Is Your Real Estate Broker a Double Agent? (The Cost of Dual Agency)

spanish-style-houseDual agency is one of the most difficult issues in real estate. It's a potent problem for real estate agents. And for people buying a home. Dual agency is not even legal in some states, and you should probably avoid it even if it's legal where you live.

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The Catch-22 of dual agency

Traditionally, real estate agents or Realtors have acted as "agents" for buyers and sellers. (Most of us use the term "Realtor" interchangeably with the term "real estate agent." A Realtor is an agent or broker who is a member of the National Association of Realtors.)

A real estate agent might list a home for a seller or act as a buyer representative for a purchaser. And most people expect that a listing agent would seek the best price and terms for a property owner while a buyer's agent would do the same for a purchaser.

But many times, buyers show up at an open house unrepresented. They love the house and ask the listing agent to submit an offer. The buyers don't understand that this agent represents the seller's interest. There is no way the agent can represent the seller (getting the highest price) and the buyers (getting the lowest price) at the same time.

And this conflict of interest can cost you if you're the buyer. Suppose you disclose to "your" agent that you'd be willing to pay up to "X" for the property. The agent will almost certainly communicate this to the seller because that is who he or she represents. And so you might pay more than you otherwise would. And "your" agent might not disclose anything negative about the home not required by law -- because he or she is duty-bound to the seller.

Related: 3 Things Buyers Should Never Say to Real Estate Agents

Agency

An "agent" is someone who represents another. Attorney John Reilly, in The Language of Real Estate (4th edition), explains that an agent is "one authorized to represent and to act on behalf of another person (called the principal). Unlike an employee, who merely works for principal, an agent works in the place of a principal."

"As an agent, a real estate broker is said to have a 'fiduciary' obligation to a principal. The fiduciary," says Reilly, "owes complete allegiance to the client. Among the obligations that fiduciary owes to his or her principal are the duties of loyalty, obedience and full disclosure; the duty to use skill, care and diligence; and the duty to account for all monies."

Being an agent is a serious matter. It's often said that an agent can only serve one master. That standard, however, is widely ignored in real estate.

Related: 3 Things Sellers Should Never Say to Real Estate Agents

Disclosed dual agency

It's entirely common in real estate for one broker to represent both a buyer and a seller in the same transaction. The principals have separate and opposing interests, but no matter; they both use a single broker. Technically, this is done only with the informed consent of both parties. They must both agree, in writing and up-front, to representation by a single broker. This is "disclosed" dual agency.

Why would a buyer agree to this? It may be that both parties trust the broker. Also, in some jurisdictions, a real estate agent can legally act as a "facilitator" or "transaction broker." A facilitator tries to bring the parties together and close the deal.

In many cases, dual agency is simply a practical reality. A broker wants to show available listings. A big brokerage might control a large number of local listings, maybe 25%. Buyers might like to see such inventory, but the broker represents various sellers. A buyer might hire a buyer's agent or an attorney. However, in practice in might be just as easy to have a dual agency agreement with the listing agent.

Buyers and sellers have the right to choose the form of representation which best meets their needs. If dual agency isn't for you, then as a purchaser you will want to consider using a buyer broker or attorney when buying a home,

Related: What You Should Never Say to an Agent When Selling Your Home

Undisclosed dual agency

What buyers and sellers don't want -- and what real estate brokers surely don't want -- is undisclosed dual agency.

Sometimes, agents operate in teams. A listing agent and selling agent may work together. In the same office and as partners. While they have a legal duty to not share the confidential information they learn from their buyers and sellers, such information could get out, even accidentally.

Dual agency is less of an issue if both parties agree in writing and in advance to such an arrangement. However, the conflict of interest doesn't go away just because everyone is informed. For this reason, buyers should probably avoid it.

But what if there is no written dual agency agreement? Realtors can create undisclosed dual agency in the course of a transaction, even inadvertently.

Related: Online Property Listings (Buyer Be Wary)

Dual agency example

Here's an example. Broker Smith has listed the Lincoln house for $395,000. A listing agreement sets out the price at which Smith can offer the property for sale. It does not allow Smith to offer the property for any other price.

Now imagine that Smith shows the property to buyer Jones. This is the fourth house they've seen together and Jones really likes Smith. Jones sees Smith as someone he can rely on, someone he can trust. In effect, Jones sees Smith as his agent.

That's a problem because the parties have not signed a dual agency agreement. The seller thinks Smith is his agent -- and only his agent.

Meanwhile, in showing the property, Smith casually mentioned that the seller told him he'd actually accept $375,000 instead of $395,000.

The listing did not authorize the $375,000 price.

"Because of the close personal relationship between broker (agent) and seller (principal)," explains Reilly, "the broker often learns certain confidential information about the seller's property and financial situation of the principal. The broker cannot legally disclose this information, even after the transaction is completed and the fiduciary relationship terminated.

"One reason it is so difficult to represent both parties in a real estate transaction is the conflict of interest that arises for the broker, who has a duty to keep confidential that information learned from the principal and also a duty to disclose all pertinent information to the principal."

It can also work the other way. Smith might mention to the seller that buyer Jones -- a buyer who sees Smith as his agent -- really liked the property and said he was willing to offer $405,000. Jones, of course, would not want the seller to know such information.

Related: Is the 6% Real estate Commission a Rip-Off?

How to protect your interests

Ethical brokers have no interest in undisclosed dual agency and understand the obligation to treat all parties to the transaction fairly.

For brokers, agency disclosures are crucial and if someone has a dual agency concern then it certainly makes sense to discuss the pros and cons.

One sure way of avoiding dual agency is to hire a buyer's agent before you shop for a home. Buyer's agents only represent buyers and do not list homes for sale. And regardless of who your agent is, you might want to be careful about how much you reveal to him or her.

A real estate transaction can be fun and exciting. But it's still a business deal.

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