The government has come under fire over the setting up of its controversial Home Information Pack scheme.
Home packs are meant to make buying and selling easier
Consultants hired to develop Hips had a financial interest in a recommended firm, the National Audit Office said.
And ministers did not act quickly enough to end this "clear conflict of interest," the spending watchdog added.
The Tories called the report a "shocking indictment", but the government said it was "satisfied no impropriety took place."
Hips are intended to speed up house sales, but critics say it makes the process expensive and bureaucratic.
The packs contain title deeds, local searches and an energy performance certificate and cost about £400 to £700 to compile.
Initially, only homes with four or more bedrooms will have to have a Hip, but the government plans to extend the scheme to all properties.
The National Audit Office said the Department for Communities and Local Government (DCLG) "fell far short of appropriate practice" in developing and publishing the standards for the certification scheme.
The conflict of interest arose because consultants Christopher Legrand and Richard Theobald had financial links with the parent company of Surveyors and Valuers Accreditation (SAVA), which was bidding to run a certification scheme.
The DCLG should have taken "more robust action" when it was informed about the potential conflict of interest in May 2006, the NAO said.
The consultants did not have their contracts terminated until November last year following an investigation by accountants Grant Thornton.
The NAO said once the review had been completed the department had "acted quickly to suspend" the pair.
But the NAO concluded: "The department employed consultants with a clear conflict of interest.
"The department did not take sufficient timely action to investigate the continued concerns raised by the correspondent.
"Departmental staff relied on assurances from the consultants themselves that a conflict did not exist."
Conservative housing spokesman Grant Shapps said: "We have long argued that Home Information Packs are fundamentally flawed, but it is even more alarming to discover that the consultants brought in by the Labour government to advise on the scheme had their snouts in the trough.
"This is a shocking indictment of the haphazard and botched manner in which Home Information Packs have been handled by Labour ministers.
"There now urgently needs to be a full NAO inquiry into the government's continued bungling."
The NAO investigation was prompted by a complaint from the Royal Institute of Chartered Surveyors.
A spokeswoman said: "RICS acted to protect the public from an ill-thought-out policy.
"RICS notes the contents of the NAO's report on Hips and welcomes its recommendations.
"We are pleased that the NAO has indicated that our concerns on Hips implementation were and remain legitimate ones."