Is the real estate industry improving?
You trust them to help you buy, sell or rent possibly the most valuable thing you own – your house. But complaints about real estate agents keep coming. Stronger deterrents may be needed to clean up the industry.
When real estate agent Bruce England sold his own home eight years ago, he told the buyers he wasn’t aware of any weather-tightness issues. That was despite having a report that flagged problematic moisture readings and knowing that his neighbour, whose house was built as part of the same development, was recladding his leaky home.
The new owners of Mr England’s house, faced with repair costs of around $400,000, opted to sell the home to a builder for $230,000 less than they paid. They were later successful in taking the agent and the Auckland firm he worked for, Barfoot and Thompson, to court. However, they didn’t receive all of the compensation they were awarded because the agent had declared bankruptcy.
Mr England’s case also ended up before a Real Estate Agents Authority (REAA) complaints committee, one of 1084 complaints that have been heard over the past three years. Verdicts of either unsatisfactory conduct or misconduct have been handed down in 442 cases. Mr England’s behaviour was ruled to be misconduct. He continues to work for Barfoot and Thompson, at their Beach Haven branch.
Real estate agents remain one of the least respected professions, according to UMR’s annual Mood of the Nation Survey. Every year since real estate agents have been included in the survey, they’ve ranked among the bottom four along with politicians, sharebrokers and investment bankers.
Public dissatisfaction with real estate agents was one of the driving forces behind the major reforms of the industry that were introduced in 2008. These reforms made it mandatory for agents to be licensed, which means they're legally required to comply with prescribed rules relating to their conduct and the way they care for clients.
The reforms had a clear purpose – to protect the interests of consumers and to promote public confidence in the performance of real estate agents. The Real Estate Agents Authority was established to run the licencing regime and respond to complaints against agents.
The professional-conduct and client-care rules say agents have a “fiduciary obligation” to their clients who pay their commission. That means sellers can expect agents to have the highest possible standards of honesty and to act in ways that deserve the absolute trust placed in them. Agents have to act in the best interests of their clients. Agents also have general obligations to both buyers and sellers – to not withhold information, to not mislead and to act in good faith. Nor can agents put them under “undue or unfair” pressure.
The conduct and client-care rules are backed by a multi-level complaints system administered by the REAA. Anyone with a complaint about an agent can make a complaint for free to the REAA. This is not an alternative to complaining to the agent directly, you should do both.
Over the past three years, the REAA has received 2204 complaints. The majority were made by buyers and sellers (there was an even split between them). Other agents and potential buyers also made complaints. There's been a consistent pattern to the types of complaints –the most common each year have been about incompetency or negligence, followed by misleading behaviour and non-disclosure.
Complaints are initially processed by REAA staff. Of the 2204 complaints from the last three years, 51 percent were resolved directly by the REAA. The remaining 49 percent – 1084 complaints – were referred for assessment by an independent Complaints Assessment Committee (CAC).
To serve on the CACs, the REAA has a pool of 20 people with the right experience and knowledge of law, the real estate industry and consumer affairs. Each CAC has three members – and at least one must be a lawyer with seven years’ or more experience.
If a CAC upholds a complaint, it can rule the agent was guilty of unsatisfactory conduct. CACs can also impose fines and award limited compensation. Where a CAC believes the case is more serious and relates to misconduct, it will lay a formal charge of misconduct. These cases are forwarded to the Real Estate Agents Disciplinary Tribunal, which is appointed by the Ministry of Justice. Any appeals against a CAC ruling are also heard by the Tribunal.
If the Disciplinary Tribunal finds fault with an agent, it has the option of ruling their actions as either unsatisfactory conduct or misconduct. There is an important difference between the two with “misconduct” being a more serious charge (see “What’s in a word”). The Tribunal can impose fines, award compensation, suspend an agent’s licence or impose a lifetime ban.
Any complaint upheld as either unsatisfactory conduct or misconduct is reported in detail on the REAA website. Of the 1084 cases heard by a CAC, 392 were eventually found to be cases of unsatisfactory conduct and 50 were found to be misconduct.
Emeritus Professor of Property Studies at Massey University Bob Hargreaves says the complaints process administered by the REAA is a significant step forward. In the past, complaints against agents were investigated by the Real Estate Institute of New Zealand (REINZ), a member-based industry group, and consumers were understandably sceptical about the objectivity of the process.
There are around 13,300 agents with active licences. On average they generate 735 complaints a year of which, based on past experience, 147 are upheld as either unsatisfactory conduct or misconduct. That’s a recorded “failure” rate of around 1 percent. However, formal complaints are usually the tip of the iceberg – many people, while dissatisfied, won’t make a complaint. And the incidence of breaches is one thing, the serious consequences of those breaches for clients is another matter.
