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The Real Deal Los Angeles

Brokers behaving badly?

A rash of lawsuits puts a spotlight on what happens when agents are accused of gaming the system
By Natalie Hoberman | October 19, 2018 07:00AM

A vast Malibu estate that sold last year for $70 million is at the center of a legal battle between an insurance firm and The Agency.

When Mauricio Umansky, co-founder of The Agency, was tapped to sell a Malibu estate on Sweetwater Mesa Road, he was taking on a property that had already seen its share of drama, having been seized by the U.S. government. But Umansky was up to the task.

The star broker, who oversees more than 350 agents, has brokered many multimillion-dollar deals in his career, including the $100 million record-breaking sale of the Playboy Mansion in 2016.

When he chose a buyer for the 15,000-square-foot Malibu mansion in December 2015, seven months after listing the property, everything appeared to be running as planned. Mauricio Oberfeld, a Los Angeles-based developer, was queued up to purchase the home for $33.5 million

But there was something different about this deal.

Umansky himself also invested in the property, though the amount he contributed toward the purchase was not made public. The two Mauricios then flipped the home for nearly $70 million in April 2017, and allegations of impropriety followed shortly thereafter.

“Anytime you have a market where [land values] are up really quickly, and somebody buys a property, renovates it and sells it for a big number, it makes the agent an easy target,” said Michael Nourmand, president of Nourmand & Associates.

The property is now the subject of a bombshell lawsuit brought forth by Umansky’s own insurance company, which is seeking relief from having to pay any damages to the seller. Umansky declined to comment for this story, but he recently responded to the complaint with a countersuit of his own.

“The entire transaction was subject to the terms of a settlement agreement between the U.S. and the seller, and every aspect of the transaction was reviewed and approved by the U.S. Department of Justice,” Umansky’s countersuit states.

Insiders say agents and their brokers are increasingly getting sued for “home flopping,” a practice in which an agent sells an asset for less than market price — often to an unofficial business partner — while collecting both sides of a commission. They then resell the property for more money. The profit is typically split among the parties, including, of course, that broker.

Those suits often fall under the umbrella of improper dual agency — instances in which a seller’s agent conspires with the buyer. Dual agency suits are hitting a number of prominent brokers.

The recent uptick is due in some part to market conditions, brokers said. Homes are still selling at astronomical prices, which tempts brokers to get involved as investors, thus creating more opportunity for “flops.”

At the same time, bad dual agency deals may be increasing since it’s taking longer for luxury homes to sell. “There’s more pressure put on a salesperson to perform,” said Stephen Kotler, CEO of Douglas Elliman’s Western Region. Agents that are eager to get a sale on the books may at times resort to unethical practices, such not disclosing problems with a home or selling to the first person who makes an offer rather than waiting to get a better price, and dual agency is often involved in those cases.

There could be even more litigation in the coming years as pocket listings become even more popular. By selling off-market, brokerages can foster more deals in-house, potentially setting up a breeding ground for more dual agency lawsuits, experts say.

Dual agenda

Umansky is far from the only broker who’s been accused of manipulating sales for a personal benefit.

Josh and Matt Altman, known collectively as the Altman Brothers, have also been the subject of dual agency lawsuits.

In December 2017, Peter Kleidman sued the brothers for allegedly misleading him into selling his home for well below its worth. Kleidman had tapped Hilton & Hyland, the Altmans’ brokerage at the time, to sell his property in 2012, just before he filed for bankruptcy.

The brothers claim another agent at the brokerage represented the buyer independently, while they represented Kleidman, the seller. The buyer, who paid $5.3 million in 2013, then flipped the home for more than $10 million.

In the $3.7 million lawsuit, which was filed in January, Kleidman claims Hilton & Hyland and the Altman Brothers “did not disclose their knowledge of the two different valuations because they were also representing [the] buyer” and “were allied far more strongly to [the] buyer.”

The issue of dual agency also made headlines earlier this year when a L.A. Superior Court judge ruled in favor of Chris Cortazzo, a Coldwell Banker luxury agent, who was involved in a five-year battle with Hiroshi Horiike, the buyer of a Malibu mansion. Horiike claimed Cortazzo misrepresented the size of the house when he sold it to him. Another Coldwell Banker agent, Chizuko Namba, had represented Horiike.

