Real Estate Ethics – Working Hard to Do the Right Thing

A short sale lead (with real estate ethics)

Yesterday I received a call about a possible real estate short sale, even better it was a referral from a past client. It always feels good when you receive a referral. In this case the referral was about a home that was $90,000 underwater and the owners wanted out. They wanted to short sale, and what was even better is that they informed me they already had a buyer lined up. Easy money, right?

All I would have to do is submit a request for a short sale, turn a blind eye to any outside offers that come in and introduce our pre-arranged “buyer” as the only person willing to make a serious offer on his home. Everyone is happy, I get to close a quick and easy transaction – one whose result has already been pre-determined – collect my commission and call it a day. What could be easier! Except if I were to go through with such a deal I would be committing fraud and jeopardizing my real estate license.

I politely informed the lead that short selling his home to a straw buyer is something I would not do (real estate ethics). As difficult as banks are to deal with (and believe me, you don’t know the meaning of the word difficult until you have dealt with the servicing departments these banks use to process short sales), I as a Realtor have a responsibility to my client. In the case of a short sale, the bank is a party in the transaction because of the seller’s negative equity position in the home. I have to do my best to recover as much money as possible from the short sale. If I limit the home’s exposure on the MLS or turn a blind eye to legitimate offers on the property, I become guilty of defrauding the bank.

When I carefully explained all of this to the lead, the response was, “Oh………………. so can you short sale my home????” I clearly wasn’t getting through to them. So once again I replied, saying that while they will undoubtedly find a real estate agent willing to go along with their scheme, that agent would not be me. I ended our conversation by informing them if they wanted to enter into a short-sale listing agreement with me, they would have to prove to the bank that they’re in a genuine financial hardship, let me expose their listing to the whole world via the MLS and other avenues and grant me the freedom to entertain all offers.

They ended up taking their business elsewhere.

The above example shows the ethical and moral dilemmas Realtors occasionally face. There are many Realtors who are all too happy to accept such deals and pocket the money. What’s the harm, right?

Actions have consequences

Last week we all heard the news about a local real estate team being sentenced to a 3.5 year prison sentence. I have removed names from this post because at this point it doesn’t matter who I am specifically talking about and if you’re a local agent in San Diego you likely already know.

Between 2005 and 2007, at the height of the housing boom, this team was raking in $40,000 a month in commissions from their real estate business. The husband & wife team were considered to be role models in Mira Mesa’s Filipino community and were regular attendees of the local church.

In February of 2012, the FBI charged the couple and seven of their associates with multiple counts of conspiracy, wire fraud, money laundering, and criminal forfeiture. According to the indictment published by the FBI, the crimes were alleged to have taken place between 2005 and 2007 and involved a criminal conspiracy to obtain mortgages for unqualified buyers by falsifying job histories, inflating incomes, creating fake financial records and using straw buyers.

Over 100 mortgages worth more than $50 million were obtained this way, mostly going to unqualified buyers. The fallout was considerable; many clients ended up in foreclosure. Losses to the banks that lent out the money amounted to $10.5 million.

The defendants didn’t appeal and it appears they all entered guilty pleas to all counts as part of a deal. For their part in the conspiracy, U.S. District Judge Anthony J. Battaglia sentenced both the husband & wife to 41 months in prison.

This affects all of us

As an agent with many years of experience, there is no doubt that this couple had a great business going but where did the legitimate business stop and the fraudulent business start? Was he an agent making $10,000 / month in real estate income doing things the right way? Was the remaining $25,000-30,000 in real estate income coming in from the shady deals described above?

I don’t know but at some point he took a step across that line and I believe he knew what he was doing. Perhaps he made a calculated decision, perhaps he thought that everyone was bending the rules so why not bend them a little his way. I’m not going to sit here and pass any judgment, the facts of the case are pretty clear.

If it was my reputation and career on the line there is no way you could convince me to plead guilty unless I knew I was guilty. Perhaps he didn’t have the resources to fight or perhaps he knew he would not prevail and wanted to accept responsibility in favor of a lighter sentence.

Real Estate Ethics

There is nothing particularly outlandish about the fraud perpetuated by this couple. Falsifying a client’s financial history to convince a lender into approving a loan is, sadly, a common form of deception in the real estate business. It must be remembered that the bulk of the fraud took place during 2005-2007, during the height of the housing bubble. It’s no secret that unscrupulous Realtors and crooked mortgage brokers were tripping over themselves to sign up as many people as they could for mortgages, regardless of their ability to pay. The fact that the wife was a mortgage broker approving these loans made the whole thing even easier.

This agent is not the first California Realtor to engage in such shenanigans and certainly won’t be the last. A lot of these cases sadly follow the same path: trusted Realtor in good standing with his community takes advantage of vulnerable members of that community (usually minorities and/or newly arrived immigrants) to make a quick profit.

It also should be noted that they practiced dual-agency as a means to perpetuate the fraud. Dual-agency, where an agent represents both the buyer and seller, isn’t explicitly illegal but as a practice it lies in the grayest of gray areas. Needless to say, we have acted as a dual agent on some transactions and I hate it, I really hate dual agency and wish it would just go away. Many other states have banned it but California is just so adamant about holding on to dual agency. Side note, check out my post on real estate dual agency and see why I dislike it so much.

The temptation of making easy money through shady practices is present in any industry, not just real estate. Cases such as this not only diminishes the business in the eyes of the public, but also negatively impacts the good, honest agents who make the tough decisions not to bend the rules and uphold the ethics of their profession. As a Realtor who was doing business during the 2005-2007 period when the subprime mortgage frenzy was at its height, I can tell you that there were countless times where I had to turn away potential clients because they simply weren’t qualified to purchase a house. Yes, it cost us money in the form of lost commissions, but we stuck to our principles and maintained our reputation – and that is something money will never buy.

As we continue down the road and work hard to earn a living in our real estate careers I know that some deals are best left for other agents and that walking away may be the best thing you can do.

Lastly, I want to say this, I don’t agree with what these agents did. Frankly, it angers me and hurts our industry and I think the feds should do more to go after individuals like them – but doesn’t it seem like Wall Street gets a free pass? Why don’t we hear more about the Feds handing out jail sentences to bank executives who lost trillions as opposed to local Realtors who lost millions?

Sources: 1, 2, 3, 4

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