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Conflict of Interest
Caveat Emptor, Latin for “let the buyer beware”. A phrase that dates back thousands of years and something we’ve seen many times in print.
We all know that we should live by this phrase but we rarely do. We have such busy schedules that we look for any way to make our lives easier. Shortcuts no longer become something to avoid, but a welcome path to problem solving.
One thing we need to keep in mind is whenever shortcuts are taken, we expose ourselves to potential risks. Knowingly taking a risk is fine. Everything we do has an inherit risk associated with it. It’s when we blindly expose ourselves to risk that we can get into trouble.
In purchasing a home you will be dealing with many different professionals. Some are working for you, some for the seller and some for the bank. You need to keep all the players identified and keep track where each person’s allegiance lies.
In the early 70’s, the federal government recognized that consumers could be overpaying for services in the home financing process when industry participants provided multiple services. A real estate broker, who represents the seller, also arranged financing for the buyer. An attorney representing the seller, who also arranged for the home inspection for the buyer are just two examples. The government also discovered different service providers were paying referral fees for business. Since these practices had the potential for abuse and/or higher costs to the consumer, the Real Estate Settlement Procedures Act (RESPA) was enacted.
RESPA, in its original form, set clear lines defining what service each industry provider could do for a fee. Real estate brokers were compensated for arranging the sale. Title companies could be compensated only for title work, etc. As time progressed, the concept of bundling services developed in the marketplace. The theory being that one source, offering multiple services, could deliver those combined services at a reduced cost. That would be cheaper to the consumer than going to a different place for each service. Taking this one step further, some companies have been working towards a one-stop shopping approach, providing all mortgage related services in one place.
This would provide convenience to the consumer, but at what risk. Before an applicant decides to use one provider for multiple, or all services, he should recognize the risks involved. The risks can then be weighted against any cost benefit. As was pointed out earlier, there are many people involved in a mortgage transaction. Each person has their own allegiance, and not all of them to the applicant.
If you are buying a house through a real estate broker, remember the broker is the agent of the seller. (Unless you are using a buyer’s broker, then he is working for, and being paid by you.) The home inspector is working for you, but if he is being provided through the real estate broker, whose interests is he looking out for? Is it to you for the one job you’ve given him or the flow of work coming from the broker? Could this relationship impact the quality of the inspection?
The mortgage broker is supposed to be working for you. If the real estate broker and the mortgage broker are the same person, where does the allegiance lie? Is the closing of this sale more important than your ability to make the payments on the mortgage?
In most cases, a mortgage is the largest amount of money you will ever borrower. It is secured by your largest asset, your home. Think twice about the risks involved in taking a shortcut and trying to save a few dollars.
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