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Dual Agency Smack-Down: Real estate in real life . . .

Kicking this back up to the top. I wrote this on November 19th, 2006, but nothing has changed since then. But, as it happens, our friends at Agent Shortbus have taken up the topic of dual agency, albeit without reference to anything rigorous or dispositive. We have a whole category devoted to dual agency, and some very interesting Bloodhounds have weighed in on the topic, over the years. I think I’ve written more on the subject than anyone — possibly more than anyone, ever — but this one post is the giant-killer on dual agency.

So: While our #RTBar-buddies are telling are telling you that dual agency feels just as good to them as a healthy bowel movement, this post explains — in painstaking detail — why disclosed dual agency cannot possibly be effected without persistent, repeated, egregious agency violations against both principals to the transaction.

Don’t doubt my gratitude, though. I love the #RTB marketing message: A “professional” Realtor won’t do open houses, but he will take a double dip when the opportunity presents itself. I cannot think of a better way of selling our own high standards than for our competitors to be so forthcoming about their self-serving “professionalism.” Very nice.

Anyway, even though every bit of this is painfully obvious, here is why even a properly disclosed dual agency is unethical.

–GSS

 
Addressing Jeff Brown’s claim that Dual Agency is more about perception than reality, and Russell Shaw’s contention that clients do what they intend to do, rather than what their agents advise them to do, let’s go buy a house and see what happens.

I’m going to split my personality in thirds (I have plenty to go around). Realtor Gregory is going to represent the buyers. Realtor Stephen is going to represent the sellers. Then we’re going to reexamine events from the point of view of Dual Agency, with Realtor Swann representing both parties in a Disclosed Dual Agency.

So: Realtor Gregory is out showing homes with his party and they settle on one they like, listed by Realtor Stephen. Because it’s a buyer’s market, and because the buyers aren’t very well-prepared, they don’t write a contract right away.

What’s the best day to write an offer? Tuesday, in principle, but the absolute best day is the first Tuesday after the first of the month. The buyers have never given this a second thought, but it’s Realtor Gregory’s job to know.

He sends them to Logan Hall of SallieMae Home Loans. Why? Because, although they have good credit and good incomes, they have no cash. Logan can write a fast 80/20 loan with very low closing costs.

When they finally write the offer, Realtor Gregory recommends a structure like this: List price less five percent with an additional three percent coming back to the buyers as closing costs. (Who actually pays those closing costs? The buyers. They borrow three percent more than they would have if they had taken the whole discount off the price.)

What’s the closing date? Again the buyers have never, ever thought about it, but it’s Realtor Gregory’s job to know. The buyers are in a lease until the end of January, and obviously they would want to limit the number of days they pay for two homes. But: Mortgage interest is paid in arrears. If the buyers close very late in the month, they will pay a small amount for those few days of interest, and then their next payment will not come until March 1st — a nice breather. Closing too late in the month is bad because things can slip through the cracks and spill over to the start of the month — which means almost a full month of interest payments in advance. And Realtor Gregory likes to skip Mondays to avoid hangovers and sick days. Ideally, he wants a Tuesday, seven to ten days from the end of the month.

But wait: The buyers are taking three percent in closing costs. Who cares about pre-paid interest? The buyers might not know to care, but Realtor Gregory cares. Logan Hall’s closing costs are so low that he might be able to apply a big chunk of that three percent to buying down the interest rates, leaving the buyers with extra money in their pockets with every monthly payment.

How much in earnest? Five hundred dollars right now, and a free bullet to shoot yourself in the foot with. This is another thing they might do with that three percent seller contribution: Refund the earnest deposit to the buyers at Close of Escrow. They can’t take more money off the table than they put on it, but they can take back every dollar they did bring. And Home Depot will be eating all of their cash for quite a while.

Now this is not a hugely aggressive offer. Buyers are always afraid they’re going to lose their dream house, so rarely are they willing to push things as hard as they might. But: What aggression there is in this offer was put there by Realtor Gregory, not by the buyers. Most of the very subtle ideas the buyers will have known nothing about, until Realtor Gregory explained them.

That’s agency — real, not perceived. It was caused by the agent, not by the clients, who really had no idea how to construct an offer for a home.

Want proof? What could Disclosed Dual Agent Realtor Swann have done in that circumstance? The pricing advice is a violation of the Dual Agency, as is the recommendation to go for closing costs. The advice on when to write the offer and when to close is a violation, as is the advice on how much to offer in earnest. The referral to the lender might be clean, but any direction Realtor Swann give to lender Logan Hall is probably a violation.

