Friendship Lost

This post is a further continuation of the "Saga of Sonnypage", an Atlanta area real estate broker who posts on my investment board the Motley FOOL.

Previous Sonnypage highlights include:

Lights Out in Georgia ...on 2006/07/27
Soft Market Debris ....... on 2006/08/02
Is the Fed irrelevant? ...on 2006/08/03
Scared in Atlanta...........on 2006/08/06
Time Keeps on Ticking..on 2006/08/27
Two Anecdotes ..............on 2006/09/15

Friendship Lost
Sonnypage 2007/01/12

The origins of "Friendship Lost" go back to a Sonnypage post made on the Motley FOOL on 2006/12/08. Let's pick up the story from Sonnypage:

My wife and I are Realtors who live and practice real estate north of Atlanta, out in Roswell and Alpharetta and further north into north Georgia. This past week has been the most unusual and unanticipated in our fourteen years in the business.

We have known Stuart and Amanda for many years. It was five years ago that we helped them sell their older home and buy a new home in Alpharetta. Two months ago, Stuart called me to ask if we could help them find and buy a “weekend house” up on Lake Lanier. Did we work up there? I explained that we did and that more and more of our business has been shifting to north Georgia. The baby boomers are looking for places to retire that are warm, beautiful and have lower taxes. North Georgia and western North Carolina have been experiencing quite a boom.

So we started our search. Keep in mind that this would just be a second home for get away weekends in the summer. We quickly learned that $300,000 did not get us much and moved up to the $400,000 range. Even here, we learned that the most important factor was access to “deep water”. So many of the homes we checked out advertised as being “on the water”, but when we got there, what we saw was a mud flat down below the house well down the hill. Water levels on Lake Lanier depend on rainfall plus how much water is released through Buford dam for Atlanta. Having a good lot on deep water is hard to find but more important by far that the actual house itself. Finally, after a long search, we found a decent but smaller home on a fantastic lot. We had great deep water plus a quality dock. Dock permits are limited and only 300 more will be allotted. So, the lesson is that deep water and a dock is very important, the house on the lot much less important. We went under contract and did our inspection. The inspection revealed a foundation crack and the contractor estimate was $5000. The seller offered to pay only $2500 of the cost to repair. That was when our deal came apart. Stuart went on a rant about how the seller was “unethical”. “I don't want this house”. We heard that three times. It seems that Stuart's sister was a Realtor in another state and she had been advising him. “The seller was being unethical”, she told him. We told Stuart that we thought the house was under priced. The seller was doing a “1031 tax exchange”. He had obviously found a higher priced home that he thought was under priced and wanted to buy it. To take advantage of this, he was also, we thought, prepared to sell his current home for less than it was worth. Stuart was having none of it. By now his ego and emotions were firmly in control. He no longer “wanted to deal with the seller”. Stuart won the argument but lost the house. We submitted a termination and release which the seller promptly signed.

I contemplated the turn of events all day in disbelief. Stuart, you let your emotions cost you a great deal. Based on all of the total garbage we had looked at on the lake while searching with Stuart and Amanda, my wife and I were convinced that they had let an incredible bargain get away from them. It took us one day to decide to buy it ourselves. We submitted an offer for $2500 more than Stuart's last offer, but again asking the seller to leave $5000 in escrow for that foundation repair after closing. They accepted. We close January 31st. Only a week ago, I was not even considering buying a second home on the lake, but here I am.

Of course, if the housing doomsayers are correct, if the slide in housing prices is just gathering steam, if a recession in 2007 is looming, then I have just stepped in front of a speeding train. My actions speak for themselves. Housing prices are bottoming and there will be no recession in 2007. More importantly, areas where the baby boomers will be retiring are just in the opening innings of a major boom. We have made an outstanding long term investment. In five years, when our youngest heads off to college, we will sell our Roswell home and retire to Lake Lanier. By then, we can roll our weekend house there into a year around house.

This year has been the slowest year we have ever experienced in real estate with only 14 deals compared to the 26 deals a year we have averaged over the past five years. But 2007 is already off to a strong start. We have already booked three large transactions that will close next year. I anticipate a very good year.