In a case heard by the Disciplinary Tribunal in 2012, an Auckland agent Rajneel Raj used his associates to purchase houses from his clients at a low price and then on sell them quickly at a high price to buyers he had met as an agent for the sellers. The difference in price on the six properties involved was substantial. All up the agent and his associates pocketed $189,000 in fraudulent transactions. On top of that Mr Raj collected thousands of dollars in commissions.
The new regime does offer far more consumer protection than before. However, there’s room for improvement. Licensed agents aren’t required to have professional-indemnity insurance. If they were required to have insurance, clients who win compensation in court would be paid what they’re owed by the agent’s insurer – and the agent’s personal financial situation would be irrelevant. Had agent Bruce England been covered by insurance, the buyers of his home may have been able to receive compensation in full despite Mr England’s bankrupt status.
Ideally, penalties for bad behaviour should be sufficiently serious to deter others from breaking the rules – and agents who break the rules should pay compensation to those they harmed. So far the new regime seems able to impose penalties easily enough, but compensation for clients hasn’t been so straightforward (see “The Compensation question”).
The CACs can impose fines of up to $10,000 for an individual agent and $20,000 for a firm. The Tribunal’s limits for fines are higher – $15,000 and $30,000 respectively. So far the highest fine for any agent found guilty of misconduct by the Tribunal is $10,000. This is considerably less than the commission for selling an average house. We don’t think it’s enough of a deterrent and would like to see higher fines. Nor do we think a three-year licence suspension is much of a penalty for fraud (see “Suspension of disbelief”).
The Real Estate Agents Act implies clients and customers can expect agents found guilty of unsatisfactory conduct or misconduct to make good the harm they have caused.
The Act states that the Committee (CAC) can “order the licensee …where it is not practicable to rectify the error or omission, to take steps to provide, at his or her or its own expense, relief, in whole or in part, from the consequences of the error or omission”.
However, in 2012 the Act was applied by the High Court and the judge decided CACs have limited authority to award damages to compensate a buyer or seller.
In the 2012 case, the buyers of a property were misled by an agent over where the boundary was. They then had to pay substantial costs for unanticipated earthworks before their intended development could go ahead. The CAC that first heard the case ruled of $25,000 in compendation should be paid. The agent appealed and the appeal was heard by the Disciplinary Tribunal, which upheld the original CAC decision and increased the compensation to $40,000. The agent then appealed to the High Court.
The court ruled that the Act didn't give a CAC the power to award compensatory damages in cases of unsatisfactory conduct. Instead, the Court took the view that a CAC's powers were confined to making agents put right their errors and omissions and provide relief if it wasn't possible to rectify the problem. So if an agent misrepresented whether a chattel was included in the purchase price, then the CAC might order that the agent arrange to buy the chattel for the purchaser or if that wasn’t possible to pay an equivalent amount to the purchaser.
The CACs and the Disciplinary Tribunal have to follow the guidance of the courts – otherwise their rulings could be successfully appealed. Without any other interpretation by a court or changes to the Act, it seems that for the lesser cases of unsatisfactory conduct buyers or sellers who seek financial compensation must resort to a remedy under other laws.
In more serious cases of misconduct, the Disciplinary Tribunal is in safer territory. In the case of defrauding buyers to the tune of $189,000, Rajneel Raj was made to pay compensation of $89,575, alongside a $10,000 fine and $2000 in Tribunal costs. He also lost his licence and received a lifetime ban.
Both the complaints assessment committees (CACs) and the Real Estate Agents Disciplinary Tribunal can rule that an agent’s action was “unsatisfactory conduct”. On the Tribunal can rule it was “misconduct”. What’s the difference between the two?
Misconduct is more serious and means the agent’s action would “reasonably be regarded by agents of good standing, or reasonable members of the public, as disgraceful”.
Unsatisfactory conduct is where the agent’s actions fall “short of the standard that a reasonable member of the public is entitled to expect from a reasonably competent licensee; or … would reasonably be regarded by agents of good standing as being unacceptable”.
How one agent behaved is not what you expect when you hire a real estate agent to help rent out your home.
In 2009, Mr WD Kamau of Ashburton became ill and moved into a residential care facility.
His son Rata, who had power of attorney at the time, used real estate agent Julie McDonald to find a tenant for his father’s house. She found a tenant, but from the beginning she was keen to do more. She wanted the job of selling the house. The family refused repeatedly.
Later the family decided to sell the house and a real estate agent other than Ms McDonald was hired to sell the house. After the house was sold, Ms McDonald provided documents to the family’s law firm which claimed she had sole agency and so was entitled to a share of the commission. She went as far as putting a caveat on the property, which is a form of debt against the property, naming her as a creditor.
The representatives of Mr Kamau complained to the Real Estate Disciplinary Tribunal, which subsequently ruled Ms McDonald had forged the signature on the agency agreement. She was found guilty of misconduct, fined $5000 and had her licence suspended for three years.