Nobody Understands Buyer Agency - Certainly Not Newsweek

An otherwise very smart real estate attorney once said to a friend "Nobody understands dual agency." It seemed like a weird thing for a lawyer to say at the time but Newsweek has just proven his point.

In a rather remarkable short piece promoting buyer agency in the "Tip Sheet" portion of the July 15 edition, the magazine made the following points:

• Not all buyer agents are created equal. Most home shoppers use agents from companies that also list properties and they're likely to steer you to company listings first. The piece quoted Stephen Brobeck of the Consumer Federation of America. "It is irreconcilable conflict of interest."
  
• If you can't find an exclusive buyer agent locally, use a selling agent as a buyer agent but do some screening. Ask about his track record of saving clients' money, their training in negotiation and property evaluation, and their loyalty to you. When they suggest homes to visit, ask if they are listed by their own company. That means that the agent has a bigger incentive for you to buy it.
  
• What about the fear that listing agents won't want to work with you if they know they have to split a commission. Listing agents are required to show your offers to the owners, even it they would rather not. In this slow market it is not such a big worry.

OK, talk about not understanding agency or even the structure of real estate. Once again a brief primer on agency.

For many years listings were handled under a sub-agency agreement. A seller hires an agent to manage the sale of his house for which he will pay a commission. His contract, however, is with the agency to which any commission will be paid. The listing agency offers some portion of that commission, usually 50 percent, to any agency that produces a buyer and consummates the sale. Thus they have extended their agency to others who agree to represent their seller. This is the way real estate sales were handled for generations and is still the model in some states.

Buyer Agency. In the 1980s consumer groups and buyers began to realize that everybody had a fiduciary responsibility to the seller and that no one represented the buyer in most transactions. Even worse, most buyers didn't realize they were on their own. This was the genesis of buyer agency.

At first agents clung to the old model and buyers sought out exclusive buyer agents, sometimes paying them a fee, sometimes relying on the agent's ability to negotiate a share of the commission from the listing agent. These buyers' agents did not accept listings which lead to all kinds of problems. First, in order to make a living in this brave new world buyer agents had to cover large geographic areas and could not possibly have thorough knowledge of the housing inventory. Second, there was a real adversarial relationship generated between the exclusive buyers' agent and offices that both listed and sold properties - a relationship that seemed to be fostered by the buyer agents to demonstrate a significant value to their clients. This is the model of buyer agency that Newsweek appeared to be promoting as recently as last week.

Things have changed significantly in the last 15 years. Many states automatically require that agents working with buyers represent those buyers although other models are still in play. Where sub-agency still exists buyer and seller agents have worked out easy and reciprocal relationships where each side knows its boundaries and responsibilities. Thus, aside from a few old dinosaurs that will never get over hating buyer agency, commissions are almost always willingly split.

Dual Agents/Dual Agency. Here is where Newsweek really fouls it up. In the first instance, Dual Agent, an agent takes a listing, automatically becoming the representative of that property and its owner. This is a fiduciary role and such an agent should not then sell that property to a buyer with whom he has agreed to act as an agent, another fiduciary situation. He can sell that property to one of his customers (as opposed to one of his clients) but remember that no man can serve two masters, an absolute conflict of interest. If it is a customer he should disclose that he is the listing agent, but this hardly seems necessary when his name is on the yard sign, the listing sheet, and probably the newspaper ad. When the situation arises that a buyer client wants to see or buy the property the agent represents the agent must pass off representation of one client or the other, probably to the buyer, to another agent in the office or to the managing broker.

But dual agency is much more arms length. It exists when Joe Jones of Enterprise Real Estate lists a property owned by the Blacks and Barbara Smith of Enterprise Real Estate, with a signed buyer representation agreement shows the Browns the property. Barbara is the representative of the buyers while Joe represents the seller but they are both independent agents operating under the auspices of a single agency which does little to control their behavior. This is not the law office model where one office cannot represent both sides of a suit. Attorney's are employees of the firm; more typically owners. Real estate agents are merely parking their licenses.

Where Newsweek really gets it wrong, however, is in suggesting that Barbara has a vested interest in showing the Browns only those properties listed under the Enterprise name. There is nothing to prevent Barbara from showing properties listed by Century 21 or any other office in town and nothing that would encourage her to show only Enterprise properties. Some offices did offer a small incentive for selling in-house listings but those with good legal offices stopped this long ago.

Further, in this era of the Internet it is very easy for the buyer to check back and determine if appropriate properties are being buried by the buyer broker.

Actually, there is one advantage to being plugged into an office that does both listing and selling. A buyers agent in a big office usually hears via what is a well-developed grapevine when good listings are expected to come to market in that office and every other office in town. This is something the exclusive buyer agency office will never be able to offer.

At the core, real estate is set up to foster some really ugly competition among agents in the same office. This is, in fact, among the least collegial of professions. Top producers are fed the best referrals by management and earn much higher commission splits than do less successful agents. As independent contractors, agents are looking to their own commissions not worrying about that of their offices or other agents in it. To suggest that there is a team spirit that will promote exclusionary real estate practices is to admit you simply don't understand the process.