Dad always warned me that if something seemed too good to be true, it probably wasn’t true.
It is not unusual for a listing broker to see the “upside” or intrinsic value of a listed property, even if the market doesn’t see it, even if no buyer offers a price that is acceptable to your owner. That stands to reason. Brokers are, by nature, optimists;why else would they choose this profession? So, when your listing hasn’t sold, and you can envision that with a little improvement, some energetic marketing and leasing, the value is there, it is natural to think about making an offer to buy that listed property from your owner client. Surely, you surmise, your lawyer can craft the appropriate protective language in the Purchase and Sale Agreement (PSA), where the owner acknowledges disclosure of the buyer’s licensed status; the owner acknowledges the broker’s agency relationship to the owner; the owner acknowledges that broker has made best efforts to market the property; the owner acknowledges that broker’s intent to buy the property is for investment, improvement, potential leasing, potential resale…the list goes on. I have been asked to craft such language more than once. In each case I have offered the same advice to my client: “Please, do NOT buy this property.” Here’s why:
First, that owner who sold the property to his broker with a sigh of relief might just suffer some seller remorse when the broker improves, leases, and sells the property for a profit. Why didn’t the broker do that for me? Why didn’t the broker inform me that this profitable path was available to me? Never mind what I agreed, never mind that I signed a contract that acknowledged these possibilities. That broker was a fiduciary to me; how could this happen?
The last question was asked of me TWICE this week alone: first when a well-meaning broker client asked my advice before proceeding with the acquisition. I counseled him to avoid the temptation. I warned him that nothing good happens when a broker buys his or her own listing. The second time this issue arose (this week alone) was in a CE class I was teaching, when a broker asked if it was wise to invest with the buyer of his listed property, and another broker in the same class pointed out that he had done so recently, with great success, and no lawsuit (yet). I chose not to embarrass my students, suggesting that perhaps we take this conversation off-line to preserve attorney-client privilege, and so that, in a more private setting, I might save this broker from what could be a tragic mistake.
Courts and juries don’t hold brokers in high esteem, and if they are to judge a broker’s intent, integrity, and good faith, there is the risk that your judge and jury might just not believe that you “did the right thing.” A few brief moments of research on Illinois case law brought me several cases where a broker’s investments were deemed self-dealing, a breach of the broker’s fiduciary duties to his client, and as a result, punishable by a civil verdict of liability to the aggrieved seller. In fact, Illinois Regulation 1450.820 explains it well: A broker may not serve as a dual agent in a transaction where he is a principal. The reasoning behind the rule is that it is impossible to serve as an unbiased dual agent when one of the parties is the broker, even with his co-investors. That the conduct is prohibited by regulation won’t help the broker in court either, when seller remorse sets in and when the seller and former client realizes that someone else made money on “his” property, when he could have-when that someone else had fiduciary duties to him.
In Letsos v. Century 21-New West Realty, 285 Ill App. 3d 1056 (1st Dist., 1996) the appellate court reversed summary judgment in favor of the broker and his firm on the following facts. The broker contracted to buy the listed property after the 18 month term of the sale listing expired. After putting the property under contract, the broker found a purchaser willing to pay a higher price. The broker resold the listed property less than three months after buying it from his client, with a sale a price of 22% more than its acquisition price. The owner, upon learning of the resale, sued his broker for actual and punitive damages. The appellate court opined that the mere expiration of the listing term may not have terminated the owner-broker relationship, and that the broker had a duty to disclose the new and higher offer on the property.
The stigma of self-dealing; the sad fact that a broker made money owning and flipping a property after he failed to sell it for his client; the aggrieved client to whom a fiduciary duty was owed…these are facts that the best disclaimer and contractual language may not overcome. Why risk it?
Brokers, you have SO much to lose if you go down this path just because there was a profit to be made. If it is deemed that you made that profit at your client’s expense, despite good intentions and clear disclosure, you face liability and a potential disciplinary action. Leave that opportunity for another buyer. Stay in your broker and fiduciary lane. You will be glad you did.