An Insider's opinion of BC Real Estate, the IAG report, and the BC Government

The IAG’s Report Is A Mixture of Hits, Misses, and the Obvious: My Insider’s Opinion

These days, the only thing hotter than BC real estate prices is the debate over those prices and what can be done. Back in February of this year, the Real Estate Council of BC (RECBC) attempted to address the issue by appointing a review committee, called the Independent Advisory Group (IAG), to investigate the current state of the real estate industry’s self-regulation. The report  they released only days ago was, for the most part, very good in my opinion, as a number of their recommendations are needed and absolutely should be implemented and taken seriously. On the other hand, others have no teeth and some aspects I disagree with wholeheartedly. To help further this conversation in the public sphere, I want to take this opportunity to respond to the IAG’s report as an industry insider and hopefully bring some clarity to the issues. I also want to explain why one element in particular, regarding the contentious scenario of the Limited Dual Agency, is not getting full and fair treatment in our often sensationalist media.

Alongside the broader issue of the rising prices and the obstacles to keeping housing costs affordable, it is necessary to restore public confidence in the professional real estate industry. Many of the IAG’s report’s recommendations focus on raising the low bar of entry that currently exists and increasing requirement for ongoing education. I couldn’t agree more. In a hot market like ours, many people are motivated to jump in and make a quick buck, and it’s way too easy to become a REALTORⓇ in BC. In many transactions, an agent is helping individuals to manage what may be the largest transaction of their life representing the bulk of their financial assets. Compare this situation to other investor relationships involving financial planners, lawyers, accountants, and the like. As the report rightly points out, these industries deal only with a fraction of their clients’ net worth and yet they have far, far higher licensing standards and education requirements, and are overseen by much more stringent regulatory bodies. To obtain a real estate license, there is only a multiple choice test, which can easily mask a lack of knowledge and is utterly insufficient for gauging real competency, in my opinion. Also, one only needs a score of 65% to pass the test, which is far too low. Even so, last year only 68% of those who sat for the test were able to pass. This is a disgraceful state of affairs when we consider the immense responsibilities the average REALTORⓇ shoulders on behalf of all clients, but especially in the case of more vulnerable, average Joe clients.

The RECBC began making inroads in the educational shortcomings a few years ago when they instituted mandatory relicensing every 2 years. However, the required educational credits do not represent as much value as one would think: there is no competency testing of the material covered and as long as the agent attends the class, they obtain the credits. I could spend a lot more time on this topic, regarding the content of the courses themselves, the highly questionable competence of the “part-time” REALTORⓇ, not to mention the issue of English language competency, which is another topic the report delves into in recommendation #25. Suffice it to say, the IAG report is spot on in stating their agreement with the public perception that the entry level qualification and education standards for real estate licensees has been “lowered and narrowed over time such that they no longer served to keep unqualified or unscrupulous players out of the sector.” Our regulatory bodies should focus their efforts on making the industry accountable to the public through competency, first and foremost. The positive effects of addressing these issues would be felt very quickly. I have witnessed innumerable problems arise from agent inexperience. Raising the requirements for licensing would improve the quality of REALTORSⓇ in the industry and eliminate most of the causes of client dissatisfaction that I see in my local market of the Fraser Valley.

A great number of the IAG report recommendations focus on strengthening existing laws and regulations intended to protect the public. Some of these include adding to the paperwork (of dubious value), others place the emphasis on marginally greater disclosure and explanation to clients (which is already mandated by law), and others increase the powers of the regulatory bodies to enforce these regulations and increase the penalties for misconduct. While I generally support these motions, especially the proposed increase to the maximum fines, I am not completely convinced that any of them will have a very big impact on restoring public confidence or improving the quality of real estate services across the board. Instead, the topics raised by the report that I think are the most important and that deserve the most scrutiny are those related to Limited Dual Agency transactions, the role of broker managers in the oversight of agent conduct, and this hot-button notion of “shadow flipping” that we are hearing constantly in the media.

