The Ugly Side of Real Estate Revealed by CBC Marketplace

This story needs to be told. It’s not pretty. I am (once again) ashamed to be part of an industry that conducts itself in this manner.

CBC’s Marketplace will be airing a story tonight (November 4th, 2016), where they will be sharing the results of their undercover investigation into real estate practices, specific to rigged bidding wars.

What’s a rigged bidding war? It’s where the listing agent (who is supposed to represent the Seller) manipulates a bidding war so that a Buyer that the agent also represents wins the bidding war (and thus doubling the amount of commission paid to the agent). In their investigation, 6 of the 10 agents they spoke to at open houses offered to rig the bidding war for Marketplace’s undercover ‘Buyer’ if the Buyer made an offer with them. Ugh. Here’s a preview of the show:

Background – Multiple Representation

Multiple Representation – where the Buyer and Seller are represented by the same person or brokerage – is legal in Ontario.  If you scroll to the bottom of this blog, I’ve outlined what it all means and how it works. I also wrote a blog about it earlier this year: Should You Buy With the Listing Agent?

Do agents really rig bidding wars in Toronto?

Unfortunately, yes.

• I’ve personally witnessed it.
• Many of my own Buyers have recounted stories of attending open houses and being offered “the inside-track” to winning a bidding war if they made their offer with the listing agent instead of with me.
• I’ve had plenty of Buyers call me about one of my listings and try to get me to agree to represent them so they’d be at an advantage over everyone else.

Why This Story Matters

When agents manipulate a bidding war, nobody wins, except for the agent.

• The Seller likely got less money for their house than they would have had a true blind bidding war occurred. When the goal of the sale pivots from representing the best interests of the Seller to making more commission for the agent, that’s NOT OK. The Seller paid to be represented, not to be manipulated.
• The Buyers who didn’t win the bidding war invested their time, money and emotions into a house they were never going to get. Unbeknownst to them, the Buyer had already been pre-determined.
• The Buyer who won the house didn’t have representation either, so while they GOT the house, they didn’t have anyone protecting their interests.
• This kind of behaviour taints the whole real estate industry, an industry that already struggles to be seen as ethical.

So 60% of Agents Are Corrupt? That’s Not the Whole Story.

It’s important to note that the CBC Marketplace hidden-camera investigation was NOT random. They didn’t enter ten open houses willy-nilly and find six agents violating the rules. The goal of the CBC Marketplace investigation was to target agents who regularly represent both the Buyer and the Seller in a sale (it’s called double-ending in industry lingo), and those rumoured to run crooked bidding wars. The goal was to catch them in the act. How do I know they were targeting specific realtors? I was one of the agents contacted by CBC Marketplace in the hopes that I would name names (note: I declined to participate in the investigation).

A sample size of 10 (even if truly a random sample) isn’t even close to being statistically relevant when you consider the fact that there are 66,000+ REALTORS in Ontario. Overwhelmingly, agents are ethical and represent their clients’ best interests instead of their own (the BREL team included).

So how many agents would pass a truly random sampling? Marketplace concentrated their investigation on “top agents” who were double-ending more than 20% of their listings (the average is apparently 10%). Most agents in Toronto sell less than five homes a year, and the bulk of the sales are actually done by 5 or 10% of agents. And because the Real Estate Council of Ontario currently operates on a complaints-only basis (vs. doing random mystery shopping themselves), it’s impossible to know.

Truth: bidding war rigging does happen. Our team has an internal (and top-secret) list of agents who we know or highly suspect of rigging bidding wars, and we’ll do our best to avoid making offers on their listings because we know their own buyer will almost always win the bidding war. And yes, there are top agents on that list.

Also true: Representing both a Buyer and a Seller can happen in an ethical way, where all parties are informed and understand what’s happening. It happens everyday. It’s particularly common in smaller communities and doesn’t always mean bad ethics are involved.

The Problem with RECO Rules

The Real Estate Council of Ontario (RECO) has plenty of rules to address multiple representation and penalties for abuses. But there are some serious problems with the current situation:

1 – The penalties for breaking RECO’s rules are minor in comparison to the commissions that an agent stands to make. While there’s a maximum fine of $25,000 for agents caught breaking the multiple representation rules, fines levied tend to be in the $3,000-$5,000 range. And when you consider that an agent who represents both the Buyer and the Seller in the sale of a house in Toronto stands to make tens of thousands of dollars, that fine is negligible. And nobody is unlucky enough to get caught every time.

