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Estate agents' commissions under threat after Real Estate Institute of Victoria blunder

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Thousands of Victorian estate agents could be forced to pay back hundreds of millions of dollars in commissions after they used contractual documents sold by the Real Estate Institute of Victoria (REIV) and approved by Consumer Affairs Victoria (CAV) that did not comply with state real estate laws.

The 82-year-old industry body, which represents 5000 estate agents in Victoria, had for years sold Exclusive Sales Authority (ESA) forms – a legally binding contract giving the agent the authority to sell a vendor’s home and be paid commission and any other outgoings such as marketing and advertising costs.

Unbeknownst to many of its members, the REIV’s ESA form included an altered statement on rebates that was approved by state’s consumer watchdog, but was different from the exact wording of the Estate Agents Act.

In April, judges in the Supreme Court of Victoria’s Court of Appeal upheld a 2017 County Court decision whereby a Ray White agent lost his claim to a $385,000 commission because he used “one of two [ESA] forms approved by the Director of Consumer Affairs Victoria and available for download by real estate agents” that did not comply with section 49A of the Act.

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This ruling has now paved the way for a flood of potentially ruinous claims by venders against estate agents who used a non-compliant ESA form provided by the REIV, with lawyers already sharpening their pencils. 

With cases potentially going back six years, one Melbourne estate agent who asked not to be named said the claims by vendors could be in the billions. “For a few thousands dollars in legal fees, vendors could potentially claw back tens of thousands of dollars in commission payments,” he said.

Amy Sheggerud-Woods, a partner at Marsh & Maher Lawyers, said she was acting for an estate agent in proceedings involving the agent’s entitlement to commission “and/or third party indemnity in circumstances where the REIV Exclusive Sales Authority form was used”.

“Not only will the Supreme Court decision have far-reaching consequences for real estate agents who have used the Exclusive Sales Authority forms, but also for vendors, for the REIV (which has supplied the forms to real estate agents), and perhaps for Consumer Affairs Victoria (which approved the short form rebate statement),” Ms Sheggerud-Woods wrote on LinkedIn.

REIV chief executive Gil King said in a statement: “Upon being made aware of the issue late last year, the REIV took immediate steps to ensure all authorities were compliant. This involved specific communications with all REIV members.”

“At this stage, the extent of the issue is not clear,” Mr King said. He added that the REIV was “working with the Victorian government to ensure this matter is resolved”.

A spokesman for CAV said the Ray White St Albans decision in County Court “affirmed the responsibilities of agents to comply with all requirements of section 49A of the Estate Agents Act 1980 in order to claim commission in respect of a property sale”.

“CAV proactively highlighted the outcome of this case to real estate agents in Victoria, and reminded them to include all the requirements of section 49A of the Act,” he said.

Barrister Chris Twidale also highlighted the case’s ramifications on his website, and said estate agents, or landowners who appointed an estate agent should “seek legal advice about their options”.   

The April Court of Appeal ruling related to a case involving a Ray White St Albans agent who had unsuccessfully sued his vendors for a $385,000 commission payment following the $8.8 million sale in May 2016 of a six-hectare industrial site at 382 Greens Road in Keysborough.

Lawyers acting for the vendors successfully argued in the County Court last year that the agent was not entitled to the commission payment because the ESA form used “did not comply” with the Estate Agents Act.

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Landlord critic James raking in cash from real estate interests

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After shaming the city’s “worst landlords” for years, Public Advocate Letitia James is hauling in donations for her state attorney general campaign from developers, management companies and other real estate interests.

The real estate industry has donated at least $213,655 to James’ AG bid since May, a Post review of state campaign filings shows. That’s nearly one fifth of her total $1.16 million haul though mid-July.

Sixteen limited liability companies in real estate gave $64,500, including an LLC under big city developer Two Trees. Donors linked to real estate firm and film studio developer Steiner NYC have given $15,100.

The wife of real estate mogul Gary Barnett gave $10,000. His company, Extell Development, sued the state attorney general’s office in 2010 after then-AG Andrew Cuomo said it had to let condo buyers out of their contracts.

Eugene Schneur, of development company Omni New York, put up $10,000 for James, while billionaire real estate investor Alexander Rovt gave $5,000. Neighborhood Preservation PAC, a pro-landlord group, donated $5,000.

The attorney general’s office enforces rules over co-op and condo sales and probes real estate fraud and other violations. The office is part of a tenant harassment task force and has prosecuted property owners like Steven Croman, the so-called “Bernie Madoff of landlords.”

