The legal pitfalls of dual agency in real estate

Why the issue of dual agency is a perfect storm that could transform business

The pitfalls of dual agency

Key Takeaways:

Realtors refer to themselves as agents, but when it comes to the agency law, the brokerage is the “agent,” not the individual salesperson.

A dual agency situation can occur when the brokerage (not necessarily a single agent) represents both sides of the transaction.

Buyer’s agents are constantly hearing the refrain: “We’ll just contact the listing agent directly.”

Off-market or pocket listings are also fraught with agency issues.

For the first time in history, homebuyers are deliberately creating dual agency situations as many refuse to work with anyone but the listing salesperson.

Couple this with pocket listings, lax agent attitudes toward dual agency issues, and a recent California Supreme Court decision changing dual agency requirements in that state, and you have a perfect storm that could fundamentally transform how Realtors conduct their businesses.

This week, I’m moderating a session at Inman Connect New York that will tackle one of the thorniest issues in real estate: dual agency.

Everyone has to cope with it, few really understand the complexities, and it is a major source of litigation in most states.

Widespread confusion

Perhaps the most confusing aspect of dual agency is how the law defines the terms “agent” and “agency.”

Realtors refer to themselves as agents, but when it comes to the agency law, the brokerage is the “agent,” not the individual salesperson.

A dual agency situation can occur when the ”brokerage” (not necessarily a single agent) represents both sides of the transaction. Consequently, an agent who works for a multi-office company with offices in Northern and Southern California could conceivably end up in a dual agency situation with someone who lives more than”700 miles away.

Confusing the matter even further, of the eight states that ban dual agency outright, four states allow designated agency (Alaska, Colorado, Maryland and Texas), three allow transaction brokerage (Florida, Kansas, and Oklahoma), and three allow both (Alaska, Colorado and Texas).

According to ”RealtorMag,” designated agency occurs when the managing broker selects a salesperson to act as an exclusive agent of either the seller or the buyer to avoid problems arising from dual agency.

A transaction broker or facilitator is permitted in states where non-agency relationships are allowed. In general, these relationships do not have the fiduciary duties of an agency relationship.

For a more detailed history of agency as well as more thorough discussion of the terms, read “From Subagency to Non-Agency: A History.”

Buyer behavior is driving more dual agency situations

In 2016, a surprising trend emerged almost everywhere in the country. When buyers call about a listing that is unavailable or unsuitable for their needs, they have no interest in hearing about other properties.

Instead, agents are constantly hearing the refrain: “We”ll just contact the listing agent directly.”

This shift is just another sign that clients have not been educated about the benefits of having a fiduciary relationship with their buyer’s agent.

Subagency was a widespread practice for many years. In this scenario, the buyer’s agency was created under the seller’s listing agreement, and the buyer’s agent had a fiduciary obligation to the seller, not to their buyer.

A California Supreme Court changes the agency rules

In Horiike v. Coldwell Banker, the California State Supreme Court ruled that for in-house deals, that the agency (Coldwell Banker and its respective salespersons in the transaction) had a fiduciary duty to both the seller and the buyer.

The California Association of Realtors (CAR) was rightfully concerned that this ruling could limit the ability of large firms to do in-house deals, raise transaction costs due to increased litigation and force agents to disclose “sensitive information about the client’s motivations or the salesperson’s personal beliefs to the other side of the transaction.”

Sadly, agents divulge this type of information all the time.

For example, a number of years ago a listing agent on a multi-million dollar property told a reporter that her sellers would take less than the listing price.

When the sellers saw the article, they filed a lawsuit. The judgment against the salesperson and her brokerage was $2 million.

How will you stay out of trouble?

Michael McDonagh, the General Counsel and Director of Government Affairs for the Massachusetts Association of Realtors, recommends that if you are in a state with designated agency or that allows transaction brokerage, then you should be crystal clear about the differences between the various types of agency and which one provides you and your clients with the greatest amount of protection.

Bill Lublin, the CEO of Century 21 Advantage Gold, suggests that the best way to avoid agency issues is to ask, “Whom are you advocating for and what are your legal obligations in terms of what you can and cannot disclose?”

Lublin goes on to warn about the dangers of being in a rush to write the offer. Many agents provide only a cursory explanation of agency, often ignoring many of the important issues.

Lublin also cautions that off-market or pocket listings are fraught with agency issues.

For example, you can create an agency relationship with a ”for-sale-by-owner” client if you advise them on the price or other issues, even in the absence of a listing agreement.

Furthermore, if you take a pocket listing that lowers the sellers” exposure to the marketplace and possibly the price as well, chances are high that you are not acting as a fiduciary, especially if you find yourself in a dual agency situation.

On the other hand, Rich Rosa, co-founder and co-owner, Buyers Brokers Only, who is also a licensed attorney, believes the solution to the dual agency issue is to be a buyer’s agent exclusively.

Rosa goes on to note how widespread agency violations actually are.

Listing agents regularly violate their fiduciary duty to the seller by disclosing the reasons the sellers are moving, the amount of any offers that the sellers have turned down, and revealing other personal data.

Agency is a patchwork of complex rules and procedures across the industry, one that agents seldom give as much attention to as they probably should.

Consequently, the next time you feel like skipping over a thorough explanation of agency for your clients, take the time to educate them to avoid more serious problems in the future.

From Inman.com

Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books.

About jptuggle


My name is Julie Tuggle, broker/owner of Carolina Buyer's Agent in Charlotte, NC. After four years working for a traditional broker, I saw the need for a firm that would represent buyers best interests only on any home for sale in the Charlotte area, including For-Sale-By-Owner homes, so I opened Carolina Buyer's Agent in 1998. Carolina Buyer's Agent specializes in buyer representation only, giving buyers the negotiating advantage throughout the home purchase process. We're one of the only real estate firms in the Charlotte area that doesn't take listings or represent sellers, so you'll never have to worry about the risk of "dual or designated agency" - the conflict of interest that exists when your agent's company is also representing the best interests of the seller on the home you want to buy.

Visit our web site, www.carolinabuyersagent.com , for more information about working with an exclusive buyer agent when you're ready to start thinking about purchasing a home. From there, you can search for MLS-listed homes and for-sale-by-owner homes, too. We'll also explain the legal difference between a dual agent and an exclusive buyer's agent so you can make the right decision on one of the most important investments you'll ever own. Search for Charlotte real estate including for-sale-by-owner homes, and find Charlotte school and community information at http://carolinabuyersagent.com/ . I'm a non-smoker and my hobbies are tennis, gardening and of course, investing in real estate!