2 – The current RECO process is based on consumer complaints, meaning they can only get involved when someone actually files a complaint. And is the Buyer who got the house they want because of shady practices really going to make a complaint? Of course not. The Buyers who lost that bidding war rarely know they’ve been duped, and when they do, they don’t generally have the proof they need to build a case. Thirdly, RECO doesn’t tend to place a lot of value on complaints made by other agents. The result?  Far fewer complaints than the real situation warrants.

3 – RECO resources and powers to investigate are limited, so even when a complaint is made, the complaint is often thrown out. I probably personally see more violations per year than the total number of people who end up being fined or convicted across Ontario.

So How Do We Fix This Mess?

1. RECO needs to go after the agents caught on Marketplace and make an example out of them. While the faces of the agents in the CBC Marketplace story are blurred (and as of writing they have refused to provide the names of the agents to RECO), many of us will be able to identify the agents. Their identities need to be made public. The videos were filmed in the Seller’s houses – I know if I saw my house on Marketplace, I’d be quick to ‘out’ the agent who manipulated my sale for their own good.
2. It’s time for stiffer penalties and greater investigative power. We need people at RECO who will find and expose the bad apples. They need to be able to impose big fines – and revoke real estate licenses. Let’s focus RECO’s attention on rooting out the REAL problems that have REAL consequences for Buyers and Sellers, instead of having them deal with complaints about how big a logo is on a website (true story, that complaint was made against us).
3. Brokerages need to take a stand. Every agent works for a brokerage, and it’s time they start firing the agents who engage in unethical practices, even if they are the top agents. If I know who the agents that engage in these practices are, I guarantee you that their brokerages know it too.
4. Bring in the mystery shoppers. I will happily pay more fees to RECO so that they can hire people to pose as Buyers and Sellers and weed out the unethical crap that happens in the industry. If shady REALTORS knew that the person they were talking to could potentially be from RECO, we’d see behaviour change in short order. Or at a minimum, we could expose and fine them, or better yet, revoke their licenses.
5. Is it time for a Code of Ethics 2.0? All REALTORS are bound by a Code of Ethics, REBBA (2002). I’d love to see agents bind together and agree: no more double-ending. Every Buyer and every Seller gets their own agent. The law doesn’t need to change for REALTORS to take a stand on that.  Who among us is ready to sign that pledge? I know I am.

I suspect that tonight’s Marketplace story will get a lot of attention, and I sincerely hope it results in positive change. We’re all quick to bash the real estate industry…but are we equally prepared to put in the effort to bring about change?

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Deep Dive: What Multiple Representation Means

In short, here’s what you need to know:

• Buyers and Sellers are technically represented by a brokerage, not an individual Salesperson
• A brokerage can legally represent a Buyer, a Seller or both people in the same transaction. In other words:
  • Salesperson A who works at RE/MAX can list a property at 123 Main Street for sale and represent the Seller
  • Salesperson B who also works at RE/MAX can represent the Buyer who buys the property at 123 Main Street
  • RE/MAX technically represents both the Buyer and Seller
• A Salesperson can represent a Buyer, a Seller or both people in the same transaction. They can also represent multiple Buyers for the same property. 
  • Salesperson A lists the property at 123 Main Street for sale; they also represent the Buyer for that property.
  • Salesperson A represents Buyer 1 and Buyer 2 who are both making offers on the same property.

The Real Estate Council of Ontario (in charge of protecting consumers) has a set of rules that must be followed when representing Buyers or Sellers, dictating the Salesperson’s obligations around fairness, honesty, integrity, confidentiality, disclosure and competent service.

They also have a set of rules that must be followed by the Salesperson/Brokerage when they represent both parties. They must:

• Confirm in writing that all parties understand and consent to the agent representing both parties
• Do what is best for both Buyer and Seller
• Not reveal confidential information to either side

It’s not surprising that this gets messy:

• Most people don’t understand multiple representation. Heck, I would guess a lot of agents couldn’t tell you what it means.
• Are best interests really being protected? How do you represent the best interests of one side when that usually means sacrificing something for the other?
• Motivations are suspect  How do you ensure that a Salesperson is really doing the right thing for the client when they stand to make two times the commission if they represent both the Buyer and the Seller?
• It all gets especially messy when there are multiple buyers wanting to buy the same house in a bidding war. Bidding wars in Ontario are blind, meaning nobody knows what any of the other offers are. Except for, of course, the Listing Agent. So if the Listing Agent is also representing one of the Buyers, it stands to reason that some unethical agents will use that knowledge to make sure that their own Buyer wins the bidding war (and thus earning twice the commission).