
Real estate licensees who participate in the multiple listing service where a home is listed for sale may be able to take a commission in the purchase of the home when they are representing themselves, Barlow said, as provided by the compensation offer stated in the MLS and the brokerage company’s rules.
Robert J. Steinberger, a partner with the Soden & Steinberger LLP law firm in San Diego, Calif., which specializes in real estate law, said that agents cannot operate outside the license of their broker in California — meaning they must follow their broker’s rules in real estate transactions — while real estate brokers in California can choose to waive a commission when representing themselves.
Steinberger, who also maintains a real estate broker’s license in California, said, “In my mind, you shouldn’t be buying a property if you think that someone else you are assisting in the marketplace wants to buy it. You should (be) clear that your client doesn’t have an interest before you make an interest on it. If you’re thinking, ‘I want to (buy) this myself,’ see if the client wants to buy it first, then maybe send them a letter.”
That will assure there is documentation if the client later claims the real estate licensee did not act in their best interest by pursuing the property purchase, he said.
Steinberger said he would choose not to take a commission when engaged in a personal real estate transaction and would instead pursue a reduced purchase price.
“I would represent myself if I were buying a property and take advantage of the ability to use the commission as a way of maybe reducing the price,” he said.
Real estate licensees do have some advantages over typical consumers in the real estate marketplace because they have access to MLS information, for example, and real estate forms.
In cases where a listing agent is interested in purchasing a property from a seller the agent represents, he said he would advise the seller to seek advice from a lawyer or another real estate broker.
Mark Galante, a broker for Exit First Choice Professional Realty in Framingham, Mass., said he has an office policy that affiliated agents “may retain the commission on their primary residence once every three years less a small administrative fee after they have closed three transactions.”
He said that the client’s interest “must always come first” in all real estate transactions. “If there is even a hint of that not occurring, I will terminate the agent from my office,” he said.
Real estate professionals who represent themselves in property purchases perform the same work in their own transactions that they would perform for a client, so the commission received by the agent-buyer should not be an issue, said Mary Pope-Handy, a Realtor for Intero Real Estate Services in Los Gatos, Calif.
“Whether the co-operating broker represents another individual or himself/herself, it is the same amount of work that must be done — negotiating, paperwork, scheduling of an appraisal, etc. So why should the seller care if the agent being compensated is working for another or himself/herself? As long as it was properly marketed and exposed, there should not be a problem here,” she said.
“In terms of the bottom line, the seller is not harmed by this at all. He or she decided to part with a percentage of the sales price when the listing agreement was signed.”
Pope-Handy also said that it would be a “huge ethical conflict if the agent purchasing the home also has interested buyers,” and in these cases “the agent needs to step aside from buying the house until or unless the buyer has clearly divested any interest whatsoever in the property.”
She also said, “On a practical level, I would suggest having a signed release of some kind from the buyer before proceeding with a purchase offer, if it later turned out that the buyer didn’t want the house or land or whatever after all. What complicates it … is the fact that the agent does, in fact, get a bit of a discount because of the commission being factored in. So it could be argued that it is not an entirely level playing field. Therefore it is extremely important that the agent never compete against his or her client.”
Pope-Handy’s office encourages agents to work with another agent from the office for personal real estate transactions, she said.
An informal discussion of the topic at the Inman News blog (Click here to view blog posting.) elicited a range of opinions.
One commenter stated, “What is funny is that it’s OK if a real estate agent does it (accepts a commission in a personal real estate transaction) … but it’s not well received by the traditional real estate community if an alternative real estate company … offers it back to the buyer.”
Another commented, “An agent purchasing a property should not be entitled to a commission. They didn’t do anyone a favor — they were a consumer, bought a product, end of day.”
A reader who identified herself as real estate broker Leesa Hilty stated, “I absolutely think Realtors should earn a commission on property they buy for themselves. We’re still representing a buyer and going through the same process that we would if we represented another buyer. Being Realtors, we can always elect not to take the commission and/or negotiate the price down.”
Another reader said, “I would assume this to be a moot point. The same way it would be moot if a car salesman were to take his commission fee off the price when buying an auto off his employer’s lot. Just because one is buying/selling to a licensed Realtor does not mean that the normal transaction fees shouldn’t be involved.”