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Problems in Real Estate Land

Someone said that if you tell a lie often enough it becomes accepted as the truth.

The rollback of regulation in Victoria reflects a similar process
- if appalling standards of conduct are practised often enough and widely enough they become accepted as "normal".

Sadly, this is pungently reflected in the real estate industry, which demonstrates endlessly the powerlessness of consumers under the great government cop-out known as "self regulation".

The same problems go on forever, consumers are exploited forever, and government looks the other way until it is forced to act (usually decades later).

Some of the common problems for real estate buyers and sellers are considered below.

The "Agency Trap"

The "Agency Trap" snaps shut on vendors the instant they sign an agency contract , whose dangers the agents have disguised by giving it an "official" sounding name ("authority"). You can rarely escape from these agency contracts, even after you work out that the fine print has disempowered you so much that it seems like the agent owns the house, not you.

For a start, the agent does not even have to do the job to get paid. If anyone else sells the house (even you) the agent can still claim commission, not only during the agency period, but for months after it ends (and possibly forever). Since these payment conditions are buried in fine print , many clients are not even aware of how much control they have given the agent until they receive a demand to hand over a fortune.

The agency contract manoeuvres you into pre-paying (perhaps) thousands for "marketing expenses", but you have no way of knowing it will be used to sell your house.

Then there is the "Rebate Rip-Off" (only recently outlawed by the Victorian Government). The fine print on agents' contracts said that the agent can keep any discounts or "rebates" they get (from newspapers). In other words, clients pay full price for advertising but the agent pays a discounted price and pockets the difference and even keeps refunds. Our calculations suggest that some agents were picking up about $1,000,000 a year with this scam. (As mentioned above, the Victorian Government has now legislated to make the practice illegal, but unless you actually get a proper accounting for the advertising (complete with copies of invoices) there is probably nothing to stop the "sweetheart deals" between agents and newspapers. And if they don't get kickbacks as "up front" rebates, can they get them some other way - such as "fly bys" that can then be sold for cash?)

The agency contract usually commits the agent to nothing - all they have to do is "endeavour" to sell your property. If the agent is inactive, ineffective, or even abusive, there is nothing you can do about it.

Commissions

Until February 1995, agents could charge no more than $1,660 plus 2% of the amount over $50,000. Then the Victorian Government removed the limits and claimed it was introducing "competition".

It was phony "competition" of course, because the government still banned competitors. The result was inevitable - commissions went through the roof, and it is now common for agents to demand 3% of the total purchase price. The commission on a Melbourne median price house is now about 250% of what it was in 1995. Furthermore, agents' commission demands are so similar that only a naive observer would fail to suspect industry-wide "collaboration".

There is absolutely nothing to guarantee consumers will get "value for money" either - agents demand their staggering commission even if they have only had your house "on the books" for a few hours (and we have heard of that happening).

Phony Negotiability

Conditions of agency (including commissions) are supposed to be "negotiable", but there is a gross inequality of bargaining power between you and the agent.

• The agent has practised the game every day for years, and is all prepared with pre-printed agency contracts that "stitch you up" so totally that most people don't realise what they have got into.
• You sell your house only once in a blue moon, so you don't know how agents operate and are therefore badly underpowered in your dealings with them. You are like a fly on a "spider's web".

Deposit control

How agents handle deposits is another major problem for both buyers and sellers. Agents push buyers for a 10% deposit and then put it in their trust account. It does not belong to them, but they view it as "prepaid commission and expenses". They just take what they say you owe them - no invoice - no approvals.

Conflict of Interest

Agents have a massive conflict of interest in their:

• valuations
• negotiations, and even in their
• advertising.

To entice you to give them the exclusive right to sell your house, they imply they can get you a really high price. As soon as they have snared you in "the Agency Trap" however, many of them start a psychological war to force you to lower your price. The lower the price you will accept, the easier it is to get a sale (and that means commission).

Agents use well-rehearsed tactics on you. For example, they often get a buyer to sign a contract and pay a deposit at a price below your asking price, and then try to heavy you into accepting it - "If you don't accept this offer you may not get another one", etc. This infuriates many sellers, and also many buyers, who have lost control of their deposit money, and become pawns in a game that they consider unethical.

Even in advertising, agents have a conflict of interest. The bigger their firm advertises, the more successful it looks to other prospective sellers. So you often find yourself paying for excessive advertising, with boastful headlines and logos that promote the agent's image - not your house. Don't take our word for it - look at the classified pages of The Age and see if the classification (by suburb) is visible under the barrage of self advertising agent logos.

Advertising can create yet another conflict of interest. An agent might take thousands from you to advertise your house, but then direct those who respond to your advertising to someone else's house instead. You can do nothing about such betrayals (and usually don't even know about them).

Toothless Regulation

Agents want you to believe that when you deal with them you are protected by a regulatory apparatus, but anyone who believes that hasn't been watching what has been going on in Victoria, whose government has sacrificed consumers on the altar of "self regulation".

Oh yes - we once had a government regulator - the Estate Agents' Board (financed by the interest on clients' money). Then the Government dismantled the Estate Agents' Board and divided its functions between 3 other bodies, two of which were:

• the Estate Agents Council - which was an agent dominated group that "advised" the government and gave guarantee fund money away - mainly to help agents market themselves.
• the Estate Agents' Licensing Authority. That short-lived excuse for a regulator was supposed to be there to help the public, but could not even award compensation if an agent's misconduct cost you money. One caller told us that the Licensing Authority even advised an offending agent about how to obstruct a complaint from a consumer. The Licensing Authority now seems to be dead, leaving agents with virtually no regulator at all. There is a "resolution service" but it is a "mediator" that agents can thwart merely by refusing to cooperate.

Clients are unable to use VCAT (Victorian Civil & Administrative Tribunal) because it has no jurisdiction over real estate. It is hard to avoid feeling that the Victorian Government takes its instructions from the real estate industry.

Some hopeful clients believe that the REIV (Real Estate Institute of Victoria) will help them, but when they appeal to it for help against an agent they discover it is the agents' trade association. Some consumers who have complained to it about agent misconduct conclude that it was futile, and mutter about "appealing to Caesar".
George Bernard Shaw once described the professions as a "conspiracy against the public" and although the real estate industry can hardly be called a profession it is so unaccountable that it seems to merit the "conspiracy" tag.

Overall, the agency deck is so badly stacked against you that the only way to be safe is not to deal with agents. That way you eliminate:

• agency contracts that use fine print to exploit you
• misreporting (of offers and valuations)
• failure to properly account (for costs)
• conflict of interest in negotiations.

You get a huge competitive benefit too. You can accept a price thousands less than your neighbour - and still end up with more money in your pocket.  Carrying a grossly overpaid agent on your back is a huge commercial disadvantage.

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17 November 2006