James touts the passage of City Council legislation forcing landlords to improve conditions on her campaign website. As public advocate, she releases an annual list of the city’s “worst landlords.”

The campaign said it ensures no donations come from those landlords or other bad actors, particularly in the real estate industry. Tenants PAC, which advocates for tenants, endorsed James in June without a formal announcement.

Spokeswoman Delaney Kempner said James is supported by a “broad spectrum of New Yorkers” because they know she’ll fight for them.

James also took in at least $369,815 from unions and other labor interests, and at least $80,650 from the construction industry. Lawyers and law firms put up at least $78,225.

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Closed-End Real Estate Funds Are Performing Well

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The real estate market is booming, with record prices being paid for everything from modest single-family homes to trophy office towers.

Not surprisingly, closed-end funds that focus on real estate have been posting good numbers so far in 2018, even as other CEFs struggle amid rising rates.

CEFs focusing on real estate saw a 1.5% increase in net asset value in June, behind only closed-end utility and growth funds, according to a survey by Tom Roseen, head of research services at Thomson Reuters Lipper.

For the second quarter, that number was 4.7%, rising to 5.3% over the past year, the survey finds.

Some closed-end funds have done even better. Resource Real Estate Diversified Income’s eight funds saw gains in net asset value in the second quarter ranging from 6.4 to 6.8%. RMR Real Estate Income Fund saw 5.2% growth in the second quarter, while the four Total Income + Real Estate funds are averaging a 5.3%.

Yet even as investors in real estate CEFs bank their returns, the savviest are keeping one eye on the business horizon for the next downturn.

Unlike utilities or infrastructure, where demand isn’t completely tied to the business cycle, real estate is very much a cyclical market, with big booms and big busts.

“How long will we have this glut of demand and long will it continue, and, if it turns, how quickly will it go south?” are some of the questions investors are asking, Roseen says.

REIT Boost

For now, though, closed-end real estate funds are on a roll. And they have Real Estate Investment Trusts, or REITs, to thank for the recent spate of good returns.

REITS, which include some of the biggest players in the real estate business, like Boston Properties, Equity Residential, and Simon Property Group, have been on a tear the last four months after a sluggish start to the year.

REITs posted their fourth monthly gain in June, with a total return of 4.2%, according to the National Association of Real Estate Investment Trusts. After a rocky January and February, REITs have posted a cumulative return of 14.6% through June, beating out the S&P 500’s much smaller 6.2% gain.

REITs that own hotels, student housing, prisons and self-storage complexes posted double-digit gains in June – corrections REITs topped 16%.

Direct Investments

Yet it’s not just all about the REITs, with managers of closed-end real estate funds also boosting returns by investing directly in real estate, whether its healthcare facilities or office towers.

And the structure of closed-end funds provides managers with the kind of stable capital they need to take on riskier investments, such as directly putting money into buildings and projects.

Closed-end funds issue shares during an IPO. The number of shares remains fixed and does not expand or contract based on market activity like it does with an ETF.

The fixed number of shares means closed-end fund managers don’t have to fear a big outflow if they start buying shares in a high-reward but high-risk sector. Shares can change hands in daily trading but the overall number stays the same.

“They can go into deals that some fund families would not be able to do that on the open end side,” Roseen says.

Unlike open-end funds, which dominate the market, or ETFs, for that matter, managers of closed-end real estate funds can also use leverage to buy more shares and pump more money into everything from office buildings to self-storage facilities, boosting returns.

Potential Bargains

Closed-end real estate funds are also selling at an attractive discount to net asset value.

That means their share prices are lower than the value of the portfolio of assets in the fund.

There are a couple factors that help create discounts in both closed-end real estate funds and in the closed-end fund world as well.

After a closed-end fund issues shares through an IPO, the number of shares remains fixed and does not expand or contract based on market activity like it does with an ETF.

This fixed-share structure means the price of a closed-end fund trades at each day on various exchanges and the net asset value of its underlying portfolio typically float independently of each other.

And while this can sometimes result in closed-end share prices that trade at a premium, or higher than their net asset value, or NAV, more frequently it results in a discount situation.

For closed-end real estate funds, the average discount is 8.37% and the median discount is 7.89%, Roseen says.

Taking that average number, that means you can buy a dollar’s worth of REIT shares and real estate for a little under 92 cents.

Risks to Mind

While all this may sound intriguing, there are some real risks to keep in mind.

Real estate busts can be as spectacular as real estate booms. Just recall the plunge the real estate market took amid the Great Recession, with record numbers of foreclosures, and not just of single-family homes.