So what is “shadow flipping”? Essentially, it happens when a property is sold under fair market value because it was not properly marketed (perhaps the property was never listed on MLSⓇ) in order to allow for the buyer (presumably the seller’s unscrupulous REALTORⓇ) to maximize profit by immediately turning around and selling it at a fair market value plus inflation. The inflation is really the key issue here in terms of why this scenario has received so much attention. The fact is, a sale price that was fair at the time of confirmation is already under market value by the time of the closing of the sale, an average time span of two months. This is a reality of our market and does not represent a malicious underselling of the property. However, the super-rapid rise in prices and the staggeringly high prices in the Vancouver market mean that the smaller percentage differences can reflect enormous sums of money, which draw the attention of the media and the ire of the public. The high prices and their effect on the cost of living contribute to widespread public anger that easily finds focus on the notion of bad actors. However, it’s important to recognize that many of the apparent incidents of “underselling” usually aren’t cases of misconduct, but are instead examples of the effects of our wild inflation. That said, there are certainly cases of some agents taking advantage of sellers through underselling. The most problematic scenarios are with the number of properties being sold sight-unseen in Vancouver to offshore investors. Of course, I support any steps that can be taken to better regulate and curb these practices. The recent actions taken by the government, however, give me no confidence at all.

Recently, Christy Clark’s provincial government instituted a new law to address shadow flipping that restricts the assignment of property contracts to a new buyer prior to close. Additionally, when contracts are assigned at a higher price, that extra profit must be funnelled back to the original seller rather than to the original buyer/middle man/shadow flipper––purportedly omitting both the profit margin and the incentive for this practice. On the surface, this appears to be a common-sense remedy to the issue as, again, the central issue and injustice of shadow flipping lies with the underselling of the property for the original homeowner. Importantly, Clark’s new law does nothing to actually fix the problem because it merely forces the unscrupulous first buyer to complete on the transaction before turning around and flipping the property at a higher price the very next day. Here’s where I start to get pretty cynical about our government’s motivations. Consider this: every time a property transaction is completed, property transfer tax is payable to the provincial government, to upwards of tens of thousands of dollars. In fact, it’s their largest single source of revenue and they’re now raking in record profits, as was reported recently in the Vancouver Sun. Therefore, it certainly seems as if the purpose of this new law is more about the government profiting off of shadow flipping and less about actually stopping it, potentially making the government the one profiting the most from shadow flipping, which they profess to hate so much. Another case in point is the new tax law Vancouver mayor Gregor Robertson is attempting to put into place. This represents a much more substantive action on the housing affordability crisis by proposing a punitive business tax on vacant homes. Thus far, Clark’s administration has neglected to support this action, such that, according to the Financial Post, the city may have to move forward with these initiatives on their own. Can you see why I’m suspicious about the provincial government’s motives?

To return to the IAG report, they do make some excellent recommendations for increased brokerage oversight that I think would go a long way in making it a lot harder for unscrupulous REALTORSⓇ to take advantage of the system. For example, they propose that all offers, even those that do not become accepted, be promptly filed with the managing broker––an absolutely necessary step considering all the competing offer situations currently in our market. At this point, when another REALTORⓇ tells you they have a competing offer on their listing, you have no real way of knowing. They also propose that brokerages implement a real-time multiple offer registry (with appropriate privacy protections) that would be kept permanently on file and available for random audit. This is an idea I have put forward before as I believe it would go a long distance toward maintaining accountability and transparency, and would discourage both the negligence and/or corruption that leads to shady real estate dealings. Some brokerages in Ontario are already implementing this step, but so far it is not legislated there either.

Furthermore, the IAG recommends maintaining a higher standard for brokerage ownership which includes strengthening their requirements to have active oversight over licensees––I totally agree. Currently, broker requirements and responsibilities are far too lax. Worse, sometimes a brokerage is just seen as a cash cow. In other words, there needs to be increased accountability for brokers. I would argue that this also means managing brokers cannot be selling agents, as this represents, to an extent, a conflict of interest. Their duties should just focus on the management and oversight of their licensees. First and foremost, their accountability should be to the Council. Many brokers I know agree with this view. Also, I would argue that the Council should thoroughly review new business models (i.e. - mere postings) before they be allowed to operate, as often there is not adequate protection for the public in these alternate models, and public protection is the key issue here!