In both the Kleidman and the Horiike cases, two agents from the same firm were representing both sides of the deal. Although that may not be as troublesome as a single broker handling the entire transaction, it still posed a problem for both agents.

“If you’re in the same brokerage, based on current law, you are a dual agent even if you are two people carrying out duties,” said Zachary Schorr, a Century City-based attorney who represented Horiike. Dual agency lawsuits happens pretty often since “a lot of agents hang their shingles in one brokerage house,” he added.

The law permits brokers to represent both the buyer and seller in a transaction, and there are, of course, benefits to doing so, since the brokerage can receive the full 6 percent commission that’s typical on a deal by handling both sides. But there are some exceptions that could make a dual agency transaction illegal, Schorr said. One of those, for example, would be disclosing one party’s financials to the other. Another example could be revealing what each party’s “best and final offer” might be, said Aaron Bloom, another Century City-based attorney.

California law permits dual agency transactions as long as the agent discloses his or her relationship to both parties in writing.

The situation often presents itself when buyers hire an agent to find a home, and then that agent offers up one of his or her other listings as a potential deal.

“Dual agency creates a very tough situation [for both the buyer and seller] where you don’t have that pit bull on your side that’s advocating for you,”
Schorr said.

When an agent represents a buyer and a seller in a transaction, it’s hard to tell whether an agent intentionally blew offers or failed to show the property, said Jeff Hyland, co-founder of luxury brokerage Hilton & Hyland.

“That’s why some agents in the business will never represent a buyer and a seller in the transaction,” Hyland said. When you have dual agency, “you have a real double whammy.”

Tami Pardee, owner of boutique brokerage Halton Pardee + Partners, said she prohibits her agents from representing both sides.

“People will want to double dip, and I don’t think that’s ethical at all,” she said. “If you’re representing both sides, whose side are you on?”

The suit against Umansky regarding the Sweetwater Mesa property sale claims that he did not disclose his relationship with the buyer, Oberfeld, or reveal that he himself was going to be the co-buyer. He also failed to mention other internal negotiations between Oberfeld and other interested buyers, that could have resulted in a higher price for the seller, the insurance company’s lawsuit claims. In the countersuit filed in late August, Umansky said he “did exactly what he was retained to do.”

Safeguarding against legal action

There are some steps that brokerages can take to minimize legal issues. Hyland said a compliance manager oversees every offer that goes through his doors. At Douglas Elliman, transaction coordinators manage all sales from contract to close. And at Westside Estate Agency, co-owner Stephen Shapiro said he’ll monitor people and let them go “whenever they appear to be headed towards lawsuits.” Case in point: Jonas Heller, the agent who was caught smuggling 50 pounds of marijuana across state lines, was let go from WEA before he joined The Agency, Shapiro said.

If there’s one thing that everyone can agree on, it’s that it all comes down to transparency. Industry experts say that one of the easiest ways to avoid litigation and ensure maximum transparency is by listing all properties on the Multiple Listings Service, or MLS. That way, a seller can gauge a property’s true market value.

Shapiro said he’s made it a policy for all WEA agents to put their listings on the MLS. The same is true at Halton Pardee + Partners.

But other companies, such as venture capital-backed Compass, as well as Douglas Elliman and The Agency, are encouraging pocket listings with new technology. As a result of Compass’ acquisition of Pacific Union International, the firm incorporated Pacific Union’s Private View into Compass’ latest tool, Coming Soon, which allows agents to tout their own listings to other agents at the firm before they go live on the MLS.

With pocket listings, Schorr said, “you’re creating a sub-market that misses the full market, which someone could claim as improper and maybe even a breach of duty to fully expose the property.”

And now that has Compass acquired 1,700 new agents with the Pacific Union merger, the potential for dual agency is even higher.

Mark McLaughlin, founder of Pacific Union, said the uptick in pocket listings stems from buyers and sellers who demand confidentiality, but he added that the firm is vigilant about ensuring that sales are conducted properly.

“Am I concerned about it?” he said. “Yes. I’m always concerned about compliance.”