In
the past decade or so, buyer agency has emerged in the real estate
brokerage business as a nationwide practice. Before this change in
brokerage practice, real estate licensees almost always represented the
seller's interests, and buyers were (legally) left pretty much on their
own. For several reasons, buyer agency initially was hailed as a long
overdue innovation. By providing agency representation to buyers, it
put them on an even playing field with sellers. Buyer agency also
"legitimized" common sales tactics used by licensees in which they
allowed buyers to infer that the licensee
represented their interests (when, in fact, they legally did not).
However, buyer agency has created problems as well as solving them. The
most significant is dual agency, the resulting conflict of interest
when agents attempt to represent both buyer and seller in a
transaction. Before the advent of buyer agency, dual agency in real
estate brokerage was very rare and usually only occurred in specialized
transactions, such as tax-deferred exchanges. In those circumstances,
dual agency usually isn't much of a problem, since buyer and seller
usually are quite sophisticated and also are likely to have retained
their own legal and accounting advisors. However, now that buyer is
common, dual agency can arise in
residential brokerage, where the participants (including, often, the
agents themselves) are not so knowledgeable; it can occur when a
licensee has listed a property (and thereby become the seller's agent),
and later wants to show it to a buyer client with whom she has
established a buyer agency relationship.
This article provides a brief overview of past developments which led
to this situation, a summary of the situation as it now stands, and
some reflections upon the implications of these problems. The
conclusion is that full-fledged agency representation cannot exist
under such circumstances and, therefore, the future of agency itself,
in residential brokerage, is uncertain.
History
A real estate licensee is, legally, an agent, and must abide by agency
law, as well as license law. An agent is an employee of a principal;
the agent represents the principal in some way, and has a duty to act
in the principal' best interests, even if doing so is against his own
personal best interests. The common example of such a potential
conflict occurs when an offer is made: sellers want the best possible
price, listing agents want a sale so that they no longer have to spend
time and effort marketing the property. But, if the agents believe the
offer is too low or that there are other problems, they should inform
their sellers and run
the "risk" that the offer might come to naught. Agents must (1) obey
the principal' instructions (so long as they are within the law), (2)
be loyal to the principal' interests, (3) act in good faith, (4) use
professional judgement, skill, and ability in his / her actions, (5)
account for all money belonging to others that comes into their
possession, (6) perform agency duties in person and (7) keep the
principal fully informed as to developments affecting their
relationships.
Until the advent of buyer agency in residential brokerage transactions,
real estate licensees represented only the seller. The primary agent
was the listing broker; all other licensees involved in a transaction
(salespersons, licensees associated with other cooperating or
multi-list firms) were subagents of the listing broker and, therefore,
agents of the seller as well. This arrangement is straightforward and
has no inherent agency conflicts, provided that the agents involved
understand and respect their agency duties to the seller. However, a
consistent problem was that buyers were likely to assume that
sub-agents working with them were
working for them as well, often encouraged by agents pointing out that
"...our service costs you nothing!" while neglecting to point out,
also, that "this is because, legally, we aren't allowed to serve you."
This resulted from the inherent conflict between legal theory on the
one hand, and the necessity to survive in a real world on the other.
Many licensees who were showing buyers around ended up acting and
performing as though they represented the buyer' interests, offering
advice and counsel that clearly violated their agency loyalty to the
seller.
At first, the states initiated requirements that licensees present
potential customers with an agency disclosure document, which explained
the licensee' agency duties to the seller; many of these disclosures
also made a point of stressing that buyers had no agency
representation. The purpose of the disclosure was to assure that,
before the agent' services were used, a prospective buyer was aware of
the agency relationship that prevailed. Not incidentally, the
disclosure requirement also was supposed to get real estate licensees
off an uncomfortable hook by stifling "He said he' look after me!"
lawsuits by disappointed buyers. Another result
of agency disclosure, however, was to stifle the useful selling
technique of genuinely (if illegally) looking after the buyer, as well
as creating considerable suspicion of licensees among many of those
prospective buyers who actually bothered to read the disclosure.
A further concern was the inherent "unfairness" of the commerce between
buyer and seller: the seller had the assistance of a supposedly
knowledgeable agent while the buyer was on his own. No doubt this
concern was exacerbated by the introduction of agency disclosure, which
had the side effect of increasing buyers' awareness of their lack of
representation. At the same time there was a continuing trend in both
legislated and case law to greatly restrict the range and effect of the
doctrine of caveat emptor, thus increasing the
perceived "need" for some sort of buyer assistance.