Sonnypage

I replied to the above post on the Motley FOOL with:

What I do not get is that the quibble seemed to be over $2,500.
Let's see ...
The home was in the $400,000 range
A 6% commission would be $24,000 would it not?
I can not figure out who in their right mind, given the slow nature of real estate right now, who would not put up the $2,500 and rush the deal to the table ASAP.

I also do not understand the owner quibbling over that same $2,500 but I would expect that if that is all it was, for the real estate agent to be happy with $21,500 instead of $24,000 or even $15,000 for that matter, just to get a deal done.

This elicited a response from "Inparadise" another real estate agent on my board who replied with....

Wrong. He has not lost his buyer, who will most likely buy something else at a similar price down the road, to which Sonny will be entitled his full commission.

Sonny's chances of selling that particular house may have been small, but his chances of selling another house to his buyer, not at a discount to his commission, large. He did not give up a chunk of commission, but postponed it until his buyer finds another place and in the mean time netted himself an investment that his buyer voluntarily passed up.

To which I replied ...

It MAY happen but "large chance"?
How many chances did Sonny have this year and how many fell thru?
In this case not only did it fall thru but sonny did not budge all for a lousy $2,500. If I was that buyer and I found out that Sonny bought that house, his odds of working with me ever again would be ZERO.

To which Inparadise responded ....

Yup, large chance: They have already done at least two transactions together. There is a large chance that they will do more.

And Sonnypage chimed in with...

We have known Stuart and Amanda many years. They will take the holidays to cool off and most probably call us after the holidays to start looking again. We have not told them what we did but Stuart will just laugh, I assure you. He's a little bit of a hot head which does not help in negotiating anything. Never fear, we will find them another great house.

Story Resolution
From Sonnypage 2007/01/12

After the holidays, Saturday, January 6th, we met them again at our usual parking lot rendezvous to go up to the lake to look at two properties. As we pulled out of the lot, my wife mentioned casually that we had personally put the home they had terminated under contract. An instant chill filled my car. Amanda said that was great and continued to chit chat with my wife in the back seat, but Stuart, sitting beside me, said not a word all the way up to the lake. The first home we looked at was priced at $499,000, was slightly larger than “our” home, had decent water but a run down dock. Stuart still had little to say other than commenting on the poor deck. We made our way to the second home we had planned to see and as my wife opened the door, Stuart and Amanda headed down to check out the water and dock. We gave them a few minutes and then headed down to join them at the dock. As I got there, Stuart turned to me and said, “Sonny, I think your buying that house was unethical and we are really upset with you. We no longer want to work with you and Tori”. I tried to talk with him, I said I had no idea they still had an interest in that home, I offered to “assign” the contract to him. As he headed up the hill to our car, he said over his shoulder, “I don't want that house”. As we drove back to Atlanta, Tori tried to strike up a conversation with Amanda, but Stuart said not a word. We returned to their car, they got out, Amanda told us goodbye but Stuart was still silent.

On Tuesday, we were working from home in our office there. Our managing broker called to say that she had received a letter from Stuart and Amanda. She faxed it to us at home. They started by saying, “We are writing this letter to bring to your attention a recent transaction that we believe to be in conflict with the Realtors Code of Ethics regarding our real estate agents”. They then named us and then sited Article 5 of the National Association of Realtors Code of Ethics which reads:” Realtors shall not undertake to provide professional services concerning a property or its value where they have a present or contemplated interest unless such interest is specifically disclosed to all affected parties”. Our managing broker asked us to respond to their allegations with an email to her and another party at our firm, and then meet with her the next afternoon to discuss. I reread Stuart's long letter carefully. It was mostly a rehash of everything that had transpired from start to finish, but bottom line, one thing was clear. They were convinced that we secretly wanted this house for ourselves while we were negotiating on their behalf, and because of this had not “negotiated diligently enough on (their) behalf”.
In my email to our managing broker, I closed in part with this: “I want to make it clear that at no time while (we) were working with the ****** were we even remotely considering an immediate purchase of a lake house for ourselves...........It was only the next day, after the ****** terminated what we thought was a great deal and we could find no other buyer, that we thought of buying the property for ourselves”.

