Conflict of Interest - The Worst Anomaly yet Most Ignored

Conflict of Interest happens when a person tasked to do a main job is in a circumstance wherein his personal interest or other professional interest could possibly run contrary to the main mission. The circumstances could be inherent or acquired.

A conflict of interest is Inherent if the person circumstances are pre-existing, such as personal relationships, prior professional engagement.

A conflict of interest is Acquired if the person just got into a new situation that may conflict his main mission, such as new employers, new contracts, new spouse, new relationships.

Real Estate Brokers are engaged as "Agents" by their clients, therefore they are also covered under the rules of agency and fiduciary trust. The most serious enemy of fiduciary trust is what we call Conflict of Interest, and although it is very common, most clients are not aware of it.

Ideally, the Real Estate Broker as an "Agent" should only have one principal client, must be 100% loyal to his client, and fully focused on accomplishing the mission defined by the client. If a broker works for a real estate developer, he must be 100% loyal to the developer and must avoid selling properties of other developers. If a broker signs up a brokerage agreement with an individual property seller, he must be loyal to that seller-client and never connive with the potential buyers in influencing the pulling down of the price. If the broker is an agent of a buyer, he must show all options to the buyer and always try his best to negotiate the lowest price possible.

However, many brokers rarely close contracts in any given consumption month, and honest earning is like a game of chance. For this reason, brokers tend to waive their loyalty, work on both sides, act like arbiters, negoiators in-between, and set aside the rule on fiduciary trust just to close the contract and earn a living. There is nothing bad in making a living, but it is not fair for clients if one earns out of conflict of interest.

Below are some of the instances of conflict of interest that I can think of.

  • There is conflict of interest if the Listing Agent signs up a Listing Agent Agreement with a property owner, but then later on connive with the prospective buyers to influence the reduction of the original listing price of the property.

  • There is conflict of interest if the Buyer's Agent signs up a Buyer's Agent Agreement with a prospective buyers, but then later on connive with property owners and present the property to the buyer with an overprice.

  • There is conflict of interest if a Listing Agent, who signed-up as in-house agent of a firm or developer, refers a prospective buyer to a property that is not listed in the inventory of the firm or developer.

  • There is conflict of interest if a Buyer's Agent have two simultaneous buyers who are seeking a similar property because he will have to present a "second best" to one of them.

Anna is a Broker who claims to a a Buyer's Agent. Benny is a Client. Client Benny sought the professional services of Broker Anna to help him find a warehouse in Binondo for his soap business. Client Benny’s purchasing budget is P100M and he agreed in writing, through a Buyer's Agent Contract, to give Anna P300T working allowance plus a promise of P700T over and above the budget if she can find and negotiate a purchase of the warehouse. In short, the total contract price of the services of Anna as Buyer's Agent of Cleint Benny is P1M. Anna was given three months to work full-time to find a property, and she was also given P50T allowance to start the first month work.

Broker Anna researched the newspapers, internet, and asked around Binondo to inquire if there is someone who wants to sell a warehouse. After a week, a certain Broker Charlie called Broker Anna telling her that he has a listing of a warehouse. Broker Anna inspects the property and it exactly fits the requirement of Client Benny.

Broker Charlie presented the property at P100M, he has Authority to Sell from the property owner that indicates he has 5% Commission if the property is sold and is willing to share it at 50/50 to any broker who can find a buyer. Broker Anna accepted the proposal of Broker Charlie on a 50/50 sharing of the 5% Commission. In short, if the property closes a sale at P100M, with a 5% commission at stake, Broker Anna would get P2.5M commission and Broker Charlie will also get P2.5M commission.

[Question: is it ethical for Broker Anna to accept the 50/50 proposal of Broker Charlie? I will answer this later when Client Benny came to me for an advice.]

So, after meeting up with Broker Charlie, Broker Anna presented the property to Client Benny with the highest recommendation, complete with explanation. When Client Benny personally inspected the property, he is not convinced that it should cost P100M because it is near a flooded canal that smells very bad. For some reason, Client Benny could not find the "bad smell" information in the research folder of Broker Anna. Client Benny directed Broker Anna to negotiate a 20% discount, meaning he is only willing to pay P80M for it.

Whatever the final price is, Broker Anna will get the P1M Buyer's Agent Fee from Client Benny – so with respect to her interest to the Buyer's Agent Fee, Broker Anna should not care about the final price.

However, Broker Anna became interested on the P2.5M share of the Commission if the property is sold at P100M. If the final price will fall to P80M, her share of the commission would only be P2M, a clear reduction of P500T from P2.5M share that she can get from Broker Charlie.

Even if Broker Anna will deny to death that there is no conflict of interest in her heart, the Client Benny would always think that he can no longer effectively use Broker Anna to represent him in the negotiation because Broker Anna "Acquired" a conflict of interest, as she rationally wants the bigger price so she can get a bigger amount of commission.

[Enter EBA John Petalcorin in the scenario]

Client Benny came to my office for an advice. I would tell him to immediately revoke her contract with Anna for reason of deliberate treachery for having defected to serving the interest of the opposing party of the transaction. Broker Anna's conivance with Broker Charlie on the split commission is a form of Conflict of Interest popularly known as Outside Employment, in which the interests of one job contradict another.

Broker Anna acquired a conflict of interest that has made her unworthy to represent Client Benny. When Broker Anna got the information that Broker Charlie is offering a 50/50 commission sharing agreement for a P100M priced property, she should have instead immediately counter-offered a P2.5M price reduction in favor of Client Benny. But what she did was accept the 50/50 sharing offer of a Listing Agent, and I don't know if she is aware that that offer looks like a "bribe".

In companies, an officer who is in charge of procurement can be terminated if he asks a commission from contractors who provide services for the company. In public service, they call this graft and corruption.

Questions and Answers on Conflict of Interest

QUESTION: Can Broker Anna insert a clause in the Finder’s Fee Contract that says she can get a share of the commission from the Seller Side over and above the finder’s fee?

ANSWER: YES she can if she has the nerve to fool Client Benny in front of his face. It is not unlawful, but it is very unprofessional.

QUESTION: Can Broker Anna and Broker Charlie keep their mouth shut about the 50/50 commission sharing deal?

ANSWER: YES they can, but ethically they SHOULD NOT because it is very unprofessional not to disclose interests such as this to the principal client.

Moral Lesson

Our loyalty to our clients must be 100 percent. We do not spare a little for our own pockets. We, professional Brokers, are not fly-by-night service providers. We put service and loyalty to our clients above personal interest. Greed should not cloud our judgment. Money will come and go. But reputation is a very important element of our personal success. We also cannot sacrifice the integrity of our profession.

If there is anything else important that I forgot to include in this article, or if you experienced a real estate transaction that is anomalous, scam, fraudulent scheme that you want me to document and expose for others to be warned, or if you want to donate to the war chest of real estate consumer rights advocacy, please feel free to email me at JohnPetalcorin@Gmail.Com. If you want to comment about this article, there is a provision for this purpose that you can find below.
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1 comment:

Anonymous said...

This "Conflict of Interest" is prevalent in the practice of real estate brokers. I can relate to it my experience as a new broker in dealing with co-brokers and developers. Thanks a lot for this great article of yours. I with you all the best in this chosen career.