The Council can do their part by expanding the scope of their broker audits. The IAG report proposes that when the Council conducts its random, spot audits of brokerage files they should read them for agent conduct, not just for financial compliance, as they do now. I think this is a valuable recommendation. An agent’s competency is definitely demonstrated in how they chose to word their clauses and subjects, whether or not the Buyer and Seller are adequately covered in case of the unforeseen, and things like this. In my view, just reading the contracts and forms alone would give the auditors a clear picture of whether or not the REALTORⓇ is practicing due diligence. With regards to these recommendations concerning the expansion of brokerage oversight, I completely support the IAG and the RECBC. Their proposal to do away with Limited Dual Agency, however, is flawed and limited in its understanding of how things work on the ground.

This is going to be a sticky subject, and one difficult to convince the public on due to all the sensationalist negative press. Case in point, The Georgia Straight phrased it as, “Finally, B.C. real-estate agents will no longer be allowed to represent both a buyer and a seller in home and property transactions,” demonstrating the popular misconception that this is at the heart of the problems with agent misconduct. Let’s think this through. What happens when a Buyer I work with is interested in one of my properties? I have lots of listings. Surely no one’s suggesting that I tell all my Buyers, at the time of signing their Buyers Agreement with me, that they cannot buy any of my listings. Is this in their best interest? So if I have a Buyer who is interested in one of my listings, it is suggested that the best thing for me to do is hand them off to another, supposedly disinterested, impartial REALTORⓇ. Much of the public when they are my Buyers don’t appreciate this or don’t feel comfortable having to work with an agent they didn’t select and perhaps don’t know at all. Another important thing to consider is that, in this scenario, the agent brought in to substitute in the double-end transaction is not truly impartial because the only way they get paid with the client is by ensuring this particular transaction goes through, even if it turns out not to be in the best interest of the Buyer during the course of negotiation. Some will say that they expect this new agent to be truly competent and honest in acting for the Buyer’s bests interests--as if somehow I am not expected to be competent or honest. And yet, this substitute agent only receives compensation if they convince the Buyer to purchase my listing otherwise the Buyer reverts back to me. I ask again: is this truly in the client’s best interest? Furthermore, I already know that Buyer’s needs intimately. I know what they want to pay, how much they’re pre-approved for, other properties they’ve seen, their enthusiasm for the property, everything. Clearly I can’t “un-know” my client by simply terminating our Agreement, so how does this arrangement protect them if I’m intent on using this knowledge to unfairly disadvantage them? It’s easy to make an argument against Limited Dual Agency transactions when you don’t understand the realities on the ground, but once you start walking it through, the reasoning falls apart. Representing both sides in a real estate transaction is not analogous to representing both parties in a lawsuit, for example. Primarily because, unlike in lawsuits, the parties to real estate transactions usually share the same goals. I know it’s a touchy subject even among my peers, but I strongly believe it’s important for us REALTORSⓇ to speak out and bring nuance to this public discussion.

Responsible, accountable, and transparent Limited Dual Agencies are possible and this is the model we as an industry should strive for. Here are my ideas on how to get there. Instead of issuing a blanket ban on the practice, focus on problem areas and weak links, which are usually about price and treating each client equally fairly. Involve the managing broker as an independent, third party overseer who is personally accountable. For example, they could fill out an additional form for the file––perhaps they would receive an extra fee––that approves and justifies the price, and verifies that the contract is impartial and properly written. Buyers (or Sellers) would of course understand that they have the option to choose another agent, but they should not be forced. I’ve represented clients in a lot of Limited Dual Agency transactions over the course of my fourteen years in the industry––I’ve had no complaints and a lot of happy customers. This is not to say that it’s always easy, but it is usually possible for an ethical agent with adequate expertise, and I have also at times recommended independent representation.

These specifics aside, a bigger question remains: will the IAG’s recommendations, which are focused on reforming the oversight of agents’ activities and rooting out misconduct, be in any way effective in curbing the rapid rise in prices that make housing costs unreachable and an undue burden for many families in the Greater Vancouver Area and Lower Mainland? While some of the suggestions are good and needed, I would argue that they do nothing to effectively address the real factors currently contributing to the wild inflation of real estate, regardless of Christy Clark’s posturing. Instead, they are focused on putting a bandaid over the public outrage by making a few unscrupulous real estate agents and practices a scapegoat for a much larger provincial problem.

Do I have an opinion on what these real factors are? You bet I do! But that’s the subject of another post …