December is upon us and the Holiday Season has begun in earnest. From our agency to your offices and homes, we wish you all the very best of blessings of the Season and a prosperous New Year in 2020. At TREC & TALCB we are celebrating the selection of our next Executive Director and Commissioner who will take on those responsibilities effective January 1st. Welcome to Chelsea Buchholtz, our current TREC General Counsel! The rest of the experienced executive team including Tony Slagle and Kristen Worman will remain in their roles and I will actively support this transition through the end of March. As the agency launches its next 5-year strategic planning process early in 2020, this overlap will be very helpful.
Continuing with the theme of my column from last month “What Does the Future Hold for the Agency?”, I’d like to explore a bit further the new challenges we face, both in general for the real estate industry and its leading professions, and specifically for the real estate related regulatory agencies. These bodies have the difficult task of setting criteria for certain key players to enter the field and vital boundaries for operating within it. This requires the agencies to closely monitor developments in these important transactional markets and assess any threats to their continuing functionality and overall health.
When considering public policy options, regulatory agencies are typically charged with maintaining an appropriate balance between protecting vulnerable consumers while not hampering market innovation. On the one hand, it is vital to preserve the legitimate expectations of consumers who engage various professionals to assist them in navigating the often very complex details of major real estate investment transactions. On the other hand, regulation of occupational licensing should promote general economic welfare by establishing rational standards with predictable enforcement of requirements. Even if the law creating the regulatory agency does not specifically mention these two goals, there is always a balance inferred – inadequate or ineffective regulation will frustrate the public’s trust in its government, and bureaucratic requirements without a clear or rational basis will constrain market innovation. Both extremes can have negative impacts on the healthy development and maintenance of orderly markets.
Some rules may appear to assume an “average” consumer is incapable of determining and deciding for themselves which options or outcomes are in their best interest without professional assistance. We might rightly be skeptical of a requirement that goes beyond the education of a consumer and acts to constrain that person’s choice. Does the rule reflect the right balance between protecting consumers from being taken advantage of by an unscrupulous “advisor” and limiting their adequately informed alternatives? Laws and rules should be written to effectively safeguard average consumers in typical situations, such as requiring disclosures of technical, risky or non-obvious matters. Mandating matters beyond disclosure can often stray into a reflection of an unwanted “nanny” state.
Ethics rules may appear to assume that a real estate license holder is not inclined to suggest actions needed to protect the best interests of their client if it might reduce the fee the license holder would receive. We know that a typical license holder must provide advice that is in their client’s best interest, and will do so even if it means a lesser fee to the agent. One reason this is common is that a personal service business is most successfully built upon client referrals and testimonials. It is almost axiomatic that what is in their client’s best interest is most often what is also in the agent’s best interest. Ethical requirements for the profession should always reinforce desirable behaviors, and then also provide tools needed to blunt the manipulations of any who would take advantage of the most vulnerable. Disclosure requirements serve this latter purpose very effectively.
The inherent tension between these contrasting but fully justifiable objectives (maximum freedom with adequate safeguards) requires agencies to develop vital skills needed to effectively manage this balance while administering sound public policy. We must recognize that the objectively neutral tendencies of unfettered capitalism are often attractively marketed as maximum freedoms, and these should always be carefully balanced by the risk of harm to those somewhat less informed or savvy. On the other hand, we should check any proposed balance against the understandably compassionate impulse to provide equal outcomes, rather than simply try to guarantee equal opportunities. This is the constant challenge for public policy makers and the professional staff who must implement their guidance.
The proverbial pendulum tends to swing in broad cycles between a trend of removing “barriers” to let the market innovate, and the reactive over-regulation that attempts to prevent a repeat of the mistakes that were deemed responsible for a prior market malfunction. The problem of course is that our crystal ball – whether peering backward or forward - is never so clear that the proposed “expert” remedies offered for causes of past dysfunction (…if we would have done...) can be applied to markets that are developing in reaction to perceived new opportunities. Every proposal shifts the ground on which we stand. To paraphrase the Greek philosopher Heraclitus: we can never step in the same river twice.
This realization is neither a reason to therefore do nothing, nor an exasperated admission that all efforts are necessarily futile; in fact- far from either. Our exploration and discussion should empower us to reach practical consensus wherever possible - and legitimate compromise whenever necessary – both as close to the center-point of that balance as we can manage. But how can we do this in practice?
Let me suggest that a positive starting place would be to invite stakeholders to engage in open dialogue around some agreed principles. Fearlessly inquire about new business practices as soon as they appear in the marketplace to determine if they respect the basic foundation of these principles. For example, does the new practice retain the clarity of fiduciary responsibilities that an agent owes to their client? Is the role of agent as a “trusted advisor” to their client reinforced by the practice or is the role clouded by an appearance of divided loyalty or potentially misplaced interests? These are highly relevant questions.
So what are some agreed upon principles that might fruitfully guide our discussion of real estate market practice developments? Surely basic considerations of agency law and freedom of contract should offer two common touchstones upon which most market participants and business practitioners could agree. In the area of valuation, we can agree that real estate appraisals should be independent and free of bias.
It is in everyone’s interest to know in what role a person is acting with respect to a proposed real estate transaction – are you a party/principal, or an agent for a principal, and if an agent, which principal do you represent? If acting as an “intermediary”, are the principals involved clear on how this modifies your duties to them? If an agent presents an offer from a buyer who is represented by or connected to the brokerage firm either contractually or by some common ownership interest, how does this affect the duties the agent owes to the seller who is their principal? Confusion around agency roles and legitimate expectations are being challenged by new business practices and investment models that buyers and sellers rely on their trusted advisors to explain clearly and fully. Too often this is not happening well.
Professional brokers and their sponsored sales agents are struggling to adopt new technologies and related business innovations at an ever more rapid pace, and to tailor responses to meet their clients’ expectations in this shifting market. Technology challenges appraisers to rethink which methods are essential to rendering a credible opinion of value. Attempting to slow down the pace of change is never a successful long-term strategy. But insisting that business practices reflect the letter of the law and respect the spirit of key underlying principles is a request that should be common to all stakeholders.