Monday 9 November 2009

Devilish real estate details about to shut down 500 NZ jobs

In a time of deep recession, the National-led government is about to shut down the jobs of up to five-hundred New Zealanders.

This is a story that hasn’t yet hit the news – in fact you’re reading it here for the first time – but it’s a story that started two years ago with plughead populist Clayton Cosgrove, and will reach its climax next week under the oversight of Nathan Guy, Gerry Brownlee and Simon Power, when hundreds of New Zealanders will lose their jobs, agencies and businesses.

The story goes like this.

Two years ago  Clayton Cosgrove devised a scheme to get himself a headline.  He announced he wanted to “drop the hammer” on real estate agents – to “drag them kicking and screaming” into the spotlight; to rewrite, for the second time in four years, the Real Estate Agent’s Act. (Rick Barker had effected a review and made a rewrite back in 2004, of which nothing came.)

This rewrite, said Plughead, would protect “Mom and Pop home-owners” from bullies, rip-offs and “land sharks” --and in September last year when the law was passed, the Real Estate Agent’s Authority (REAA) set up under the Act began rewriting the Real Estate Agent’s code to make it fit the plughead populist’s new law.

Both the new code and the new quango, the REAA, come into force in ten days, on November 17.

But here’s a problem.  There were problems enough with the demonisation of real estate agents and hasty rewriting of law simply to get headlines for an underperforming minister. 

But there’s a new problem, a serious one. which has only just become apparent now Clayton’s Code is about to be introduced: The Act was intended simply to protect “Mom and Pop home-owners,” but the Code has been written by some minion in Wellington who has expanded it to cover not just all real estate, but all businesses for sale as well.

The small change will have a fatal unintended impact on agents who sell land and businesses. Let me explain why.

For decades now, real estate agents have been selling businesses on commission to businessmen and women. These aren’t “mom and pop” New Zealanders, they’re entrepreneurs based both here and overseas.  They’ve been selling dairies, superettes, motels, hotels, service stations, resorts, backpackers operations and everything else in between.  What the minion who’s written the new code has done however is to effectively close down agents who specialise in selling land and businesses.

You see, what the new code requires is that in order for agents to secure a listing, they must first supply clients with a written appraisal of their land or business.  Despite much confusion about what this might mean, this view is now confirmed by both the in-house lawyer of the Real Estate Institute of NZ (REINZ) and by REINZ’s David Bigio – i.e., that every new listing secured by every agent must now be supported by a written appraisal.  (When I say “much confusion,” until last week David Bigio was traipsing the North Island telling REINZ members they would need a written appraisal, while another lawyer was traipsing the South Island telling REINZ members they won’t!)

Here’s the relevant clause from the new code:

“9.5       An appraisal of land or a business must be provided in writing to a client by a licensee; must realistically reflect current market conditions; and must be supported by comparable information on sales of similar land in similar locations or businesses.”

Pretty clear, huh.

But here’s the rub. In order to offer a professional written appraisal in the manner required by this new code, an agent would have to have the professionals on board to make those appraisals, and insurance cover to be a professional valuer of businesses.

To be specific, valuing a business for sale requires setting a value for each of:

  1. Land & Buildings
  2. Chattels
  3. Benefit in the Lease
  4. Goodwill

Which means that each agent, broker or office selling businesses on commission are going to need up to four specialist valuers:

  1. A Registered Valuer to value land & buildings
  2. A Registered Valuer to value Chattels Valuer
  3. A Registered Valuer and/or Chartered Accountant to value benefits in terms of lease remaining
  4. A Registered Valuer and/or Chartered Accountant to value Goodwill.

Now just to repeat, to secure a new listing to sell a dairy or a motel, an agent must offer a professional appraisal written by both a Registered Valuer and a Chartered Accountant, to have insurance cover to be a professional valuer of businesses.

They say that the devil is in the details, and for around 500 agents and brokers thoughout NZ who specialise in selling land and businesses, that couldn’t be more true.

But there’s more: since the appraisal is prepared in order to secure a listing, i.e., to secure the chance to earn a commission, the appraisal itself must be offered at no charge.

So not only are there no offices in the country (outside one or two of the very big boys) that has the professionals on board who can offer such appraisals, there are none at all who will be able to foot such a bill.

There are around five-hundred agents and brokers around New Zealand who sell businesses like hotels, motels and resorts around the country.  In a week’s time they will be out of business.

And here’s the irony.

The National Government who say they stand for "Free Enterprise" have sat back and allowed this code to be written and introduced – a code which will effectively destroy agents, brokers and businesses throughout NZ.

And here’s another one.

Not one of those agents, brokers or businesses – not even the REINZ  or anyone else for that matter – are allowed access to the new Real Estate Agents Authority to challenge the code.  They’re not allowed access until 9am on the 17th November, when the new agency officially comes into being!

