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 …
