Real Estate Agents: Get Your Money's Worth
Maureen F. Glasheen
Will the real estate agent you hire work for you? This is a question that has the real estate industry in a state of crisis these days and, of course, bears directly on what you can expect this year when you enter the housing market.
At issue is to whom the agent owes loyalty in a real estate transaction. Centuries of common law--the legal rules that courts hand down, case by case--have set down an unambiguous rule: agents owe undivided allegiance to their client whether the client is a buyer or seller. The recent growth of buyer brokers--companies that represent only the buyer in a given transaction (never buyer and seller)--signifies growing consumer understanding of these issues. But questionable arrangements persist in customary practice.
The customary practice of residential real estate in the United States has, for decades, ignored this common law rule. As a result, consumers seeking to buy or sell a home today face a confusing array of arrangements, many of which disregard the need for an agent's undivided loyalty to the client and expose unwary consumers to unnecessary financial and legal risks.
To make matters worse, a number of states have enacted legislation that rewrites common law; essentially to legitimize customary practice. Although technical and legalistic, the issue goes to the heart of what you should expect from your agent when you seek to buy or sell a home.
Consumers assume significant financial risk for their agents' acts in exchange for services their agents provide. Consumers also dish out sizeable sums for those services, mainly because of what they entail--not only access to the housing listings, but expert advice and representation when making a deal. Historically, commissions for residential broker services have run between 6% and 7% of the sales price for the home: typically between $5,000 and $14,000. Have you ever paid this much money for services in connection with a single transaction to anyone else?
This is not to say you should avoid real estate agents. When you cannot take care of yourself in a real estate transaction, an agent can save you a fortune. And, on balance, having a good agent working on your behalf will lead to a better deal than going without, particularly if you are a home buyer. But you must know that to get a good agent, you need one who understands his legal obligations to you.
Conflicts Of Interest
Law firms wouldn't represent different parties in the same financial transaction because the conflicts of interest between the buyer (who seeks the lowest price possible) and the seller (who seeks the highest price possible) are so fundamentally incompatible as to make it impossible to represent both sides fairly. Throw in the fees for "representing" both sides at once and the potential for unfair dealing intensifies. That is why this conduct has always been wrong for fiduciaries.
Agents are fiduciaries; they are required to act solely in their clients' best interest, subject to their control. Agents, such as brokers and attorneys, have the same six fiduciary duties as trustees or guardians: confidentiality, obedience, undivided loyalty, full disclosure, reasonable care, and accounting for property received. This is what you pay for when you hire an agent to work on your behalf.
You don't hire an attorney, trustee, or accountant to work only partly in your interest, for the risk of self-dealing in financial matters is obvious. Likewise with real estate agents. You cannot have partial loyalty; an agent either works for you, or works for someone else.
Until the 1980s, relatively few real estate consumers or brokers gave much thought to the legal significance of the term real estate "agent." Many brokers called themselves agents with no understanding or concern for whether they were agents, subagents, dual agents, or not agents at all. As long as they had access to the Multiple Listing Service, which lists homes for sale, they could put together deals without the uncomfortable issue of loyalty ever arising. Consumers assumed they had what they needed. A landmark 1983 Federal Trade Commission report, for example, found that three-fourths of all buyers and sellers of residential real estate believed that each had their own agent when there were two real estate brokers involved in the transaction. This, however, was not the way the industry had structured itself.
The FTC documented how the industry had taken the position that everyone using its multiple listing service represented home sellers. Thus, when there were two brokers involved, both worked for the seller and the buyer had no one on his side. The FTC noted that the practice was one of convenience, not necessity. (It was based on a false premise that agents owed loyalty to whoever wrote the commission check at closing. In fact, a seller can agree to pay the agent fees incurred by the buyer without making the buyer's agent his own.)
Such arrangements put buyers at a disadvantage. As the FTC noted: "many buyers may run several risks...if they identify as ‘their broker' a person who is not in fact intending to act as their agent." For example:
a buyer may believe a broker is "‘scouring' the market...as a representative, when in fact, he or she is picking out those properties...which both meet the buyer's criteria and which also will bring in a large commission...."
Survey data from the study revealed that, in many transactions, sellers were informed by agents about how much buyers might be willing to spend, while most buyers expected such information would not be revealed.
Such double dealing can also work against sellers, if their agent isn't protecting their interests, but seeking simply to close a deal. For example, sellers can be required to refund the buyer's money if the seller's agent (or subagent) misleads the buyer about the nature of their relationship or facts about the house. By common law, agency relationships are created when you ask another person to act on your behalf and he agrees to do so.
