Suggestions for new laws to make the real estate market less disingenuous

Make it a crime to:

-- Misrepresent the number of rooms in an apartment.
-- Overstate the square footage.
-- Lie about the building's neighborhood.

I see no reason why people should not be able to know what is in contract, and the price of the contract.

Next up would be mortgage broker / loan officer reform. I don't even know where to start on that one.
" Yes, mortgage rates can change multiple times a day but we won't tell you when, or where, or to what rate."

I thought everyone here was a supporter of the Free Market. Those laws seem kind of Socialist to me.

Aren't cooperative apartments basically socialist communes?

Mr Pres -- Good point. Streeteasy banter has preceded just about every terrorist incident since ...well, how long has this been around. It may well be the only reliable predictable element of SE banter. So, why remove the only good predictor?

Very clever, 30 years! Ha!

Actually President, the entire premise behind a free market is perfect information. The problem with free markets is when information is far from perfect, this is when exploitation occurs

Thank you, dcorreale. This is exactly the purpose behind the siggestion to make it a crime to misrepresent a number of apartments in contract or closed. This is very similar to misrepresenting earnings of a company in order to sell stock or debt. In my opinion this is a lie so common that it is viewed as something normal. Information (ideally, perfect information) is a necessary condition for free markets to function. When sellers sell real estate they are defacto accessing public markets, albeit not in the stock exchange sense of the word. It is therefore fair, appropriate and reasonable to make them abide by standards of disclosure that allow the buyers to have an informed and unobscured look into the state of a given real property and all material factors surrounding it.

"-- Overstate the square footage"

I think square footage needs to be at top of the list. Though before being able to acknowledge what is the right and wrong square footage, there has to be a standard of measurement in residential RE.
I don't know who or which regulatory agency would decide but it has to be done.

"I see no reason why people should not be able to know what is in contract, and the price of the contract."

I do. As a buyer I would love to the terms and price of a contract on a property I am interested in but this is inappropriate. Some things need to be left to fair trade and competition and this is certainly one of them.
Acris is enough of an intrusion.

ukrguy - I'm curious about the situation you describe. Have you experienced a broker actively misrepresenting the number of units in contract on a property? Or are you saying this information has been withheld?
Tina
(Brooklyn broker)

tina24

Probably frustration this particular year (as with me as well) with properties in the saved list going "in contract" whether went in contract and failed to get financing or falsely listed in contract proping up sales in a particular building for other units all the while casting false momentary aspersions of a rebounding market.

I'm not a broker, but a bit of responsibility might be in order on the other side of the equation.
(i) make it a felony to misrepresent the number of apartments in contract or that have been closed.
- a year in prison for a lie? How about people exercise extra caution when buying into a development that isn't yet completed. Why should buyers believe that this risky route is no more risky than buying into an existing development
(ii) Prohibit off the market marketing for any property with an asking price of $1,000,000 or less.
So I'm a seller and I can't make a decision about how to market my own property? I can't choose my own broker based on his marketing strategy that I might find preferential?
(iii) Mandate a 2-week cool-off period during which the buyers will have a right to inspect the property as often they want during business hours and will be allowed to back out for ANY reason. Pass the law in such form that no waiver of this right will be allowed or accepted by court.
I'm all for cooling off periods. But keep in mind that buyers are judged by sellers both based on price and based on certainty.

-- Misrepresent the number of rooms in an apartment. The Chinese have a relatively new solution to this counting problem that might make its way to the United States. An abacus. Once buyers have the abacus they probably won't be fooled by this representation. Lets hope the abacus makes it to the U.S.
-- Overstate the square footage. We should also have criminal penalties for misrepresentation on dating and hookup sites.
-- Lie about the building's neighborhood. Extremely egregious, especially for investors who are just buying from abroad and never intend to come to the U.S. Lying about the building neighborhood disadvantages the foreign buyer over the domestic and local buyer who can just GO TO THE LOCATION. Or use Google maps.

I see no reason why people should not be able to know what is in contract, and the price of the contract. Well information is always nice, but isn't a right. Even the New York Stock Exchange charges for trade data.