And by that time they are out of business! 

That’s the sort of tale Franz Kafka might have written.

31 comments:

Simon said...

All the commission agent needs to do is have the client sign a bit of paper to say that the client has consulted their own Chartered Accountant as to the value of goodwill. This forms part of the agreement blah blah blah.

This is incredibility stupid legislation. Of course any true value for an asset is what the market is prepared to pay. Not some figure some clown in an office has come up with.

LGM said...

Simon

You wrote: "All the commission agent needs to do is have the client sign a bit of paper to say that the client has consulted their own Chartered Accountant as to the value of goodwill."

No. That's not correct. The relevant clause is, "An appraisal of land or a business must be provided in writing to a client by a licensee; must realistically reflect current market conditions; and must be supported by comparable information on sales of similar land in similar locations or businesses.”

Note WHO is responsible for providing the appraisal. The clause specifies who that party WILL be. Note the actual nature of what is required in the appraisal. the clause specifies what is actually required. It aint a triviality.

Another point, do you really think that the client's CA is going to wear the responsibility of appraising/valuing aspects of the business, especially intangible ones like goodwill? Get real!


LGM

LGM said...

Now to make the perfect storm for business motivation all that's required is a capital gains tax...


LGM

Chris R said...

The Act requires an "Appraisal" not a binding quote. Of course a CA will routinely provide appraisals. I agree the new legislation is likely an overkill but practising under it will be essentially the same as the previous legislation. NotPC is starting at shadows as are the other commentators.

Mark.V. said...

Just wondering, how will this new law affect the sale/purchase of businesses by way of the sale/purchase of shares in the business, stock brokers being commissioned sales people?

Adolf Fiinkensein said...

It's not too difficult for an agent to present such an appraisal with appropriate disclaimers and an indemnity signed by the vendor.

Peter Cresswell said...

Chris R: A few questions for you:

What will it cost for a CA to provide an appraisal?

Who will pay for it?

When?

How long will it take to commission, prepare and deliver the appraisal?

To have the books delivered, the figures pored over, and the calculations made and confirmed?

Why is this even bloody necessary, just to sign up for an agency?

How can an agent start marketing a business until that appraisal has been confirmed and agreed?

How can they confirm their agency?

What do they do while they're waiting?

Fact is, isn't it, that this will require an office either to have a CA and a Registered Valuer in that office, or they're no longer able to work.

If your own professional opinion is that this is "essentially the same" as before, then perhaps you'll be prepared to tender that particular appraisal under your professional letterhead, and over your signature?

Peter Cresswell said...

@Adolf: That's not the legal advice that several agents have been given.


Next . . .

Chris R said...

I find that generally commercial vendors whom we are primarily concerned with in this debate, have their own accountants who are familiar with the business being sold and could prepare an appraisal in a matter of an hour or so based on the previous 2-3 years trading figures.

As far as land valuations are concerned all that will be required is a recent rates demand from the relevant local authority which will refer to the RV.

Insurers, land agents, solicitors and bankers have undertaken "drive-by appraisals" for generations and do so having reference to RVs. Costs are usually minimal.

The new Act does not require inviolable valuations, simply appraisals, which may only be a "best guess."

I think you'll find that traditionally oiled wheels won't cease turning under the new Act.

I agree that the need for an appraisal is irksome but stress they're not difficult to prepare. If all accountants behave in the manner of mine the appraisals will be emblazoned with disclaimers; hence rendering them of nebulous use. 500 jobs won't disappear as a result of this fresh requirement...this portent sounds like the utterance of an Opposition MP!

To conclude, the legislation was revisited after 42 years for the most part due to the misconduct of a small percentage of agents/principals. That misconduct was at times pernicious.

Peter Cresswell said...

@Chris R.: "500 jobs won't disappear as a result of this fresh requirement...this portent sounds like the utterance of an Opposition MP"

In fact it's the utterance of someone who's discovered after much research and several legal opinions that his business model will end on November 17th. I doubt your bland assurances will persuade him.

Chris R said...

PC I am not given to making bland assurances to parties unknown. The statement you drew out is only an observation by any measure; surely?
I attended a pre-Act seminar a week or so ago and agents in this area seem comfortable enough with the added requirements and are not presently disposed to doom-saying. (I confess that I have never been overly concerned with the welfare of members of the RE industry.)

Peter Cresswell said...

@Chris R.: :. . .agents [at the seminar] seem comfortable enough with the added requirements . . .

And many property-owners were "comfortable enough" with the added requirements of the RMA when it was introduced.

Let's look at facts, not people's feelings.

"I confess that I have never been overly concerned with the welfare of members of the RE industry."

Clearly. Perhaps I could send Clayton Cosgrove your details.

