A recent article at BiggerPockets.com speaks to full disclosure in real estate deals when it isn’t necessarily legally required. The article is written by the owner of a real estate company that locates properties and sells them to real estate investors from around the world. It correctly states that full disclosure is normally legally required of real estate license holders, agents and brokers. However, it isn’t required in many cases when neither of the principals are licensed.
In the purchase of homes and wholesaling them to other investors, this company does a great many transactions annually. The article speaks to reputation in the real estate investment arena, and how it’s important to this company and should be to anyone buying and selling property, licensed or not. The investor buyer in these deals usually never meets this company’s people, the seller, title company personnel, appraiser, property manager to be hired, or others. They’re remote and must trust in the actions and reputation of the people bringing all of this together.
The importance of disclosure in a relationship like this is illustrated through example deals. Here are summaries of two of them:
Working with a buyer who had previously purchased two other properties through this company without problems or mishaps, the buyer returned to make another purchase. This buyer wanted to work with the same lender that had handled previous deals for them. In talking to this repeat buyer, it was learned that the buyer was excited to be making lifestyle changes. He would be leaving his job and starting a business.
The ethics problem here was that the investment company knew that the lender’s pre-approval was based on the stable job with a good salary that this buyer was about to quit. In this case, the buyer was informed that the process was being held up for the buyer to inform the lender of their plans to quit their steady job to see if the lender would still approve the deal for closing. In this true story, the buyer did inform the lender, and the lender decided not to fund the deal. However, the buyer and the lender both expressed approval of the actions of the investment company.
This was a very similar situation with a new buyer, not a previous client. This buyer wanted to purchase two properties with loans. In talking to the buyer the company’s personnel learned that this buyer was also planning to quit their job and travel, using the income from these rental properties for “fun money.” Again, full disclosure was made to the lender, and the deals did not happen.
In this article the author makes it clear that their reputation in ongoing deals with lenders and others was very important, and that they would rather pass on deals if that’s what was required to maintain their reputation.