A number of prominent office towers were also taken back by their lenders or auctioned off. Boston’s marquee Hancock tower smashed local records when it sold for $1.2 billion in 2007 to a New York investment group, only to be turned over two years later to a group of lenders for $665 million.

And money sunk into real estate can be tough to unwind, especially when prices are falling.

“People want to buy these illiquid assets and trade them on a daily basis, but the real world doesn’t work like that,” Nuttall says.

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China's Crypto Millionaires Are Using Bitcoin to Buy Real Estate Abroad

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The chives growing in one crypto tycoon’s California mansion carry a hidden message.

Guo Hongcai, a beef salesman turned early bitcoin adopter from China’s Shanxi province, is one of many freshly minted millionaires funneling parts of their wealth out of the country by purchasing real estate abroad.

In April, Hongcai sold 500 bitcoin in the U.S. then used that money to buy a 100,000-square-foot mansion in Los Gatos, a 90-minute drive from San Francisco, California. His Rolls-Royce, also purchased with the fruits of bitcoin arbitrage, sits in the driveway close to a small chives garden.

“It’s very normal to sell bitcoin in the U.S. After selling bitcoin, you can just buy anything you want,” he told CoinDesk.

Guo calls this secondary residence his “Mansion of Chives,” because the vegetable is also Chinese slang for crypto investors who prove vulnerable to big sell-offs.

As Chinese regulators clamp down on industry business on the mainland, crypto millionaires are turning to foreign real estate markets to diversify their holdings. Some purchase property directly with crypto, others like Hongcai use bitcoin to gain foreign currencies without going through a bank.

The founders of one U.S. crypto real estate startup, who spoke on condition of anonymity, told CoinDesk roughly one-third of their prospective users hail from Asia, figures which include Chinese investors seeking tokenized property rights through Hong Kong securities brokers.

According to the South China Morning Post, real estate purchased in Hong Kong doesn’t require the same taxes and documentation as other financial assets held abroad. Chinese investment in foreign real estate, often through Hong Kong brokers, has been rising for years. Now early bitcoin adopters are utilizing new wealth for familiar patterns.

“The requests we have from them start at $50,000 or $100,000 up to, the latest one was $3 to $4 million for Silicon Valley,” Natalia Karayaneva, CEO of Propy, another crypto-powered real estate marketplace, told CoinDesk.

She added:

“We’re seeing that more and more people are willing to buy properties with cryptocurrencies because it’s getting easier to get their money out of the country using bitcoin, rather than establishing a bank account based in Hong Kong and getting their money out of the country using business channels.”

Crypto hubs

According to Karayaneva, the U.S. and the U.K. are the most sought-after locations for real estate, especially fintech hubs like London or California’s Bay Area.

“They were mostly interested in residential properties next to good education, like Stanford,” she said. “Also, they want to diversify. They want to have parts of their assets abroad in more stable countries.”

So far, around half of the traffic to Propy’s website comes from China, out of 50,000 monthly views.

It’s a trend that has implications far beyond China, though, especially in California, where, according to statistics gathered over a decade by ATTOM Data Solutions, nearly a quarter of all single-family homes are now purchased in all-cash transactions without a mortgage.

According to CEO Roy Dekel at SetSchedule, a California-based startup helping licensed real estate agents connect with buyers and homeowners, it’s more common for Chinese bitcoin veterans to convert cryptocurrency into cash than to buy property directly with it.

“We have noticed a drop in Chinese interest, but certain cities like Los Angeles, San Francisco, and New York remain strong,” he told CoinDesk. “The ultra-wealthy Chinese have used this source as a diversification of investment.”

High rollers

On the other hand, Dekel also noticed “many blockchain enthusiasts” are buying second homes or investment properties, leading to an uptick in sellers interested in accepting cryptocurrencies directly from international buyers.

Since platforms like Propy are compliant across jurisdictions, the reason behind this trend may go beyond tax evasion, speaking to real pain points in legitimate markets.

In January, The New York Times asserted that China’s exorbitant housing market is “like a casino.” Further, Reuters reported property development restrictions continue to tighten, such as reduced subsidies for housing developers.

“In Beijing, only last year they saw a 40 percent rise in price,” Karayaneva said. “Historically, real estate investors from China are very active abroad because their own property market is going crazy.”

All things considered, Chinese buyers are hardly the only ones purchasing property with cryptocurrency. In 2017, Europeans used bitcoin to buy luxury apartments in Dubai’s Aston Crypto Plaza, a project spearheaded by British Baroness Michelle Mone.

Wherever it’s taking place, though, it has become increasingly clear that crypto wealth could have a real impact on global real estate patterns.

Door image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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