The risks of ignoring 'caveat emptor' (or buyer beware)

When I've bought property in the past, I'm happy to admit I've been exceptionally difficult because I simply don't trust that anyone who stands to earn a commission from my business can be objective. From my first new condo purchase in the early 1990s -- during which I lectured the agent for not knowing the dimensions of the tiny second bedroom -- to my most recent buy -- when I told my agent, broker and escrow officer "no junk fees or the deal is off" -- I insisted on reading every single page of every single document I signed as well as seeing the final appraisal. I wanted them to know that I had options (fortunately, the real estate agents I've used have been great and are still friends of mine).

But I've got an advantage -- I analyze property values for a living, so I know where to go to estimate potential rents, project future development patterns or know when a property is temporarily undervalued because it's in the 'wrong' zip code or within walking distance of a transit corridor that's not yet opened.

For those people who can't or won't do their own research, they rely on their agent -- increasingly 'buyer's agents' who are supposed to represent their best interests -- or the loan brokers with the ever-smiling faces and the cool key chains.

And yet apparently that just hasn't worked well for buyers who now find they overbought during the boom years. Writing in today's New York Times, David Streitfeld provides some examples of the first of what may become an avalanche of lawsuits:

Agents representing buyers rarely had the opportunity to make mistakes during the last real estate boom, in the late 1980s, because the job hardly existed then. For decades, residential transactions almost always involved brokers who, whatever assistance they gave the buyer, legally represented only the seller.

The long boom that began in the late 1990s put an end to that one-sided world. As prices spiked, buyer’s agents and brokers became popular as sounding boards, advisers and negotiators. The National Association of Realtors estimates they are now involved in two-thirds of all residential purchases.

That makes this the first housing collapse in which large numbers of buyers had a real estate professional explicitly looking after their interests. The Ummel case poses the question: In a relationship built on trust, where promises are rarely written down and where — as in this case — there is no signed contract, what are the exact obligations of these representatives in guiding their clients through a sizzling market?...

It's a good question. What do the agents say?

The defendant in the Ummel case is Mike Little, a veteran agent with ReMax Associates. He will argue that Marty Ummel, who brought the case with her husband, Vernon, is trying to shift the blame for the couple’s own failures of research and due diligence.

“They simply didn’t do what is expected of a knowledgeable, sophisticated buyer, and are now looking for someone other than themselves to take responsibility,” Roger Holtsclaw, an agent who was hired by Mr. Little as an expert witness, said in a court deposition.

Oh, right -- sophisticated. Like the same borrowers who signed sub prime loans they now claim they never understood or were forced through by unscrupulous brokers?

So what do the lawyers say?

Mr. Horner, the lawyer, said valuation is a tricky area for brokers.

“Brokers aren’t appraisers,” said Mr. Horner, one of the writers of a guide to suing brokers. “They have no obligation to opine about value. But once they do, it becomes a gray area whether it’s puffery or a misstatement of a known fact.”

So what's next?

The Ummels may be on the leading edge of the law, but they are unlikely to be alone for long. With the market falling, many homeowners owe more on their mortgages than their houses are worth. And many of those deals involved brokers who are required to carry professional liability insurance, presenting a tempting target for angry buyers.

I remember sitting in a room back in the early 1990s during the last boom and listening to a mortgage broker brag about charging 3 points to borrowers with bad credit just because he could. "I'm making $300k a year!" he crowed. It was at that point I vowed never to join his ranks. Because the only thing separating the "Creampuff" sign on a used car from an over-priced house or a toxic loan is the ethics of the salesperson.

Caveat emptor, indeed.