The next afternoon we met with our managing broker. We were told that we had done nothing improper. She reminded us that as long as that property is on the market, it is available for purchase by any qualified buyer. We discussed several scenarios, all of which would be perfectly legal. What if we had another set of buyers also interested in lake property and they wanted to make an offer simultaneously with Stuart and Amanda. Should we make that offer? Absolutely, and the listing agent is obligated to present all offers. Any agent is free to make an offer on behalf of their clients, or in the case of other agents, on their own behalf as well. It would only be if Stuart's allegations were true would there be an ethics violation. If we were indeed considering the house for ourselves, as Stuart suspected, there would be an issue. But that was not the case. If this ever came to litigation, the listing agent would testify that we had not indicated a personal interest in the property to her until almost a full day after the termination and release by Stuart had been signed by her seller. Our interest could not have impacted his willingness to terminate with Stuart. Also, his bottom line with us was the same as it would have been with Stuart. We in effect accepted the deal they terminated.

When my wife met Stuart and Amanda that Friday morning, she tried to convince them to counter offer on the inspection amendment. Stuart was having none of it, “I don't want that house”, he said that repeatedly. He was angry at a seller who would not agree to a repair that would cost that seller an additional $2500. Stuart is guilty of not being able to see “the forest for the trees”. After we were under contract, I asked our mortgage lender to have a conservative appraiser, familiar with lake property, do the appraisal. I wanted to be very sure, in my own mind, that this was as good a deal as I thought. The appraisal came in yesterday at $450,000. We have an immediate gain of $30,000 before we even close. So why is this such a good deal? Is the seller unaware of the true value of his property? Not at all, this is, as I mentioned in my last post, a 1031 tax free exchange. What the seller is losing by selling this property below value he more than makes up in saved taxes. He has already “identified” a property priced at $1.2 million that he wants and that he must think is a great value.

My wife and I and Stuart and Amanda have all lost something though. We have known them and called them friends for eighteen years now. But that is, as my wife said, “over now”. Too bad, but then, I have never been called unethical in all my years in business. Stuart, you have a temper, and this time you have said things to me, and believe things of me, that no friend would say or believe. You are no friend of mine. Sue me if you will, you will lose, and we will close in two weeks. I drove up to “our” lake house this morning. Our insurance company wanted to know the location of the nearest fire hydrant. There must certainly be an easier way to have found that out but I really wanted an excuse to drive up there. The lake is up from all the rain and that lot looks more beautiful all the time. When we retire in a few years, I can see tearing down that little cottage and building a real house. It's strange how things work out. It's really beautiful up there.

Sonnypage

Wow.
Given that I consider Sonnypage a friend (I hope he still feels this way after this post) I would rather have been wrong than right. I do not know the law in this case but I am willing for now to accept that Sonnypage was within the limits of the law.

I am looking for how this could have been prevented.
It seems easy enough to me (but of course hindsight is 20/20).

• If that property was such a great deal, Sonnypage could have snatched it himself before showing it to the client. Why wasn't the value recognized before the initial showing?
• If that was a friend of 18 years whose future business and referrals one could count on, what's the big deal in offering to personally pony up $2,500 to close the deal on a lucrative transaction?
• Rather than offering assignment after the fact when showing another house, why wasn't it offered ahead of time?
• Was all this worth the loss of a friend and associate with all the potential repercussions down the road with legal challenges?

I am not a lawyer but by offering to assign the house I think Sonnypage did a very smart thing. Perhaps it would be smart to offer it in writing with a small deadline. There are no possible damages (that I can see) if that assignment was offered. Still, this all seems too easy to have avoided in the first place, and possibly numerous places along the way.

Good Luck Sonnypage .
I hope this does not result in another "Friendship Lost" but the aftermath needed to be reported and Sonnypage at least stepped up to the plate and did it. Opinions on this transaction are requested from a legal and ethical standpoint. Fire away.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/