The eventual logical step, then, was to initiate buyer agency. In and
of itself, buyer agency is a sound idea. If the seller has an agent,
then the buyer should have one as well. The playing field is equalized;
both parties have professional representation and advice at their
disposal. Many states have gone further in their real estate license
laws to include the doctrine of implied buyer agency: the law assumes
that a licensee who is showing a buying prospect around is
automatically an agent for that prospect unless there is a contract
that says different. The result is that in most states, most
residential brokerage firms now will
represent either party: they take listings, and they accept buyer
agency agreements.
The Dual Agency Problem
With buyer agency common, the possibility arises of representing both
the buyer and the seller in the same transaction (dual agency). In
brokerages that will represent either party, salespeople solicit and
secure listings (the firm becomes an agent of the seller) and also sign
agency agreements with buying prospects (the firm becomes an agent of
the prospect). But what if one of these buyers is shown a property that
the same firm or licensee also listed? Now the salesperson (and the
firm) becomes the agent for both. Given the prevalence of multiple
listing, one might argue that dual agency would be an isolated case,
but it is not. While it
may not be the most common situation, the motivation of both agents and
firms to be on both sides of a transaction (selling their own listings
to their own buyers) assures that it will happen frequently. Recall
that the concern about dual agency is not limited only to actual
consummated sales, but to any situation wherein the agent will
represent both parties. Particularly, dual agency occurs when a buyer
with an agency contract with a brokerage firm is merely shown a
property also listed by that same brokerage.
An ancient precept of agency law is that "no man can serve two
masters." Nonetheless, dual agency in real estate brokerage is legal in
most states. In practice, however, it is an awkward and poor solution.
Agents representing both parties in a transaction cannot perform their
contracted agency duties to either party without violating the same
agency duties that have been contracted with the other. Consider these
examples: A buyer' agent tells a prospect, "These high ceilings may
look nifty, but your heating bills will be astronomical, you' have to
climb a lot more stairs to get to the bedrooms, and you' have a devil
of a time changing the
bulbs in those fixtures way up there." The seller' agents tells his
principal, "These people seem to really want your house; I think you
should hold out for a high price." Both are reasonable from the single
point of view of agents properly looking out for their principals' best
interests; indeed, agents would be obliged to make these statements if
they represented their professional opinions. But a dual agent has two
principals. If these statements were made by the same agent, who
represented both buyer and seller, then while this agent would have a
clear agency duty to make the statement to one party, doing so would
just as clearly be in
direct violation of the agent' duty to the other. Even when the agent
tries to maintain impartiality (one of the requirements of dual agency
as permitted by the states), given the agent' knowledge of each party's
objectives, there is considerable risk of letting something slip, even
unintentionally.
"Solutions"
In most states, the real estate brokerage industry and license law
administrators have been trying to find ways to deal with the dual
agency problem. Attempts at solutions to the problems of dual agency
come about in two ways. The states (often influenced by brokerage
interests) may change and refine their license laws. Also, brokerage
businesses themselves may institute practices that might skirt the
problems of dual agency. At times it seems that there are as many
"solutions" as there are states and firms wrestling with them, but none
has provided an effective solution. This is because it is inherently
impossible to have genuine agency
representation to both sides of a transaction. The end result is that
no matter which course is chosen, agency representation is curtailed
(or even eliminated) for one or both of the transacting parties.
The most common approach in state license law is to require that before
a dual agency can exist, all parties (agent(s) and principals) receive,
read and sign a dual agency disclosure. The disclosure usually will
describe the dual agency, perhaps recap agency duties, and then provide
a list of restrictions in which all parties agree that there are
certain things which the dual agent cannot do. At the very least, the
states require all parties to a dual agency to agree that the dual
agent cannot inform either party (buyer or seller) of the price and
terms the other will accept. Leaving it at that is dangerously
limiting, since there can be
plenty of other information which the agent may have about either party
which would be useful to the other. Therefore, some states go further
and require the dual agency disclosure/agreement to state that the
agent cannot reveal to either party anything advantageous about the
other. This is more comprehensive, but it requires judgment calls by
the agent: Which information is advantageous? Which is innocent? The
effect is that in dual agency the prudent course of action for the
licensee is to all but abandon agency representation for either party.
Some states now permit brokerage without agency by
allowing transaction brokerage (also called facilitative
brokerage), which gets around the dual agency problem by
eliminating agency altogether. Licensees acting as a transaction broker
must inform the parties involved of their status. A typical transaction
broker notice states that the licensee facilitates a
transaction between a seller and a buyer without representing either
party, and has no fiduciary duty to either party except the duties of
accounting and to use skill, care and diligence, along with the
requirement to treat the seller and buyer with honesty
and fairness. A few states now have outlawed dual agency and require
transaction brokerage whenever a licensee deals with both parties.
