Few topics spark hotter debate among real estate agents than real estate dual agency. Some are passionately in favor of the practice, some are vehemently opposed. A few states have banned or tightly regulated dual agency and more states are currently considering similar legislation. Since the decision to enter into a dual agency situation is made strictly by buyers and sellers, let’s take a few minutes to define dual agency and look at some of the pro’s and con’s. I write this column in California and will therefore reference terms and examples commonly used here. If you’re in another state where terminology is slightly different, please focus on how the agency relationships work regardless of titles and labels.
Dual agency is simply the situation that exists when the buyer and seller in a transaction are both represented by the same real estate broker. Ever visit a home holding an open house and meet the listing agent (agent representing the seller)? If you express interest in the home, the listing agent will usually ask if you are currently working with an agent. If not, they may offer to submit a bid to the seller on your behalf. If you agree, you would be entering into a dual agency situation.
Why enter into dual agency situations? Here are the most commonly-heard pro’s to dual agency.
- Lower commission: The listing agent may offer to reduce their commission if representing both sides. In theory, sellers usually pay commissions for both agents. Reducing the commission effectively reduces the seller’s costs and makes the dual agency offer more attractive. For example, if the listing agent is charging the seller 6% with a requirement to share half with the buyer’s agent (3% to seller’s agent, 3% to buyer’s agent), the purchase offer might stipulate that the real estate agent representing both parties receive only 5% total.
- Inside track: The listing agent may claim they have a unique understanding of the seller’s offer selection criteria or they can get your offer in front of the seller immediately, potentially obtaining acceptance before competing offers can be submitted.
- Centralized transaction management: Representing buyer and seller allows the dual agent to more effectively manage the sale, including scheduling of inspections and exchange of documents.
- Win-Win: The achievement of a win-win agreement is usually the primary objective of agents in dual agency transactions.
Why avoid dual agency situations? Here are the con’s.
- Split allegiance: An agent’s allegiance to their client is functional, fiduciary and strategic. Supporters of dual agency claim allegiance can be split without reducing a commitment to achieve the best possible terms of sale for both clients. In reality, strategies for listing a property or submitting a competitive offer are both frequently based on information held confidential between a client and their agent. An agent who discloses a client’s confidential information to outside parties violates their fiduciary duty. But what if the other party is the agent themselves? The paradox is simple, here’s an example.
Agent Arnold lists a small Silicon Valley home for sale at an asking price of $4,100,000. The seller told Agent Arnold in confidence that he will accept $3,900,000. Buyer Bob meets Arnold at an open house and agrees to let Arnold submit an offer for him in a dual agency situation. Bob wants to offer $4,000,000 and relies on Agent Arnold for advice regarding how much to bid. Can Agent Arnold advise Bob on how to get the best deal – his fiduciary duty – without using or disclosing information confidential to the seller? Hint: Bob needs a number, he doesn’t consider “make your best offer” acceptable advice.
- Loss of services: As illustrated above, dual agency gets sticky when negotiating a sales contract for both parties. Some agents reduce the scope of their services to both parties during dual agency transactions to remove conflicts of interest. That works fine when the parties have the ability to develop their own strategy and negotiate without assistance, which is seldom the case (that’s why most people hire agents).
- Win-Win (Not) : The ideal contract could be better defined as Win-Give Just Enough To Keep The Other Side In The Deal. The ability to successfully negotiate the best possible deal for their client is the primary stock in trade of many successful agents. Withholding that service severely reduces the agent’s value to the client.
There are actually two types of dual agency, so let’s expand the simple definition provided above by addressing the role of brokers in real estate agreements. In most states, real estate agents are required to work for an employing broker. That broker either owns the office or manages the sales staff where agents work. Here in California, real estate contracts, such as listing agreements and buyer’s representative agreements, are made between the client and the broker, not the client and the individual agent (unless the agent is also the employing broker). Put simply, when you hire an agent to list your home for sale, you are essentially hiring the broker and therefore all the agents who work for the broker. You may never meet the broker, but their name or office name will be on every document you sign with the agent. How does this involve dual agency? Let’s look at another example.
Seller Ann signs a listing agreement to sell her home with Agent Sally, an agent with Happy Valley Realty. Within days an offer is received from a buyer represented by Agent Doris, who is also an agent with Happy Valley Realty.
Will this sale be a dual agency situation if Seller Ann accepts the offer? Yes, since the listing contract is between the seller and the same broker/office that employs both agents. In some states, this form of dual agency is called multi-agency, but the pro’s and con’s of dual agency described above apply.
Is dual agency risky for buyer or seller? Buyers and sellers should weigh the pro’s and con’s of dual agency situations based on their specific transaction and level of comfort with the process. Some sellers will not accept offers that create dual agency situations and some buyers will not work with agents who are employed by the same brokerage that has listed the home they want to buy. Some brokerages have developed innovative and ethical solutions to minimize risks present in dual and multi-agency transactions, while others forbid their agents to enter into dual agency situations. Consumers concerned with risks in any real estate agreements should consult with an attorney in the state where their property is located.
Have questions about real estate dual agency or other aspects of real estate buying and selling? Drop me a line!