Peter Cresswell said...

@Chris R.: And note, as I say above, that those seminars were dispensing different -- not to say conflicting -- information about those requirements.

Monsieur said...

The first thing a propective buyer of a business is going to ask for is a professional appraisal of it, then some form of due diligence... so what difference will this make? None.
It just makes the government look like they're doing something.

Peter Cresswell said...

@ Monsieur: Yes, of course they will be seeking a professional appraisal, and perform some due diligence.

That's precisely the point.

By slipping in the words "and businesses" the code fails to understand that process, and makes agents seeking vendors the people to do that work.

It's not just insane, it's not just death to agents and brokers who are currently doing that work, but it will either add weeks to every deal, since no agent can be signed up until this world is done, or just kill the agent-vendor model altogether and hand over the work of selling dairies, motels and resorts etc. to TradeMe.

Barry said...

The dirtiest tricks I heard about from land agents often involved the accountants. So I cannot see how this legislation will hinder these schemers at all. They would still provide misleading appraisals in order to get sales through.

Chris R said...

It is not unusual for new legislation to be interpreted in conflicting ways from its inception. The seminar I went to was an in-house one for a particular brand and the advice given was that agents ought not be distraught on the commencement date of the new Act.

I agree that the appraisal necessity would be better included in the sales agreement rather than the listing authority but I believe that the agent will co-ordinate the information on behalf of the vendor in a similar manner as is undertaken in Particulars and Conditions of an auction. This allows for early public digestion and has been the industry's custom for a long time.

It remains to be seen whether the Act will curb agents giving vendors unrealistic expectations as to the worth of what is being sold. I understand that many past grievances expressed by customers were centered around agents over stating values to obtain a listing."I can get you $X the bloke down the road is hopeless and will only realise you $Y." Then hammering the expectations downwards. I have sat on a Tribunal and heard those boasts on numerous occasions.

The scraps between agents are rabid and ongoing.After years of witnessing scraps between agents it is understandable that their attributes can at times be withering to the point where one loses any enthusiasm for their well-being.

Sinner said...

To conclude, the legislation was revisited after 42 years for the most part due to the misconduct of a small percentage of agents/principals. That misconduct was at times pernicious.


Rubbish. Neither legislation nor the police/nanny state can protect people in a free market, and nor should it try. The legislation was rewritten after 42 year because the previous Labour government hated enterprise, hated profit, hated indeed the entire capitalist economy with every fibre of it's being.

At the time, the Nats promised to repeal the legislation wholesale, as indeed they should have done. It's disgusting that this piece of party-political Labour-biased crap is still going into law!

Chris R said...

I do not disagree with Sinner's estimation of the Labour Government but Sinner's belief that this was the true reason why the legislation was revisited is untrue. I can PERSONALLy attest to this!

At what time did National promise to repeal the 1967 Act?

Anonymous said...

"An appraisal of land or a business must be provided in writing to a client by a licensee; must realistically reflect current market conditions; and must be supported by comparable information on sales of similar land in similar locations or businesses.”

This says that where an appraisal is supplied it must be in writing.
It does not actually say an appraisal MUST be supplied.

Linda

LGM said...

Linda

Read it again.

LGM

Anonymous said...

Linda
The REAA have informed the industry via enquiries to their 0800 number that all listings can only be signed off after completing a n appraisal in writing

Clause 9.8 (a) states:
"When inviting signature of an agency agreement a licensee MUST explain to a prospective xlient (vendor) in writing-
(a) the conditions under which commission must be paid and how commission is calculated, INCLUDING an estimated cost (actual$ amount) of commission payable by the client (vendor) BASED and the appraisal price of the land or business"

This clearly takes the option of doing an appraisal away.

David

Anonymous said...

Normally, the client (vendor) determines the asking or selling price based on what they paid for the business, improvements made to the business during their watch, their view on what the market is doing in their sector of the ecomony etc and only about 1% of clients (vendors) decide to fund a registered valuation of the business.

Louise

Anonymous said...

It will be interesting to see how the insurers of real estate companies view this new law, as currently do not offer cover to real estate companies to do valuations unless the company has a registered valuer in the team, and the insurance is very expensive for valuers ( if you can get it at all)
The big question here, how does an "appraisal" differ from a "valuation" - in the US an appraisal is a valuation

If the insurance issue is resolved and real estate agents can do "written apprisals", what is the fall out if the written apprisal is too low or too high - I sense courtroom battles based on the client (vendor) saying they now have grounds not to pay the commission as the actual sale price did not match the "written appraisal" supplied by the real estate agent.

Alexander

LGM said...

Any of you notice that in the situation where the vendor misrepresents the nature or state of the property, it is the agent/licensee who is liable, even if he didn't know? The window of opportunity for the buyer to initiate litigation extends some six years...