Special words, writing, or compensation are not needed for this informal agreement to be effective. Once he induces you to rely on him as your agent, all six fiduciary duties apply--even if he later refuses to admit that he intended to be your agent. The four most important fiduciary duties required of agents are:
To use all special knowledge always to act solely in the best interest of the client (undivided loyalty);
To follow instructions and stay within the scope of delegated authority (obedience);
To disclose all information about the transaction that might affect the client's best interest (full disclosure); and
To keep client confidences even after the agency relationship ends (confidentiality).
In many transactions real estate brokers play a "deal maker" role: they manipulate buyers and sellers to agree on a price and other terms for the home. In contrast, true agents help their clients reach common ground to make a deal that both parties can comfortably live with. When buyer and seller each have their own true agent, neither side may get everything they asked for "going in," but the true agents made sure that their respective clients did not give up too much.
Problems arise when deal makers misuse their influence or make decisions without their client's consent, leading buyers and sellers to give up more in the deal than they needed to. This can happen when real estate brokers or brokerage firms create the illusion that they can represent both buyer and seller in the same transaction.
This practice is known, in common law, as "dual agency," a breach of a true agent's duty of undivided loyalty. Dual agency is grounds for forfeiture of the agent's entire fee and other money damages. (Self-dealing and using your role of trust to advance your own interest at the expense of the client also are grounds for such penalties.)
As the National Association of Realtors, the trade association for real estate brokers, explains in a 1986 report: "Dual agency is a totally inappropriate agency relationship for real estate brokers to create as a matter of general business practice. Under common law of agency, ‘undisclosed dual agency' is a clear breach of an agent's fiduciary obligations to his principal and generally is viewed as an act of fraud."
Can't Serve Two Masters
Under common law, an agent is not allowed to represent those on opposite sides of the same transaction because it means that an agent must necessarily be disloyal to one or the other party. This is just common sense and is why consumers have assumed that they could trust that nice real estate broker with whom they have such a good rapport. Often consumers turn to family and friends to represent them for the same logical reason. Common law simply translates common sense into good old-fashioned rules of ethical behavior.
Unfortunately, there came to be a big gap between the common law and the industry custom. Therefore, buyers didn't know that, under common law, they could have an agent of their own if they wanted one, and sellers didn't know they could get all their money Back if their agent or subagent also looked out for the buyer in the deal. This was the situation Back in 1989 when state legislation mandating disclosure of agency relationships swept the country. This legislation required real estate licensees to make it clear to consumers whether they were in an arm's length customer relationship with the real estate broker or in a true agency relationship of trust and confidence.
These agency disclosure rules have encouraged more consumers to become aware of their rights and to ask the question: "whom do you represent?"
Indeed, in October 1993 market research for the NAR, 73% of sellers and 71% of buyers said it was "very important" to have an agent's exclusive loyalty. When offered a choice between using the services of agents and those of non-agent "facilitators," nearly three-fourths of the sellers and half of the buyers said they would pay less for such non-agent services and be more likely to use an attorney. Consumers clearly preferred the loyalty of agents over deal-making services of non-agents.
Now that dual agency is recognized as illegal, many real estate firms are presenting "disclosed dual agency" to consumers as if it were an alternative service, rather than another term for disloyalty. Disclosure of dual agency doesn't resolve conflicts of interest: it just attempts to legitimize them. The law still would hold home sellers accountable for their agent's actions--a buyer can sue for his money Back after closing--and the buyer would continue to have no assurance that the advice the agent provided him led to the best possible deal.
Disclosed dual agency is not an option a sophisticated consumer would choose. The sophisticated consumer knows, at the beginning of the process, whether he wants to spend the extra money to have the loyalty and protection of a broker acting as an agent. He does not begin an agency relationship or agree to pay the full fee only to consent to the agent's infidelity in the middle of a transaction, just so the agent can collect another fee in the same deal.
The only protection such disclosure offers consumers is the chance to choose another agent before a potentially disloyal agent is given sensitive financial information.
(If you are a home seller, remember you hired the entire firm to find a buyer--and that's what you are paying the firm to do. You are not employing the firm to betray you by conning the buyers into thinking the firm or one of its employees is working for them too.)
When you send an agent out to conduct your business you receive the benefits of his work, and you should bear the burdens. By the same token, your broker should not be allowed to separate the benefits of being your agent from the burdens. This is precisely what recent and proposed laws in several states intend to do.
