Conflict of Interest in Negotiation?

Question

Hey guys, I have a lengthy scenario and a few unique questions so please bare with me.

I am getting my real estate license right now to hopefully broker some deals and make some money to later put into starting a real estate investment company. Let's say two other partners and I start an LLC to invest in real estate and we get a homeowner to come in and do a short sale. After the homeowner comes in he says lets do a short sale so we sign a purchase agreement, I get him to sign a document allowing the LLC to negotiate on behalf of him with the mortgage company, I get him to sign a document allowing us to list the property on the mls for resale(during negotiations), and also I get him to sign an agent contract saying I am his real estate agent during this transaction. So the next day I or one of my other partners(on behalf of the LLC) contact the bank to start negotiations.

Is there a problem here? Would it make a difference if it was a partner talking to the bank instead of me (for LLC)? Conflict of interest? Can I represent the homeowner and My company who is trying to buy the house? Also say we did get it and resell it, do i just pay my broker out of my commision or of the actual profit my LLC makes?

Sorry if this doesn't make any sense. Any help would be appreciated.

Thanks, Daniel

J Scott · Answer

As a licensed agent, you will be obligated to submit ALL written offers to your Seller, even if the property is already under contract (or under any other circumstances).

If you represent the Seller, your fiduciary to him will be to get him the most money possible for his property. So, when you receive that higher/better offer, you will be obligated to tell the Seller that he should submit it to the bank so that the bank can weigh the two offers against each other.

Not to submit the offer to the Seller, and not to recommend to the Seller that he notify the bank of the higher offer would violate your fiduciary duty to your client.

Jon Holdman · Answer

Is your llc going to hire a separate buyers agent? Will the offer state you are acting as a transaction broker? If the offer says youre acting as the listing agent when in fact you're also the buyer, this sure seems like misrepresentation to me.

What does your broker say about this?

Maryann L. · Answer

I think as long as you disclose to the lender that you are the listing agent AND buyer, you should not have a problem. I would NOT represent the homeowner. You should act as a 'facilitator' on the listing agreement.

That said, I think it's a MUCH smoother and cleaner transaction if you have someone else negotiate or list. Even if it's someone in your brokerage. I think if you pick one side to be on instead of two you don't run the "conflict of interest" or "arms length transaction risk"

You can only submit one contract at a time to the lender, so anything that comes in after the fact shouldn't be submitted to the lender unless you are absolutely certain you cannot get your contract approved for an agreeable price.

AND OF COURSE you need to disclose you are flipping the property.

There are a lot of variables here. BOA does not let listing agents purchase property..it kicks you right out of the system. They are also the second biggest servicer in the country.

Daniel Bradshaw · Answer

Thanks to everybody that replied. As I implied before, this is a hypothetical situation. I will keep all of this in mind as I continue in my real estate career.

J Scott, I went to your 123flip website. Really kool, thats what I am hoping to start out doing when I get my R.E. license.

Joel Owens · Answer

Daniel anytime I work with investors on my commercial deals I analyze the "time invested",their "money",and their "plan".

If they are going after a long shot I don't work with them.

Too many things to go wrong to take a chance when I have cash investors that are buy and hold.Vanilla deals that are easy to close and offer me the least amount of liability in a transaction.

Remember you are getting the license.These other people will want to use your license for financial gain many times at all costs.

I do close deals and use the money to buy other investments for myself but it is all above board.I simply state I do not represent the seller and I am the buyer.Then I submit the offer to the bank after getting ATR signed and on file.

Some banks will want it listed and others won't care and of they like the offer will go for it.All licensed activities will fall under your broker.They are liable so they create the rules not your friends in the LLC with a strategy they want to employ.

Good Luck

Daniel Bradshaw · Answer

Hey J Scott, Thanks for the reply.

Yes and Yes, I will market to the best extent possible and will do showings, mainly because I am trying to find a second buyer after me.

Correct me if I am wrong, I'm probably not as educated in these matter as you, but why would I submit another offer to the bank even if its better than mine? If the seller had already signed a purchase agreement or option contract with my LLC wouldnt the owner have to sell to me? Also I'm not representing the bank so I wouldn't think I would have to submit any other offer other than mine.

I know of a few investment companies in my area and this is the way they find their second buyers, and their attorneys say it is totally legal. The only issue I thought would be was if it was me representing both the seller and my LLC.

Feel free to add any other comments.

Rusty Thompson · Answer

If I was you I would do the same thing. Determine the price you are willing to pay, then if it reaches that point make a offer. If not don't. This works in your favor two fold. It shows that you did your best to market the property ( as you should be) & it makes sure that your buying property at a good investment price. Though I would be surprised if you score any good deals this way. Short sales rarely reaches a point were a investor would be interested in buying it here.

Rusty Thompson · Answer

In my area the listing agent pulls comps. Lists the property. Then lowers the asking price until they get a offer. They then submit that one offer to the bank with documentation showing there efforts to.market the property as proof of the "fair market value" of the property. This is a win/ win in my book. As the bank gets the best price they could & it reduces the complexity in the process.

J Scott · Answer

You said you're going to list it on the MLS...

Will you market to the best extent possible (great pictures, great marketing copy, etc)? Will you do showings to other potential buyers? What if you get an offer higher than your own...will you submit it to the bank?

Rusty Thompson · Answer

I have read about this scenario before and from what I read it can be construed as such. The problem is, its hard to prove you were " working in the best intrests of the seller.

Conflict of Interest in Negotiation?

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