A wise man once said "No one understands dual agency."
Since the wise man was also a real estate attorney, it might be more than a wise saying; it might even be a warning. If lawyers don't understand dual agency, then pity consumers and real estate agents. Many are not only clueless about dual agency, but about buyer's agents, undisclosed dual agents, some hybrids that we will call non-agency, and the ramifications of each.
Many states have consumer protection laws requiring real estate agents to disclose their agency relationship to customers. Some laws require this be done before a single house is shown, or even described. This is critically important. A customer needs and deserves to know if and by whom they are represented, but many agents, even when they understand the concept themselves, and they often do not, cannot clearly convey the information to their customers. It is also uncomfortable for an agent to explain, thirty seconds after meeting a customer, that they may end up as adversaries.
This is a complicated subject made more so because laws and practices vary wildly from state to state. This is our attempt to explain various kinds of agents and agencies. Bear in mind that we are not legal experts. This is merely an attempt to define the terms as they are pretty much understood everywhere. Hopefully when your agent starts explaining your local situation, you will understand enough to ask the right questions.
Agency is usually defined as a relationship in which one person has the legal authority to act on behalf of another; i.e., it defines who a professional represents and how that representation will be employed. Your insurance agency has authority to represent you with a carrier and attempt to obtain the right coverage for your home or your car. A real estate agent has his client's authority to present an offer to a seller, perhaps even talk to a mortgage officer about a client's financial situation. Agency carries a fiduciary responsibility, a requirement that the agent put his client's interests above his own. Notice that, only when an agency relationship is present, is the term 'client' appropriate. If does not exist then the customer is just ' a customer.
The relationship between a listing agent and his seller is pretty easy to understand. There is nearly always a contract stating that the agent is employed by the seller (this is not always an exclusive arrangement, particularly in commercial real estate
, where a seller may offer an open listing to many different agents, nor in some states is it necessarily in writing) and defines the terms under which compensation will be paid.
While a seller seldom has any doubt about the seller/listing agent relationship, he also needs to understand his rights and responsibilities with the other agents involved in the transaction. We will return to this later.
In the old days (approximately pre-1985), every agent represented the seller. This was part of an ancient legal theory; the guy who pays the bill gets to call the shots. The seller paid a commission upon completion of the sale and his agent agreed to share the commission ' usually, but not always 50/50 ' with the agent who brought a buyer to the closing table. That cooperative agreement created an implied contract; a sub-agency agreement; every agent who participated in showing, even talking about that listing, even those who were not ultimately successful in securing a buyer, was, by implied contract, a sub-agent representing the seller.
No matter that the sub-agent had never laid eyes on the seller while spending enough time with the buyers to know their dog's birthday. No matter that the sub-agent had become emotionally invested in the buyer's housing search, even if the sub-agent's son married the customer's daughter, the agent's fiduciary responsibility was to the seller.
Most buyers had no idea that 'their' agent was representing someone else. If they made an offer of $100,000 but confided to 'their' agent that they might be willing to pay $125,000, the agent, bound by sub-contract to represent the seller, was required to relay that tidbit to the listing agent.
Buyers were sandbagged by this lack of information.
Beginning in the mid 1980's, state agencies and consumer protection groups finally woke up and realized that a problem existed. The emphasis then became, not one of changing the system, but on making sure that the consumer was aware of the flaws in the existing rules and most states ultimately passed agency disclosure laws. These mandated that a real estate agent make it totally clear to a buyer where the agent's fiduciary responsibility, and thus his loyalty resided.
When buyers were made aware of their vulnerability under the old sub-agency rules, they demanded a level playing field.
And thus, buyer's agency was born.
Buyer's agency, obviously, is the flip side of seller agency; an agreement that an agent will represent a buyer in a real estate transaction.
At first the playing field was still not all that level. Buyer's agency was first predicated that a buyer would pay a commission or even a fee independent of a purchase, to his agent. This quickly became absurd, as it merely moved the accounting from one column to another. The seller had already agreed to pay the listing broker 6% for listing the house and the buyer was paying a 3% buyer agent fee. 9% is a lot of commission.
Buyers, usually out of financial necessity, automatically reduced offers to account for these fees and a smart seller would renegotiate his listing deal downward to adjust for the offer. Sanity ultimately prevailed and buyers' agents turned to the listing agent for a share of the commission. Sometimes this worked and sometimes buyer's brokers met some very unseemly opposition.
Seller's agents have maintained that they are forced, by buyer's agents, to shoulder 'all of the work.' Since they are the only agent representing the seller, the argument goes; they must work harder and thus should keep most, if not all of the commission.
First of all, a seller should know that a buyer's agent relieves both the seller and his agent of liability. When a subagent shows a house and makes an unwarranted or untrue claim 'No, this house has never had a drop of water in the basement,' or 'The roof was replaced just last year,' he may be assumed, as a sub agent, to be speaking for the agent and for the seller. Sometime subagents even manage to violate fair housing laws. Neither seller nor listing agents may know the sub-agent; he is just a name on the Multiple Listing Service database. But, because of an implied contract, they could be held responsible for his actions. A buyer's agent, on the other hand, is working only for the buyer. If he misspeaks or misrepresents information about the property or the transaction, it is not the fault of anyone on the seller's side and the chain of responsibility will probably end with that agent and not involve the seller or the listing agent.
Well we still don't understand dual agency, but we will discuss that and other agency relationships in a later article. We will also talk about some of the other benefits, consequences, and danger signals when employing the various types of agency.