THE DOUBLE DIP
The real problem is that dual agency has been the norm in residential real estate for many decades.
Many large firms have indulged in the lucrative practice of "in-house sales" in which only one company is involved in listing the property and producing the buyer. In other words, the same company acts as the seller's agent and buyer's agent in the same transaction to pick up the 6% or so set aside to pay two agents. Recent laws passed in Texas, Georgia, Illinois, Minnesota, and Colorado would appear to minimize broker liability for this "double dip."
The Pro-Consumer Options
Under common law, consumers have the right to choose whether to hire a broker as an agent or non-agent. The general rule is that brokers are agents. But agency law allows brokers to offer their services as non-agent "finders." This is the exception; it is designed to give consumers who can take care of themselves flexibility, not to excuse disloyal agents from accountability to their client.
But you should be aware that the non-agent finder is a narrow role: he should only be allowed to introduce you and the other party. He should not be allowed to make representations about your finances or your property, exercise discretion, or give advice (in which case agency duties apply). As long as you do not hold him out as your agent, you will not be accountable for his acts and errors.
A finder is fundamentally different from a dual agent. A dual agent is another term for disloyal agent--a "double" agent, if you will. Therefore, a "disclosed dual agent" is a disloyal agent who has told you he has been or intends to be disloyal. It is appropriate to pay a lesser fee to a finder who offers assistance in marketing your property but does not advise or represent you.
On the other hand, a dual agent, as an adviser and representative, has information about you that can be used against you and may do so to close a deal. What's a fair price for such disloyalty?
The courts have said, for centuries, that a disloyal agent deserves nothing. When agents have been found guilty of dual agency, self-dealing, or self-preference, the court makes them forfeit their entire fee. Why volunteer to pay someone more than the common law thinks he is worth?
An agent's services are priced to reflect the value added of the six fiduciary duties and the finder's services are not. The stock market, for example, offers a similar arrangement for sophisticated investors: discount brokers offer nonfiduciary services at fees appropriately below those of full-service brokers.
In the real estate industry, sellers have saved money by using the Dallas-based For Sale By Owner Club as an old-fashioned finder. But this is the only company that I know of in the country that does this non-agent service correctly--choice of straightforward finder service for a fee that is roughly one-third that charged for being a seller's agent and one-sixth of what other firms charge to be a disclosed dual agent. Buyers, meanwhile, have saved money by using agency services of either exclusive buyer broker firms, such as Buyer's Resource and Buyer's Agent franchises, or single agency firms, such as the Carriage Trade Real Estate of Philadelphia. Firms such as these, which specialize in agency services for the buyer, have been springing up all over the country.
Where To Begin?
You should begin by asking yourself whether you need an agent at all. If you cannot take care of yourself in a business transaction then it is money well spent to have a loyal agent of your own.
Most of us are not experts in real estate issues, even if we are experts in other areas. Unless we are familiar with local property values, business customs, mortgage lender rates, and other terms, it is easy to make expensive mistakes in marketing, selecting, and pricing real estate for purchase, sale or lease. The fee paid is insurance against a much greater loss later.
Those of us who know what we don't know employ agents such as lawyers, accountants, or brokers so that they will use their experience and expertise to protect us from foreseeable problems, disputes, financial loss, and lawsuits. Sophisticated consumers will not try to do without such protection or obtain valuable services for free. On the other hand, if you can take care of yourself in a real estate transaction, you should not be forced to pay for more than you need.
Choose what you need and pay only for what you get. Not everyone needs an agent to help with the sale or purchase of real property. But if you do, you should insist on loyalty if you need it and make sure you get the loyalty you pay for.
Remember the options you have under traditional agency common law and be wary of "double agents" who want to offer disclosed dual agency as another "consumer choice."
There are good signs ahead. Consumer demand has pushed the residential real estate market toward a system that allows consumers to choose the services they want and to pay only for what they get. (Remember, broker fees are not set by law; they are negotiable.) The residential real estate market is changing at an unprecedented rate due to the expansion of consumer knowledge over the past then years.
Nevertheless, until the industry gets used to old-fashioned rules of loyalty, you should remember that you are the boss in this market, and you set the terms of employment. When you engage a broker or attorney to act as your agent, you should look for companies that subscribe to a "single agency" policy or "exclusive buyer agency" policy. Steer clear of companies that offer disclosed dual agency as a policy.
Consumer Research, February 1994