Who Has A Legitimate Interest In A Real Estate Transaction?

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I've been answering this question for a long time. Whose interests do we need to be concerned about, in a "If they are harmed, we've got a problem" sort of way? Who has a primary stake in a real estate transaction, and who does not? Whose interests must be served by said transaction? Whose interests are critical, and whose are not. I never really went into an explicit answer. But some nasty emails and deleted comments of late have made an explicit answer important.

For as long as I've been thinking about the question, I've been answering it the same way. Depending upon the transaction, there are two or three parties with a primary stake: The buyer, the seller, and the lender if there is one.

The buyers interests are the most important and the most critical. They are giving up a very large sum of money in order to purchase real estate. Money is liquid; real estate is not. You can do anything with money; real estate, not so much. Therefore, there must be a compelling arguments made why it is in that buyer's interest to part with that much cash in order to buy that property. I've made a fair number of said compelling arguments, but you always have to be able to make it. Every time. If they're getting a loan, you also have to build an argument why it is worth them taking out a loan, which forces them to pay out a given amount of money every month for the next thirty years in most cases. Money that the buyer hasn't earned yet, and in most cases couldn't pay back right now if they had to. You've got to build a compelling argument for why that buyer giving that seller however many thousands of dollars in order to buy that property is in that buyer's best interest. If you're a real estate agent and you can't do this from the ground up, you're in the wrong business.

The seller's interests are also critical. There's got to be a compelling argument made as to why it's a good idea for that seller to agree to sell their property for that price. If not, we should be looking at buying some other property. Real estate may be illiquid, but nobody is creating any more of it. Not the Dutch, not the UAE, not anybody, not really. So why, to paraphrase the immortal words of Roald Dahl, would someone willingly exchange something of which nobody is making more of for something which they're printing more of every day? Again, if you're an agent and you can't do this, you're in the wrong line of work.

The seller's interests and the buyer's interests are different, of course. Without those differences, nobody would ever trade anything to anyone else ever again, and that includes trading for money, or sales as it is usually called. But you've got to be able to make compelling arguments for both sides, and you've got to be right, as real estate transactions are not readily reversible in the general case. There are some exceptions, but you can't usually go back afterwards and say, "Let's call the whole thing off!".

The lender, if there is one, also has a compelling primary interest in a real estate transaction. They are putting up many thousands of dollars of money they have already earned or gotten in some fashion in order so that the seller gets cash from the buyer rather than having to wait thirty years for the last bit to trickle in. In most cases, the lack of a lender will prevent the transaction from happening at all because that seller needs cash in order to pay off their own lender, or cash for the property in order to accomplish their reasons for selling it, not monthly payments trickling it over the next thirty years. Therefore, without the lender, the seller's interests could not be met, and therefore the buyer's interests would not be met. But the lender doesn't have a direct interest in the property investment, only that it can be sold to pay off the debt if the borrower defaults. What they do have an interest in is whether the buyer can pay them back, and, failing that, if they can get their money out of selling the property if the buyer does not.

The seller is usually paying almost everyone who works on the transaction, the buyer's money is the reason why the seller is able to pay everyone, and the lender's money is what is used so the seller can pay everyone. These three parties have legitimate, primary interests in the transaction. If their needs and criteria are not being met, they can call the entire transaction off. As strange as it may be to see a real estate agent writing this, they should call the transaction off if their interests are not being met.

Everyone else is working for a paycheck: Agents, loan officers, escrow, title, appraiser, inspector, notary, ad nauseam. We make our money by being able to help one of the above three "people" consummate the transaction. We are worthy of our pay to the extent we help one or more of those people serve their interests, or serve those interests better. If we can't do that, we shouldn't be part of the transaction. We only make money by serving the interests of the primary stakeholders, and if we're not doing that, we shouldn't make money.

If you cannot agree with this, you and I have nothing further to talk about. I make my money by putting my clients into a situation that's better than it would have been without me. If that's not the way you make money in real estate or any other business you might be in, then you are trying to be a tollbooth, and the dynamics of the market are going to do their best to route around you. In other words, if you cannot show a value to those you serve that is at least as great as the money you make from providing those services, the market evolution is going to put you out of business as soon as it can. This knowledge goes back at least to Frédéric Bastiat, but it's nothing that despots the world over haven't known for millennia, who have been getting increasingly sophisticated about not getting put out of business as the markets have gotten more sophisticated about what adds value and what does not. I have absolutely no sympathy for any argument that concludes you must pay someone because the law says you must. The law, to the extent it relies upon "because I said so!" is an ass.

That doesn't mean there aren't legitimate economic reasons to choose to use a real estate agent, a lender, a notary or whomever. But to the extent the law forces you to use one, the law is a tyrant, engaging in rent-seeking behavior. Healthy economic organisms interpret rent seeking behavior as damage, and seek to route around it. Eventually, they will succeed. It may take a while, but they will succeed.

So now you know why I am always looking at "What is the consumer's interest?" and "How can the consumer benefit?" and "Does this benefit the consumer?" It isn't altruism. It's enlightened self-interest. By providing value for the consumer, even if in the context of specialized knowledge or judgment that consumer may not have, I am showing an economic reason why it is in that consumer's best interest to put money in my pocket. If $1 in my pocket means more than $1 in theirs (and it does), consumers will freely choose to line up at my door for the privilege of paying me. Some consumers may not agree, and that's fine. There's plenty who agree do to keep someone who is so oriented hopping for as long as I am willing and able to work. That's the best income insurance there is or ever will be.

But if you are not so oriented - and I am looking here at any alleged professionals who think in terms of their own benefit, rather than the benefit of consumers - then it's only a matter of time before the market figures out a way to route itself around you. I and others like me are going to be working forever. Those who take the tack that "you pay me because you have to!" are going to find yourselves in declining industries, and no amount of regulation (e.g. this) is going to do anything other than delay the tide until someone figures out how. And acting self-righteously as if you have some kind of "right" to that money as you lobby the government for them to force people to do it your way will only make you more and more contemptible, more and more an object of ridicule.

Caveat Emptor (and especially Caveat Vendor)

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This page contains a single entry by Dan Melson published on April 6, 2009 7:00 AM.

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