Agent buys house from under client's nose

Lawsuit leads to out of court settlement

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 23, 2011

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Lawsuit leads to out of court settlement

Tom Kelly
Inman News™

In a recent column, we asked if a person who serves homebuyers and sellers for a living should be held to different guidelines if they are competing to purchase a property.

For example, should the listing be exposed to the market for a certain amount of time (perhaps 48 hours) before a licensed agent can buy a home that somebody else is ready, willing and able to buy?

The question came in light of new research that revealed nearly 43 percent of all members of the National Association of Realtors owned at least one rental property.

The responses fell into two main pots: Readers said agents should be allowed to buy if it was in the best interest of the seller. Others who responded thought that agents should be allowed to purchase a property as soon as it is listed provided they knowingly had no other active clients who wanted the same home.

A recent Washington state case that was settled out of court (and whose financial terms remain confidential) contained that second caveat. The interesting, complicated affair included a short sale, an appraisal $125,000 more than the listing price, and a supposed loophole the buyer's agent argued no longer tied him to his buyer.

Not only did the buyer's agent end up purchasing a property that his client desired, but he also communicated to the listing agent that his buyer did not have the funds to close when the cash was in the bank, then proceeded to form a separate company to purchase the property in his wife's name. The money used to purchase the property came from the couple's joint checking account.

The shut-out buyer then sued his agent for forsaking his fiduciary responsibility. Short of cash, the buyer acted as his legal representative until the final months of the case when he hired an attorney.

In a nutshell, the would-be buyer found the short-sale property online, a single-family home in north Seattle listed for $299,000. The property contained an additional unfinished kitchen area, once planned to be used as an accessory dwelling unit, commonly known as a mother-in-law apartment. The plan was to buy the place as an investment, allowing his daughter and her friends to use it as a sort of "dormitory alternative" while attending the University of Washington.

Things progressed smoothly until the buyer's lender discovered via a structural inspection that there was no building permit issued for the unfinished space. An addendum was submitted extending the closing date so that the unfinished space could be resolved.

According to court documents, when all parties had not signed the addendum in a timely fashion, the buyer's agent contended that his professional responsibilities toward his client had ended. At the same time, court papers show, the agent continued to encourage his buyer regarding the possibilities of a sale and told his client he would visit again with the listing agent to convince the seller to accept his client's offer.

In the meantime, the buyer's agent proceeded to set up a company headed by his wife for the purpose of buying the home, court documents show. Another agent in the buyer agent's office signed the purchase and sale agreement for the buyer's agent's wife. After the offer was submitted, the buyer's agent sent an email to the seller's agent, indicating his original buyer did not have the funds to close, that the new offer was solid and suggested that both sides "were tired" and eager to close.

After the transaction closed, the original buyer sued for damages. Court documents showed that the seller's agent would not have participated in the deal had he known the eventual buyer (the buyer's agents wife) was related to the buyer's agent.

On the surface, it's difficult to see how the buyer's agent was operating on solid legal ground once he started the wheels rolling to purchase the property. He contended, however, that no buyer's agent agreement enlisting his services was ever formally signed even though he signed the purchase and sale agreement as the buyer's representative, records show.

Washington real estate law requires that a buyer's agent "be loyal to the buyer by taking no action that is adverse or detrimental to the buyer's interest in a transaction (and) to timely disclose to the buyer any conflicts of interest."

The law also requires that no "confidential information" be revealed after the agent-client relationship ceases or has been finalized. The law does not state if that information refers to the buyer, agent or both. The agent operated under the assumption that confidential information involved only the buyer, given his stance that the relationship ended when the addendum for an extension was not properly signed.

Still, the facts in the case clearly showed that the agent worked his way around his buyer to obtain the property for himself. The agent will pay the price when word gets out in the real estate community, even though any monetary penalty remains confidential as part of the settlement.

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