There's No Real Way to Take The Complexity Out of Real Estate

Every so often I get e-mail asking why real estate transactions are so complex. Matter of fact, I have this discussion with most clients at some point. The answer is, "Because real estate transactions for a lot of money, and because there's a lot of money involved, con artists and other people will make a lot of money if they successfully con you out of even small proportions of it. Therefore, real estate acts as a magnet for the less than scrupulous."

Nor is outright fraud the only issue. If Sellers can persuade potential buyers that their property is 2% more valuable, that's $10,000 on a half million dollar property. If buyers can persuade sellers to sell that half million dollar property for 2% less, that's the same $10,000. Offer ordinary Americans - wealthy by the standards of the vast majority of the world - a chance to make $10,000, and they'll do anything from eating live worms to months of primitive living and Macchiavellian scheming to be the last one voted off the island.

Greed is a very powerful motivator. The lure of "easy" money has a very strong appeal. The lure of extra money has a very strong appeal. Because of that, there are a large number of scams and games out there. If you've been in either real estate or mortgage very long, chances are that you've had more than one tried on you or your clients. Perhaps one has even succeeded. Sometimes people get taken and don't realize it for years, if ever. Not too far from me, a couple months ago somebody got nearly $600,000 for a property that was really worth $480,000 to $490,000. The buyers are happy, too, according to the listing agent, never mind the fact that they paid $100,000 too much for the property. They'll eventually realize that their property isn't worth that much more than the neighbors', but they'll probably never make the connection back to "We paid too much". Unless the condition was completely misrepresented or something about what the seller says just isn't true, there's a good possibility of getting away with it. Even the sharp buyer's agents who spot the issue just want to keep their own clients out of trouble. There's no advantage to me or my clients in publicizing other people's lies for the benefit of third parties. Even on the listing side, the agent either thinks an offer is good or they don't, and the seller ends up accepting or sending the prospective buyer on their way. There's no advantage in warning others about one particular person trying to pull one particular scam.

With the amount of money to be made quickly, a lot of transactions have something fishy about them. I've seen figures and estimates varying all the way from two percent to nearly fifty percent of all real estate and mortgage transactions have something untoward happening. The percentages depend mostly upon where they set the threshold.

Against this backdrop, security measures have been instituted. Appraisal, inspection, disclosures, title insurance, escrow, notaries, etcetera, etcetera, etcetera. Every single one of them has reasons why they are advantageous and why they are required. Every time you do without one of the security measures that the industry has implemented which is applicable to your situation, you leave yourself open for the other side to do things which vary from minor games to completely illegal, from selling you a property that's worth less than the purchase price to selling you a property that is worthless for the purpose you intend. Yes, the security measures cost money - a lot of money in the aggregate. However, when the alternative is leaving the door open to transactions that are one hundred percent fraud, they have gotten incredibly cheap. Every time you try to cut out the professional who is supposed to protect you or work on your behalf, you leave the door open for losing more than that professional might possibly cost.

Take out the security measures, and not only do you open the door wider, but the people who are mildly concerned that they might end up imprisoned now will have no real downside to the activity. If there's no real chance of being caught and punished, what rational incentive is there not to do it? Do it, and make an extra $50,000. Don't do it, and the only difference is that you won't make that extra $50k. What's the incentive not to? There just aren't a lot of saints out there. Look at the way people behave in traffic, for a lot less gain, and pretty much every day I see someone getting a ticket that's going to cost them more than getting away with the offense 100 times would save. For this reason, all sorts of folks hope that you can somehow be persuaded not to take advantage of all available protective measures. It means they stand a better chance of getting away with whatever they're trying to pull.

In fact, the level of complexity and detail assists in finding and convicting malefactors. The more information you have, the better you can pin down exactly who did what. By breaking up the charges and the payments to track exactly what went where and for what purpose, a paper trail is created detailing what happened. If the only record made is that A paid B $X for some land somewhere, that says nothing about whether B owned it in the first place, what B told A in order to sell it, what A thought the condition was, or even what exact land was sold. I can go on for quite a while, but the point is that every little finger in the pie should have a good reason why it's there. If you're not trying to pull anything, they're there to protect you. Even if you are trying to pull something, they're there to protect you from the other side of the transaction cheating better than you. Especially if you're honest in the first place, it's a better situation for everyone, because now the other side (and any lender involved!) has assurance you're not trying to pull an entire range of unscrupulous activities, meaning the end outcome for you does not suffer from these apprehensions on the other side, and is therefore likely to be better for you. In short, for buyers, sellers, and lenders, all of these protections increase the value of the property.

Like employment and tort law, real estate law and practice has evolved the way it has as a protection against unscrupulous practices, and short-circuiting any part of it increases the odds that you will find yourself very unhappy indeed.

Caveat Emptor

Original article here