What is Self Dealing in Real Estate?

Self dealing in real estate

Share This Post

Self dealing in real estate means two different things with regard to real estate. The first meaning relates to a real estate consultant or agent. When they do not report personal interest in a transaction is when problems arise. The second meaning of  ‘self dealing’ relates to a retirement account. An Individual Self Direct Retirement Account is the name of this account. Self dealing has many meanings, but these two ways relate to real estate.

The first definition of self-dealing happens when agents act in their own self interest.

what is Self dealing in real estate

If an agent owes a fiduciary duty to a client, they agree to put the client’s interests before theirs. Fiduciary duty is often given by financial advisors and others in positions of trust. These agents are in a position of trust and deal with their client’s sensitive matters. If you are in an exclusive agency agreement with an agent to buy or sell, the agent owes a fiduciary duty. Self dealing is a type of betrayal. Generally, this happens when advisors profit from a transaction when they owe a fiduciary duty and do not disclose this info.

In real estate, state governments mandate the nature of agent-client relationships. State disclosures tell potential clients about what to expect. Real estate agents have the right to offer an Exclusive Agency or some type of limited agency.

Exclusive agency is the highest form of representation of agents and brokers. The exclusive agency is a fiduciary duty related to agency representation. When meeting an agent, a customer of what types of representations exist. The customer doesn’t have to commit during an initial meeting. They should receive an introductory explanation. Agents disclose the nature of agent-client relationships early in the relationship. The customer decides which type of relationship to enter into.

A good example of self dealing is when an agent doesn’t reveal their self interest. When an exclusive agency is when an agent owes a fiduciary duty to a client. An agent who engages in self dealing uses a ‘straw man’ to buy a client’s property. After the transaction, the ‘straw man’ might later transfer the property to the agent. The principal might never know what happened. Self dealing is sometimes hard to prove since it is often an act of omission.

Other Examples of Self Dealing:

  • A broker offers a house to a client. The broker doesn’t disclose that he is a potential buyer. a ‘helper’ closes the transaction that then transfers the house back to the broker. This is against the law and can result in revocation of the broker’s license, fines, and possible legal action.
  • A stockbroker receives a sell order for stocks from a customer. He then sells his personal shares of that company before his customer’s shares.
  • A partner in a company pursues an opportunity on his own and does not tell the other partners.
  • A manager outsources jobs to a firm they have an interest in without disclosing the fact.
  • A  financial advisor promotes stocks that are not in the best interest of the customer. They do this to make larger fees or commissions.

Avoiding the risk is better

How can you avoid involving yourself with a self dealing agent or broker? Prevention is always better, right? Finding a professional with a character starts with asking the right questions. Ask them about what type of representation you will be receiving. You may also search the licensing authority to see if there are any blemishes on their record.

If you are an agent with a personal interest in a property, disclose your very best practice. States require explicit disclosure of your interest in the property when selling.

What should you do if you feel that someone has engaged in self dealing and has damaged you?

  • You will need to prove that a fiduciary relationship existed. between you and also the individual you’re submitting the claim against:
  • Gather proof that may verify a violation of fiduciary obligation. Evidence will be helpful to prove that the violation of fiduciary duty caused you financial damage. Proving to the courts that an agent harmed you could allow a court could remedy with a civil judgment
  • Meet with a lawyer to assist in developing a claim.

Self dealing in an IRA – a different form of real estate. This second variant of Self Dealing with real estate is somewhat of an esoteric topic. This is for those that deal with real estate inside an SDIRA.

A few of my mentors have actually advised me to avoid using “I” or “my” in the exact same sentence as an SDIRA. This is a separate account from your personal finances. When you use a SDIRA, you place investments in various ways for a return. This is meant to be an enterprise that is separate from your other money making activities. You cannot use your account like a business and make a habit of abusing the tax free privileges given with this type of arrangement.

Self-directed Individual retirement accounts allow one to include alternate investments. These investments include real estate.  The internal revenue service has specific rules that ban self-dealing activities, consisting of:

  • Make any type of improvements or repairs to a financial investment yourself. You are not allowed to self manage a property inside the individual retirement account.
  • Paying yourself for any kind of work done on an investment home.
  • Using self-directed individual retirement account funds to buy a business you have or regulate.
  • Making use of self-directed IRA funds to pay debts connected to a business you possess
  • Living in an investment building part-time or using it for a villa
  • Combining individual and IRA funds

Any of these things are self-dealing by the internal revenue service. If the IRS believes you’re self-dealing, you could lose any type of tax benefits associated with having a self-directed IRA.

Can a real estate agent buy a house for himself?

Of course! The main point to remember is to disclose that the buyer does hold a real estate license and may have an additional level of expertise.

What are the pros and cons of using self-directed ira real estate?

The pros are obviously the tax free nature of potential gains and fruits. The cons are the level of acumen needed to acquire and maintain the asset.

What types of agent representation exist?

These vary by state in terminology. The basic models are; exclusive representation, dual representation or dual agency, and customer/administrative type duties (no representation).

Final thoughts:

Self Dealing has two different definitions with regard to real estate. One meaning is when an agent does not reveal their individual interest in a transaction. Agents must disclose self-interest when they owe a fiduciary duty to a client.  If you have damages you may need the help of an attorney to receive compensation for damages.

The other meaning of ‘self dealing’ relates to self directed individual retirement accounts. Rules call for the money to be treated in a particular way to receive the tax benefits. If you misuse or abuse the rules, you might lose the benefits of having the account.

I hope that you have found this article informative and useful. Best regards.

Want to work with me?
Schedule a free consultation with our sales team!

More To Explore

Pyramiding in real estate

What is pyramiding in real estate?

Pyramiding is when an investor buys multiple properties with the intention of selling them at a profit. The properties are usually purchased with the help