Complaints about price in an imperfect market

NY Times:

Marty Ummel feels she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.

What makes Ms. Ummel different is that she is suing her agent, saying it was all his fault.

Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.

Real estate lawyers and brokers say the case, which goes to trial in North County Superior Court on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from the agents who found them a home and arranged its purchase.

“When your house appreciates $100,000 in the first six months, you’re not quite as concerned that maybe the valuation was $25,000 or $50,000 off,” said Clifford Horner of the law firm Horner & Singer. “But when your house goes down, you ask: ‘Who might have led me astray here?’ ”

Agents representing buyers rarely had the opportunity to make mistakes during the last real estate boom, in the late 1980s, because the job hardly existed then. For decades, residential transactions almost always involved brokers who, whatever assistance they gave the buyer, legally represented only the seller.

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The defendant in the Ummel case is Mike Little, a veteran agent with ReMax Associates. He will argue that Marty Ummel, who brought the case with her husband, Vernon, is trying to shift the blame for the couple’s own failures of research and due diligence.

“They simply didn’t do what is expected of a knowledgeable, sophisticated buyer, and are now looking for someone other than themselves to take responsibility,” Roger Holtsclaw, an agent who was hired by Mr. Little as an expert witness, said in a court deposition.

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It is clear the Ummels did not rush into a decision: They dismissed one agent and canceled deals on two houses before Mr. Little found them a prospect on a cul-de-sac in a five-year-old luxury development. A deal was struck with the owner, herself a real estate agent, for $1.2 million.

Mr. Little also worked as a mortgage broker. The Ummels say he encouraged them to get their loan through him. Mr. Little ordered an appraisal of the house but did not respond to the couple’s requests to see it, the suit charges.

A few days after the couple moved in, in August 2005, they got a flier on their door from another realty agent. It showed a house up the street had just sold for $105,000 less than theirs, even though it was the same size.

Then they finally got their appraisal, which told them the house up the street was not only cheaper but had a pool. Another flier in early October mentioned a house down the street that was the same size and closed the same day as the Ummels’ but went for $175,000 less.

The Ummels accuse Mr. Little not only of withholding information but of exaggerating the virtues of their house to push them into a deal.

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Both sides have hired appraisers who have combed the surrounding development. Mr. Little’s appraiser concluded the four-bedroom, 3.5-bath house was worth $1,150,000 to $1.2 million in the summer of 2005. The Ummels’ appraiser said it was worth $1,050,000.

The outlines of Mr. Little’s defense can be seen in his lawyer’s lengthy deposition of the Ummels. Even in a relatively new development, Mr. Bright said, no two houses and no two deals can be seen as identical. For instance, a pool does not necessarily add value because “some buyers like it, some don’t.”

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Real estate is not like the stock market. In stocks trades take place on an exchange which is technically a perfect market because everyone knows what the value is at the given time of purchases. While some might argue about how perfect it is in a falling market, the market sets the price and buyers and sellers decide if they will do trades at that price. Real Estate is different as the testimony on the pool suggest. I had a house with a hot tub, where the buyer demanded that I remove the tub before the purchase closed. Pools add to the maintenance and utility cost of a home.

I do question the Times suggestion that this is the first down market where both purchasers and sellers have agents. I had an agent when I bought my first house in 1971 and he split the commission with the sellers agent which is a standard practice in Texas. I gave him the parameters of price and location and size and he found several choices for me to select from.

What is unusual about the transaction in this case is that the appraisal was withheld. That should be a red flag. Normally appraisals are demanded by the mortgage company. It is strange that it was not demanded by the lender as a condition of closing. California is a little weird on appraisals because Prop 13 does not permit the taxing authorities to mark to market on an annual basis. In Texas a buyer can look at the annual tax appraisal of the house as well as comparable sales. It is a standard practice. Still some people will value a piece of property more than someone else and professional real estate investors make money off the differences.

The fact that the real estate broker was also the mortgage broker was a clear conflict of interest--with the lender. Brokers have always been the business of finding financing to get the deal closed, but the lender needs someone looking out for his interest int he transaction. This may be one of the reasons why so many bad loans were made.