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Archive for June, 2006

Let’s go get sued . . .

In a comment below, Jon offers this:

What are you talking about? Lawsuits against emongoo, zillow and refin? None of them are doing anything wrong…sorry to say. I looked at emongoo, zillow and redfins sites and I don’t see anywhere where they say they give legal advice.

First, I only cited legal advice with respect to emongoo.com – and we’ll come back to that. We should exclude zillow.com from this discussion, because, for now at least, they are doing nothing but running a look-up service with no legal consequences that I know of.

But redfin.com has considerable legal exposure, as does buysiderealty.com and anyone emulating the general redfin.com business model. The first and most obvious problem is the legal doctrine known as procuring cause. These sites are a procuring cause lawsuit – or perhaps a procuring cause class action suit – waiting to happen. They go out of their way to flout the rights of cooperating brokers, openly advising buyers to see homes at open houses or by contacting the listing broker directly. The NAR Code of Ethics forbids brokers from letting a procuring cause dispute impede a transaction, but there is nothing to prevent the aggrieved broker from pursuing damages after the fact. I’m not saying this will happen, but their noses are wide open.

(As a side note, the way I read buysiderealty.com’s web site, their real business is loan origination. My guess is that the real estate brokerage side of the business will be one or more separate operating entities, with the broker being hung out to dry in the event of a lawsuit.)

The entire discount sector of the real estate industry – on-line and brick ‘n’ mortar – faces huge risks on the subject of agency law. It is difficult to argue that you did everything possible to advance your client’s interests when you did everything possible to avoid knowing what your client’s interests actually are. From the outside, you might want to shout caveat emptor! But the law of agency in real estate is by now much closer to caveat venditor.

There is actually added risk for the discounters, as opposed to a more traditional business model. Since the net commission to the practitioner is so low, it seems reasonable to suppose that only the least-talented licensees will work for these outfits. With added volume as the only path to income, we get a frazzled turkey, rushed and incompetent. And deep, deep pockets full of venture capital. Who believes sharks can’t smell blood in the water?

If you click here, you will see emongoo.com promising legal advice. Presumably they disclaim agency in the fine print, but here is the actual law of agency as interpreted by real judges in real courts: If I think you’re my agent, then you’re my agent. Most of these web sites seem to me to be fools rushing in where angels fear to tread.

Also Realtors are not attorneys and if they give legal advice they are in the same danger as the guy off the street.

Precisely! Depending on the jurisdiction, real estate licensees are authorized by legislation to do a small subset of the things an attorney can do, and they are held to strict standards of accountability to make sure they are exercising due diligence and care in the performance of their duties. When they err, they risk lawsuits that can wipe them out.

Companies like redfin.com and buysiderealty.com are engaged in real estate brokerage, and they face the same litigation risks as any other real estate broker. The folks as emongoo.com might want to argue that they are an advertising medium, like the newspaper’s classified section or craigslist.com. But by offering to assist in the work incident to the transfer of real property – and taking compensation for it – I think they stand an excellent chance of being regarded by the courts as being real estate practitioners, engaged in the business of real estate brokerage.

Does this mean they will necessarily be bled white by lawsuits? No. But they really are asking for it…

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    Two out of three ain’t bad when purchasing a home

    Good income, good credit and a sizable down payment. That’s what it takes to buy a house. Everyone knows that.

    But here’s some good news: Two out of three ain’t bad.

    The Republic‘s version is here. Here is a more permanent link.

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    Mapping a full-service real estate strategy…

    The map above is a tiny slice of my week. My clients are buying the home that sits on lot 387 of that plat map. Their insurance underwriter deemed it vital that they know where the fire hydrants are with respect to that house. This is a job that can be delegated, but it is not a job that can be easily disintermediated. In anticipation of sputtering expostulations: I made another trip to that house to measure the exact dimensions of the cavities of space into which the appliances will be installed. These are but two of the dozens of little things that go into delivering the whole product…

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    Ten trillion times a tiny loss is a huge loss . . .

    I have been devoting a lot of my time to some ascendant ideas in Real Estate loosely based on the Web 2.0 model of internet commerce. The ideas are ascendant, but they’re not necessarily good. I weigh in on the skeptical side for now, but I’m watching all this with interest. I’ve been wrong before.

    Of all the fascinating things I’ve seen, the most impressive was the painstaking deconstruction of the redfin.com numbers. We can scale those results any way we want and they still stink. Any brick ‘n’ mortar accountant could do the math. As with Web 1.0, it doesn’t matter how many different ways you shout down the numerical analysis, ten trillion times a tiny loss is a huge loss.

    So: One procuring cause lawsuit–and there are apt to be dozens… One negligence lawsuit–and the business model is proudly based on negligence… Emongoo.com is actually in worse shape, since they’re taking quite a bit less money but openly promising legal advice. The aggregators and sites like zillow.com are probably safe–though possibly not profitable. But sites attempting anything like agency have the same legal exposure as B&M brokers, but with a lot less money to cover the losses.

    It’s an interesting problem…

    Here’s another one:

    The real estate industry has always been about seller representation. This was true historically, but it’s still a huge source of lawsuits among the old-timers. The idea of dual-agency–itself a huge fount of lawsuits–is an attempt to cling to double-commissions in the age of buyer agency.

    But here is where we’re headed, at least for now: In the world of redfin.com, emongoo.com, HelpUSell, etc., buyers will have full representation, but many sellers will be essentially unrepresented.

    The immediate knee-jerk answer to this would be to make buyers pay for their own representation, but, of course, now more than ever buyers arrive at the closing table with no cash at all. Good income, good credit, but little or no cash.

    So why should sellers pay for the buyer’s agent? For the same reason they always have, agency law be damned: For the introduction.

    So how does this shake out?

    On the one hand, sellers might think they can hold their own hands. I think they’re mistaken, and I think the promises emongoo.com is making are a very funny flavor of lawyer-bait.

    But on the other hand, buyers know they need help, know they want it, and know they can’t pay for it.

    So: What next?

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    People power…

    The phenomenon Chris Anderson writes about in this article from Wired Magazine is a secondary consequence of outrageous abundance. In a subsistence culture, the work of the mind is precious and literally unsupportable. We are by now so rich that millions of people can create intellectual resources that they give away, in turn to be remarketed by others. This may or may not work in the long run for companies tapping into and amplifying open-source-like works of the mind. Consider that aggregator software levels the playing field for small players. The interesting thing is what it will do to companies whose entire business model is based on scarcity and hoarding. If almost-as-good is free or nearly free, what is the market value of slightly-better?

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