Did you also notice that the course a prospective agent will need to complete prior to registration now extends some three months full-time or one year part-time?

Also that the new agent is not going to be allowed to execute agreements for the first 18 months after passing the course.

Keep reading and enjoy what is coming up.

All that is required now is CGT and small business will be enjoying the perfect storm.

LGM

Falafulu Fisi said...

Just a question to real-estate agents on this thread.

Do you mean, appraisal as the same thing as evaluation of the property?

If it is, then I may have a software solution to sell you, ie, an automated appraisal system.

Falafulu Fisi said...

Ok, for realestate agents, who wondered what the hell Falafulu is talking about, it is a system that is based on ANN (artificial neural network), which is an adaptive self-learning algorithm, ie, it adapts & updates itself, in real-time as new data arrives (in this case of real-estate, whenever there is a house or property that is being sold, somewhere and this data is fed in automatically to the system). I have noted that some arseholes from the US had already filed a patent on using ANN as a method and system for automated property valuation .

I am opposed to this, because the claimants didn't invent anything at all, because ANN pre-existed before their patent was filed. I think that this is what's wrong with filing patents these days is that some arseholes, can stop others from using pre-existing technologies to solve a partcicular solution to a specific industry.

There are different variants of ANN/s available today, and the ANN engine I have (which I do use it for financial market analytics & predictive modeling) is the same one described in the patent above, but perhaps they have a different variant to the one that I have implemented, where my version is the one described in the following publications:

ANFIS: Adaptive-Network-based Fuzzy Inference Systems, IEEE Transactions on Systems, Man, and Cybernetics, vol. 23, pp. 665-685.

Here is a description of how ANFIS (cited above) is used in Real Estate evaluation.


An Adaptive Neuro-Fuzzy Inference System Based Approach to Real Estate Property Assessment


The above reference is not the only publication that ANN is being used in real-estate appraisal system. I have seen a few of them such as the following:

Neural Network Hedonic Pricing Models in Mass Real Estate Appraisal

There are some ANN-based commercial tools available already, but their accuracies is what makes one tool superior to other tools. I think that my ANN-based ANFIS system is more robust, because I have modified the original algorithm itself with some other techniques, therefore making it more robust, although no comparison tests had been made with other available tools.

Falafulu Fisi said...

Continue on from my message above...

Why should it be an important tool for real-estate agents?

Well, tests had shown that ANN-based automated appraisal system had outperformed the property evaluations made by human real-estate experts. Real-estate agents often ignore their own intuitions in their evaluations, thus relying heavily on the automated evaluation of the tool itself, because the tool's evaluations , when compared to their own, are either similar or the tool is more accurate than the human agents. Manual evaluation is time-consuming, and time costs money. ANN-based automated tool is quite fast to be used by an agent as a preliminary or rough estimation first.

So, local agents, if you think there is a market for such tool here, with the legislation coming into effect soon, then please indicate here, perhaps it is something that I can do that it will give me extra earnings. I did communicate such tool concept with QV about me getting involved with their developers to develop an automated system as I described above, about 3 years ago, but they said that perhaps at some future time. I had moved on, to other interests, but this discussion reminds me, to re-look at it.

Anyway, if you wondered what ANN is and if you have seen the movie Terminator with Arnie, saying I'll be back, then you have encountered ANN already. Terminator movie plot is about a machine that has got neural-net chip, that engineers/scientists at SkyNet developed into it. In fact there are different types of neural-net chipsets that are commercially deployed today in telecommunication devices, such as mobile phones, etc,... One of its main functions is to de-noise communication signals in real-time as the device receives it. It also adapts to different environments, since they have different noise levels. It is something that engineers can't foresee during design time, thus they make them adaptive, where the chip itself just learns on the fly of what noise-level that it encounters and adapt to it to be able to do its filtering tasks properly.

Sus said...

LG .. off-topic, but did you get my msge last week? I've since mislaid your details, sorry.

vet said...

So there will be specialist agents for businesses, and separate agents for selling simple real estate. Is that so bad? Do we really need the trade to be exclusively conducted by jacks-of-trades who do neither job particularly well?

And is there any requirement to provide appraisals free of charge? That is: is there anything, other than competition, to prevent an agent from charging a few hundred bucks for an appraisal?

Anonymous said...

The real estate industry has been arse about face for too long. The current state of the industry is that the vendor pays for the service on a base fee and a commission (and often advertising costs too!)

The agent frequently spends the majority of time with the purchaser who pays nothing for the service. If the costs of an appraisal were addressed in the sales contract rather than the listing authority then a term of the contract could simply dictate that the purchaser bear the appraisal costs. This would sort out the genuine buyers from the "tyre-kickers."

The new Act is flawed to this extent at least!

Chris R.