Dear Miss Snark,
I have an acquaintence who completed a novel two or three years ago. She sent out a number of queries and started collecting rejection letters when, at the point of giving up, she received an offer of representation. Since then she has, at the behest of her agent, rewritten the novel several times. For two years. Without the agent sending it out to any editors. I don't know this woman well enough to ask if she has paid this agent money. I did ask her if she was concerned that the book had not been shopped at all in two years. She says trusts her agent, whom she recently met on a trip to NYC. The agent apparently loves her book, but isn't sure it or the market is quite ready yet.
From what I can gather, the agent is the foreign rights representative for some agency (the author won't divulge the name) and worked for a time as an editor at Random House. Does this happen -- this long term babysitting of a work in progress? It doesn't seem to fit the patterns you describe here on the site.
It's really hard to comment on a situation without knowing what the agent is actually saying. I've heard people talk about letters from "their agent" only to realize they were referring to ongoing rejection letters.
Without commenting specifically on this example, I can tell you that yes, this does happen. I've got a couple things right now that are being redrafted. Usually I only take on things that I think are ready to be shopped right away but sometimes I don't. And sometimes I'll send things back for redrafting after we've gotten some feedback from the rejection letters.
Your more general question of "can stuff happen that isn't like what is described here on the blog and not be a red flag" the answer is a big fat 'you betcha'. There are a lot of agents, a lot of projects and authors aren't widgets. Not that some of them wouldn't benefit from a ball peen hammer to the diemold some days...but you get the drift.