At the level of the individual brokerage business, a variety of
"solutions" is being tried. The objective is to prevent a single
licensee from representing both parties. Most commonly, when the dual
agency situation occurs, either buyer or seller is "off" to another
licensee within the brokerage firm. Typically, the salesperson who has
both the listing and the buyer representation contract continues to
represent the seller, while a different salesperson is brought in to
assist the buyer for this particular showing. While it appears that the
situation is resolved — parties now are represented by
separate licensees — it is not. The original
salesperson has knowledge about the potential buyer; as the now
exclusive agent of the seller, he or she is required by agency law to
use this information to assist the seller. But is the buyer agency
contract canceled? Is the licensee really free to transmit such
information to the seller? It is likely that the courts would be very
unsympathetic to such an interpretation, and therefore that the
licensee will not be able to provide full agency representation to the
seller. Of course, the firm' buyer agency contract could contain
language allowing the agent to do so or, conversely, the firm' listing
contract could state that in such an event
the seller could not benefit from the agent' information about the
buyer. In either case, however, we are beginning to approach
transaction brokerage rather than full agency representation.
How about the buyer? He may be annoyed and uncomfortable at having to
suddenly work with a different agent; they might not get along, but
even if they do the established relationship with the original agent
will be absent. The new agent has to be informed about his temporary
client; should the original agent share information about the buyer
with the new one? What if the new agent knows quite a lot about the
seller (salespeople who work together will converse from time to time,
and might not always be circumspect); can this information be shared
with the buyer? Finally, suppose that no transaction occurs, and the
buyer returns to the
original agent; later on, he is shown a property listed by the one-time
temporary agent. Now that agent is at the crossroads; he now has
information about the buyer, but can he share that information with his
seller?
A critical issue here is that even when the firm provides a separate
agent for one of the parties, dual agency is not legally avoided. This
is because in most— not all states— is not the
salesperson who is the buyer' or seller' only agent— firm is
the primary agent and so, in this situation, the brokerage itself
remains a dual agent. (Anyone who examines a listing or buyer agency
contract will realize that the contract is with the brokerage firm and
not with the individual salesperson, who actually is acting as the
firm' subagent.) This is more than just a legal nicety because the firm
maintains responsibility to both parties for properly
conducted business. A very dangerous potential pitfall is that both
agents work with the same firm and, so, are likely to spend time in
each other' company— sometimes talk business. How much
potentially useful information might be divulged in such situations?
How careful will they be to always remain closed-mouthed about their
clients?
Buyer agency is supposed to assure a level playing field in terms of
agency for both parties. However, when the dual agency situation
arises, it does indeed do so, but not in the manner "intended": The
result is that agency representation for both is severely curtailed.
Rather than give the buyer the same agency advantage the seller
normally has, what ends up happening is that the buyer still doesn't'
get much more agency assistance than caveat emptor, while the seller'
agency representation is reduced almost to the same near-nonexistent
level.
It is obvious that at present no universally acceptable solution
exists; rather, the situation is in flux: The various states present us
with almost every conceivable arrangement. Dual agency is pretty much
universal, except in those states which have outlawed it in favor of
transaction brokerage. In many states agency of some kind is implied
whenever a licensee deals with a buyer or seller; others also allow
nonagency transaction brokerage and at least one apparently is
considering replacing agency altogether with universal transaction
brokerage.
Where Do We Go from Here?
Dual agency, in its various incarnations, and transaction brokerage
appear to be attempts at solutions to the problem of dealing directly
with both sides to a transaction, but their real purpose is to get
licensees off a potentially nasty legal hook, at the cost of a serious
diminution of service to principals; neither buyers nor sellers receive
effective agency representation and assistance. By encouraging
regulators to allow limited dual agency and/or transaction brokerage,
real estate brokerage professionals may be abetting expedient
solutions, but in the long run they probably are shooting themselves in
the foot. This is because they are
ignoring the difference between merchandising and professional real
estate brokerage. The merchant stacks his goods on the shelf; customers
inspects them on their own and, perhaps, chooses to buy. Professional
real estate licensees offer much more than a catalog of wares: They
offer service. This service is expensive. Typical commission rates are
in the 6% to 7% range; in many parts of the country this means that a
median home transaction can involve a fee that goes into five figures.
For this kind of money, buyers and sellers ought to expect more than
merely a shopping experience. The real estate professional' service
should include advice
and guidance, giving the client the advantage of the licensee'
experience, knowledge and access to a large and useful volume of
information. It is the service that buyers and sellers are purchasing;
it is the availability of this service that the brokerage industry
historically has used as its major selling point: "We know how to sell
your house." "We can help you buy the home of your dreams."
