Investing in real estate requires generally requires several processes with the help of several professionals. For instance, you may work with a realtor to sell your home or buy a new property. However, it’s important that they have your best interest in mind while helping you achieve your goals. If you work with the wrong person, you may run into a major conflict of interest. If you want to learn more about conflict of interest in real estate and how to avoid it, just keep reading.
Contents of This Article:
- What Is a Conflict of Interest in Real Estate?
- Scenarios That May Cause Conflict of Interest
- How to Avoid Conflict of Interest in Real Estate
- Find a Property Management Team for Your Business
What Is a Conflict of Interest in Real Estate?
Conflict of interest in real estate can occur in several instances. Whether you’re an investor, broker, real estate agent, or property manager in Richmond, it’s crucial to keep your client’s best interests in mind. You can run into a major conflict of interest when you forget your main objective and put your personal interests above others.
Although the personal relationship or benefit may not be illegal, you can run into legal trouble if the conflict of interest is not disclosed to the right parties. As such, keeping your ethical standards and reputation in mind throughout every real estate transaction and relationship is crucial.
Unfortunately, there are times when you may run into a conflict of interest while working with different professionals. Here are a few scenarios to avoid and watch for throughout every real estate transaction.
Scenarios That May Cause Conflict of Interest
Real estate professionals can find themselves in conflict with clients or other professionals in several scenarios. After all, each property manager or real estate agent must keep their client’s best interest in mind before their own. However, you may find yourself in a number of complicated situations that could lead to conflict. Here are a few examples:
- Dual Agencies
- Self-Dealing
- Recommendations for Commissions
- Personal Interest
- Working With Friends or Family
- Favoritism
Dual Agencies
A dual agency represents both a seller and a buyer in a real estate transaction. Additionally, a dual-agency situation may occur when there are two separate real estate agents working for the same brokerage.
Dual agencies are legal in some states as long as all parties are aware and there is no actual perceived conflict of interest. However, it’s difficult to negotiate for both parties in a real estate transaction, as it’s hard to keep everyone’s best interest in mind. As such, dual agencies are generally rare.
Self-Dealing
Another conflict of interest in real estate is self-dealing. Self-dealing occurs when an investor or agent directly benefits from a business outcome or decision. For instance, an example of self-dealing may include a real estate agent purchasing a client’s property and selling it to another client for profit.
Self-dealing is generally illegal, as investors, property managers, and real estate agents have an obligation to put their client’s needs over their own. Additionally, disclosure is key when working in the real estate industry. Otherwise, you could run into legal consequences.
Recommendations for Commissions
If you work with an agent that urges you to work with a direct buyer or certain party so they can make more commissions, it’s a major conflict of interest. If your agent receives commissions from a third party, it’s not only unethical, but it’s also illegal.
The Real Estate Settlement Procedures Act (RESPA) prohibits real estate agents and brokers from receiving commissions in return for a business referral.
Personal Interest
Real estate agents work with investors to buy properties, keeping the buyer’s best interest in mind. However, if your agent has a personal interest in the property, they may put their needs above yours.
For instance, they could influence you not to purchase a certain property. Clearly, this is a major conflict of interest and can result in lawsuits and damages. As such, it’s crucial for agents to disclose if they have a personal interest in any property.
Working With Friends or Family
Business relationships with friends or family have benefits and disadvantages. Whether you hire a family member to work for you or they’re involved in your real estate purchase, it’s crucial to disclose your relationship to the necessary parties.
For instance, if you’re a real estate agent selling a home to a family member, full transparency is required throughout the process. On the other hand, some brokerages prohibit agents from dealing with family or close friends to avoid conflict of interest or favoritism.
Favoritism
Working with friends or family in a business setting could be considered favoritism as it is. So, if you do hire a friend or family member, it’s crucial to ensure they have the necessary skills and treat them like any other employee.
To avoid favoritism and conflict of interest, you’ll want to present the same opportunities to everyone in the workplace. Additionally, transparency is key. So, disclose your relationship with other industry professionals whenever necessary.
How to Avoid Conflict of Interest in Real Estate
Consequences for deliberate favoritism or conflict of interest can majorly affect your reputation as a real estate professional. As such, it’s important to keep your ethical standards high and make sure everyone that you work with does the same. Here are a few ways you can avoid conflict and protect your reputation.
- Be Transparent- Transparency is key in any business situation. So, make sure to submit the right disclosure when working with clients, tenants, or other real estate professionals.
- Educate Yourself- Staying up-to-date and well-versed with state and local laws is crucial for any real estate investor, agent, manager, or professional. As such, it doesn’t hurt to check with legal and financial advisors to ensure you take the necessary steps throughout all transactions.
- Remember Your Obligations- Finally, your main obligation is to keep your client’s best interest in mind, not your own. So, when it comes to accepting gifts, commissions, or incentives, you have to stay firm in your ethical reactions.
Find a Property Management Team for Your Business
One of the best ways for investors to stay compliant and avoid conflict of interest in real estate is by working with a trusted property management team. After all, writing up contracts, hiring vendors, and maintaining properties are important processes with several laws and regulations involved.
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