Actually President, the entire premise behind a free market is perfect information. The problem with free markets is when information is far from perfect, this is when exploitation occurs.
Very true, but what entitles the buyer to perfect information? Perfect information might also mean that a seller knows about the full financial profile of the buyer and is able to negotiate upwards on price based on a full ability to pay.

to tina24: I have had various experiences, the most common of which was overstatement of square footage and withholding of material negative facts. I work on the buy side (pick stocks for an asset management firm) and have considerable day-to-day experience of dealing with salespeople. Although real estate and securities business have differences, they also have much in common, the most important shared characteristic being that sellers and their representatives tend to be untruthful because it is in their interest. There are two types of dishonesty, one is a straightforward lie (i.e. misstating square footage, number of apts. sold, etc) the other one is a lie of omission. For instance, not mentioning a material adverse fact. Securities business has an interesting clause: fiduciary responsibility to the buyers at all times. Many outside the business do not know this, but in case of a placement (IPO or secondary issue) the broker has a fiduciary responsibility to the buyer, even though most of the time the commission gets paid by the seller. Ideally there should be something similar in real estate.

I am digressing, but it is also annoying to no end how brokers try to hold onto the entire fee even if the client buys on his/her own.

While rapaciousness is present in many aspects of life (don't even get me started about the Wall Street), real estate is the only 'everyday' industry that I know of where transaction costs have not declined, but held steady or increased over the last 10-20 years. As much as I despise some of the practices on Wall Street, I must admit that transaction costs (both in brokerages and asset management) have declined substantially and competition increased dramatically. Much of this is the result of legislated transparency. In other words, there is a standard, mandatory way of disclosing costs, compensation and a number of other practices.

The real estate industry functions as a de-facto cartel, especially on the retail side. The industry is greedy, unprofessional and dishonest in the extreme. Its (largely successful) attempts to block legislature aimed at transparency and disclosure have cost consumers billions. I come from a country that is run by cartels: there is an agricultural cartel, mining cartel, shipping cartel, etc. It has one of the lowest standards of living one can find.

So, my distaste for the 'cloak and dagger' way in which the real estate industry operates is driven not only by professional convictions about the benefit of free markets, but also by sad experiences associated with just about any economy that is dominated by highly concentrated economic power.

to splaken: real estate is much more of a public domain then most realize. This justifies a number of requiments that I and others proposed. Let me explain.

When a person takes a mortgage, they create a financial liability that if not met will have a negative impact on them, on the fiancial institution that provided it, on investors that bought the CMO from the lender, on taxpayers whose $$ backs the FDIC and many other faucets of the economy. Oh, didi I mention Fannie and Freddie? Whether or not the seller realizes it, all these faucets have to function properly in order for the sale to occur. When sales occur based on the flawed and often on wht I characterize as fraudulent information, we begin to build the house of cards. We all know how nicely this worked out. To be clear, the real estate industry is not the only one at fault. Changes in related industries need to take place as well, but this blog is about the real estate, so I am focusing on that.

People often confuse freedom with irresponsibility, especially if the irresponsibility is in their fiancail interest.

ukrguy
Have to say you make a sound argument.

"I thought everyone here was a supporter of the Free Market. Those laws seem kind of Socialist to me."

Only because you are a moron who doesn't understand the terms "free market" or "socialist".

A fair and open market is as free as it gets...

After spending the last 12 months looking for a condo or co-op in Brooklyn & Manhattan - new developments, pre war, renovated, etc. - the one constant has been the persistent use of lies, half truths, and misrepresentations about virtually everything we have come across. Brokers are like fungi - they do well in dark recesses. For now - we have given up and will wait for the time when units are left vacant by their previous owners and banks. Just like the cars left at airports by fleeing bankrupt foreign workers across the oil rich emirates.

ukrguy,

I am in no way an apologist for my industry, which is problematic in many ways. But I would like to speak to the phenomenon you have observed - namely, properties moving in and out of contract, seemingly randomly (or worse, manipulatively). You correctly identify the main issue resulting in these movements: failure to get financing. In the heights of the bubble, most new developments would not agree to contracts with financing contingencies, and buyers were locked into their contracts with little recourse beyond class action and/or a developer's failure to perform by a certain drop dead date. There are many threads here, and news stories elsewhere, describing the ensuing misery.

Flash forward to 2009. Buyers have developers over a barrel, and sponsors agree to a whole slew of contingencies they never would have considered in 2006 - paying closing costs, covering maintenance and common charges, and allowing financing contingencies in most every contract. Buyers are satisfied, sellers are happy, everyone signs and the property is marked as In Contract. No "contract out" or "offer accepted" but "in contract." But then what? Banks are incredibly tough these days, and a buyer can fail to get a mortgage due to mediocre credit or job uncertainty. Even if the bank approves the buyer, the building still has to qualify, and the unit has to appraise. In our new era of actually diligent due diligence, a deal can fall apart at any of these key moments. At which point the contract is void, the buyer gets his/her deposit back, and the property returns to the market.