The currently applied "solutions" of some kind dual agency and/or
transaction brokerage severely curtail agency service, and have the
effect of reducing the licensee to a conspicuously silent purveyor who,
because his "wares" cannot be conveniently collected in one place,
drives the customer around to look at them. The dual agent,
effectively, combines the services of a minimum-wage convenience store
clerk and a taxi driver. This is not "service" for which one would
expect to pay (or receive) a fee of several thousand dollars.
Experienced and knowledgeable parties may not need the advice and
counsel of an agent, but in a good many
residential transactions, the parties involved don' have that kind of
advantage. For them, dual agency and transaction brokerage do not
provide the agency assistance they may need, and they may contend that
with dual agency, they aren't' getting what's being paid for.
In the last few years the real estate brokerage industry has realized
that such innovations as the Internet can cut into the traditional
brokerage business and provide intense price competition. Instead of
using brokerage services, buyers might surf the net, looking at
listings and making their choices. Sellers, similarly, will post their
own listings, or use the far less expensive service of someone who will
do it for them. This procedure will leave the brokerage business out of
the loop, and it will wither and die.
This sort of thing doesn't' have to happen. No matter how glitzy,
Internet marketing is merely a form of merchandising. To bypass the
brokerage, users will have to arrange their own showings, do their own
negotiating, answer their own questions and deal with closing and
settlement by themselves. In other words, they will have to do without
the services that an agent can provide them. How many of them are
equipped to do that? One could suggest that so long as the agent can
provide professional service, there will be a great many clients who
will want to use it and pay for it.
To survive in its present form, the brokerage business will have to
emphasize its professionalism and its service role, and will have to be
able to provide that service to its customers. Agency is the heart and
soul of this service. To accomplish this will require, among other
things, continuing emphasis on education and professional capacity and
knowledge, but within the context of this paper it also means that dual
agency must be eliminated and, along with it, such other "solutions" as
mandatory transaction brokerage. Real estate licensees simply cannot
represent both sides of a transaction and also provide any sort of
effective service,
and they will not survive in business without providing agency service
to their clients. License laws and business practice must be altered to
assure that both buyers and sellers receive advocacy agency
representation not only from the individual salespeople that they deal
with directly, but also from the brokerage firms themselves.
Ideally, licensees and brokerage firms should be required to specialize
either in seller agency (listing brokers) or buyer agency (buyers'
brokers). This may seem to be a radical solution, but it is the only
way to guarantee proper agency for all parties. Any solution less
far-reaching necessarily allows for the possibility that a licensee or
a firm may end up having contracted agency for both sides to a
transaction.
As a practical matter, though, we should assume that the brokerage
industry would much prefer a solution which allows firms and even
licensees to solicit both buyers and sellers. If this solution is
pursued, then there would have to be very clear laws and regulations
which, when the "dual agency" situation arises, defuse it and assure
proper agency representation to both sides. Of necessity this would
mean that for one of the parties there would have to be some sort of
mandatory transfer of agency representation away from the influence of
the dually contracting licensee and/or brokerage firm. This means that
one of the parties would have to
employ licensees from another firm to represent them in such situations.
Although this would maintain agency representation, it still would
create other problems similar to those of requiring different agents
within the same firm: Who (buyer or seller) gets transferred to another
agent? How will a buyer or seller react to suddenly having to work with
an unfamiliar licensee and firm? What if no transaction results from
the situation: Does the outside licensee or firm get paid for their
trouble — do the transferred clients return to working with
their original agents? Suppose buyers want to look at several listings
held by the firm with which they have buyer agency contracts; do we
transfer agency back and forth
for each one? Do we transfer agency a single time, and then show all
the listings at once? Of course, agency contracts and disclosures would
have to warn clients of the possibility of being transferred to another
agent, and establish at the outset which party' agency representation
would be transferred. Inevitably such a policy would create far more
complication and annoyance both to principals and agents than would
absolute separation of firms and licensees into exclusive buyer or
seller agents, but not both.
The brokerage industry needs to plan for its future. It isn't' doing
all that good of a job. Today' solutions to dual representation are
short-sighted and self-serving: to have the cake and eat it too by
representing both sides without getting into legal trouble. This is
accomplished only by diminishing or eliminating the service aspect of
the business, but it is this service that can only be provided by
agency that is the only hope for the present industry' future.
Licensees and regulators should concentrate upon the long-term welfare
both of the brokerage industry and of the many buyers and sellers who
will need, and pay for, its services.
Buyer agency is a fact of life and it isn't' going away any time soon.
It shouldn't' the industry' future depends upon being able to
adequately represent both sides. The brokerage industry probably will
end up being overhauled one way or another sometime soon; it would be
best for all concerned if the necessary changes assure that the service
aspect of the business remains intact, and part of the solution is to
eliminate dual agency.
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