More broker adventures on my continuing search for a new shore home.
I met a new broker who told me he had a developer client who had a great lot under his control, and he could build us the home we wanted on it. “Great,” I said! “Set up a meeting.”
At the meeting, the broker and developer described a transaction structure where my wife and I would buy the land and then contract with the developer to build the home on it. When I asked if the price would be based on the actual cost of the work plus an agreed upon fee/profit for the developer, I was told “no.” The price would be what the developer would sell it for if he bought the land and developed the home as a spec home (less the land cost which we would have already paid for).
I was confused.
I pointed out that under the proposed structure (as opposed to one where we simply purchased a completed home from a builder), we would be the ones carrying the cost of the land and funding all the development costs throughout the project so shouldn’t the interest payments on the construction loan, return on equity, and real estate taxes and other carrying costs be subtracted out of the price?
“Umm, well I suppose that’s fair” they said.
I then pointed out that, as we were wringing all of the typical risk out of the project, wasn’t he more like a general contractor as opposed to a developer? If so, shouldn’t that risk premium be subtracted from the price? Also, because the developer would be freeing up his equity to invest in another home project, wasn’t that a benefit to him that we should share in?
Afterward, I asked the broker if he thought the deal that was presented was a good deal for his big developer client or us? He acknowledged that all of my points/concerns were valid and that the deal was way too rich.
Why then, as our broker, did he present that structure to us? Wasn’t that clearly against our economic interests?
He said his job is to present us with all options and we can decide what is best for us. In essence, it was our job to assess the merits of the deal, and he wasn’t going to weigh in on it unless asked. Being on both sides, he was just facilitating the deal.
On a transaction of this size and importance to us, we need and deserve more than a facilitator, especially given the size of his fee. We need someone to point out when something is unfair, unreasonable and a bad economic outcome.
I question what would have happened if the buyer was not me, but instead, an unsophisticated one. Would the broker have raised my concerns to protect them?
I must suffer from some sort of illness because I’m enjoying this entire home-buying process. I have preached about the dangers of dual agency and conflicts of interest for 25 years. Now, I am seeing it play out in real life as a consumer, and everything I have said is true.
You cannot represent both sides in a transaction if you are going to be an advocate for you client.