There is no margin in claiming something is legitimately off the market when it is still available. Nor is there any reason for a broker to represent that a building has a higher ratio of sold and in-contract units than it actually does. All of this is a matter of public record, as you note above, and the legions of attorneys, underwriters, title companies and appraisers who are part of a real estate transaction will ferret out the truth. So what possible strategy can there by in claiming something is unavailable if it actually is still on the market?

You may well have encountered some shady real estate agents. I certainly have. But there are indeed many, many checks, balances, laws and standard practices in effect already to counteract the types of behavior you describe. And for the moment, the marketplace itself is one of them. No one, certainly not the real estate agent, likes to see a property come back out of contract. But it happens every day. You see evidence of that in your "saved sales" alerts. It's not evidence of people wishing a resurgent market into being - rather, it's evidence that despite buyers' renewed appetites, developers' restructured debt, and real estate agents' refusal to play possum during open season, a real estate deal has to make sense to a lot of deeply skeptical folks before it is permitted to close. Is this a bad thing? I don't think so. Do you?

I agree with you that there ought to be some revisions to the (actually quite stringent) laws of real estate agency in New York State. But that's a separate issue. Under current laws, if buyers want an agent to represent their fiduciary interests they may elect to hire a buyers' broker. Trouble is, they have to pay that person. Most buyers balk at that option. But it is a legal option nonetheless.

Tina
(Brooklyn broker)

Tina, I am busy at the moment. If you have time, check this blog tonight, I will go over some points in more detail.

"There is no margin in claiming something is legitimately off the market when it is still available. Nor is there any reason for a broker to represent that a building has a higher ratio of sold and in-contract units than it actually does."

Of course there is. Just one of several buildings that comes to mind is Loft 14. Even back to 2007 boasted "only 3 units left"
http://streeteasy.com/nyc/sale/107073-condo-135-west-14th-street-chelsea-new-york
And then a series of false listings of 3 to 4 units simultaneously "in contract" over the last 2 years to create an illusion to buyers to get the "other units fast" in this 90 day window of false contracts.
Am I saying everyone does it? or a lot do it? No. But ENOUGH do it and it is inappropriate, or at the very least "a reason" as you humbly ask.

"So what possible strategy can there by in claiming something is unavailable if it actually is still on the market?"

Tina, does this really need to be explained?

Tina: " Nor is there any reason for a broker to represent that a building has a higher ratio of sold and in-contract units than it actually does. "

When we were looking at a new building, the sponsor's selling agent consistently would give us inflated estimates of how many units were in contract. There was no way for us to actually tell as they kept many of the available units off of their website. The obvious incentive to them was to try and get us into contract, but the problem for us was that we were on a fixed timeline, and could not be in contract for the next year.

Look, I'm not saying brokers have no incentive to make a building appear "hot" - of course they do; it's called marketing. What I am saying is that a broker has no reason to claim a specific apartment is no longer available unless it is truly in contract. Nor do they gain from claiming, say, that a building is 50% or 70% sold unless it actually is. Because a buyer who depends on a Fannie/Freddie loan will just bail out on a signed contract should those ratios not be borne out (as long as they have a mortgage contingency, which most of them do).

Please note that I'm talking about now - the market as we know it in 2009/2010. It seemed to me that the original poster was speaking about units moving in and out of contract in the past few months. Obviously, lying to people in order to get them to sign contracts that waive all contingencies made sense as a strategy during the bubble. It doesn't make any strategic sense now.

We'll set aside the fact that it was never legal - I recognize that these laws are not always rigorously enforced. I'm saying the market itself is driving people to be more honest about this stuff. Because if they're not, buyers will walk away with their deposits and the agents and developers lose weeks and maybe months of time that they could have been finding other buyers.

Tina
(Brooklyn broker)

"Only because you are a moron who doesn't understand the terms "free market" or "socialist".

I know very well the differecne between the two. I am a Socialist. And requiring all sellers to list their properties in a privately owned MLS system is Socialist. The MLS is a PRIVATE databse and you cannot regulate who must be listed in it.

Anyone figure out what happened to ukrguy?