Do you see why? Anything that Realtor Swann does to the advantage of his buyers is necessarily done to the disadvantage of his sellers. What’s the best day for them to get an offer? Friday. What’s the best day for them to close? On or before the first five days of next month.

Everything that Realtor Gregory might do, as sole representative of the buyers, Realtor Swann must not do, as Disclosed Dual Agent. This is not a matter of perception, this is a real difference in performance. The buyers can direct Realtor Swann however they wish, but he cannot advise them as to what is to their advantage, and for the most part they do not know. If Realtor Swann is faithful to the limitations of Disclosed Dual Agent, the offer the buyers make for the house will necessarily be substantially worse than the offer written by Realtor Gregory.

Now let’s switch sides and work with Realtor Stephen as he and his sellers weigh what to do about the offer. It might suck eggs, they reflect, but at least it doesn’t suck rotten eggs. They’ve been waiting for four months for an offer, so they know not to scare away a bird in the hand. On the other hand, it’s a long closing period, and the buyers are clearly only marginally qualified. What if the sellers accept the offer, wait two months and then have it fall apart anyway?

Enter the non-refundable earnest deposit. The price is what it is, and the sellers are resigned to either accepting it or staying put for a couple more years. But Realtor Stephen suggests a way to at least take the risk out of taking the offer: Counter, bumping the earnest deposit to $2,500, and making it non-refundable to the buyer at the mutually-satisfactory completion of the repair negotiations. That way, the sellers either cash out in two months or they get $2,500 in compensation for holding the property off the market for those two months.

Inviting Disclosed Dual Agent Realtor Swann back on stage, is the proposal suggested by Realtor Stephen to the advantage of the sellers? You bet. Is it to the disadvantage of the buyers? Hugely. Could Realtor Swann suggest something like that to the sellers? Absolutely not. Is this is real difference, not a matter of perception? Oh, yes. Is it something that sellers are likely to come up with on their own? Not hardly.

Would the buyers be better represented by Realtor Gregory or Realtor Swann?

Would the sellers be better represented by Realtor Stephen or Realtor Swann?

I don’t think there is any counter argument to be made to this. By this demonstration, it is slam dunk obvious that separate representation is better for buyers and sellers, considered separately, than a Disclosed Dual Agency. The only workable way even to achieve Disclosed Dual Agency is by repeated, overt agency violations against either the buyer or the seller, or each in their turn. In other words, you would have to hint at them what to “order” you to do, and each one of those hints would be a betrayal of the interests of the other party.

I don’t think you can gloss over this. I think the pro Dual Agency argument is toast. Disclosed Dual Agency cannot possibly be effected — in reality — without repeated, overt agency violations…

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  • 16 comments

    16 Comments so far

    1. Doug Quance November 19th, 2006 5:37 pm

      Big Greg… delivering the pile-driver…

      Hey, let’s not forget that Dual Agency is also an invitation for legal recourse, in this litigious society we now live in.

      I am enjoying this…

      I don’t have to worry about Dual Agency – my broker forbids it. And when I was with a broker that did allow it – I wouldn’t participate.

      I’m going to have to give this round to Greg… though I am trying really hard to keep an open mind to Russell’s argument.

    2. Bonnie Erickson November 19th, 2006 9:23 pm

      Let me get some clarification. Minnesota does not have a “disclosed dual agency” category. Our clients must agree, or not, to dual agency at the time they sign for us to represent them. Every agent and the broker in the brokerage represent the client (either buyer or seller). If the client refuses dual agency at representation contract signing, we cannot show their house to a buyer represented by our company or if they refuse dual agency as a buyer we cannot show that buyer any of our company listings. Your description sounds like the agents in your brokerage can provide full agency representation for their side of the transaction and that it is only the broker who is dual. Is that correct? In Minnesota the entire office is dual or single based on the client’s request. We also still have sub-agency, IF we take a buyer customer out without a contract, we are considered sub-agents of only our own company listings until the buyer signs a contract with us to represent them. We are not, however, considered sub-agents of other company’s sellers. Our default position is “facilitator” in most cases.

    3. Doug Quance November 19th, 2006 10:12 pm

      Yes, Bonnie… In Georgia we have what is called Designated Agency, in addition to Dual Agency. Designated Agency is a form of Dual Agency whereby only one Broker represents both sides – but each side has a Designated Agent.

      The Designated Agents are empowered to fully represent the interests of their clients as they would in any transaction not involving another agent in the same brokerage.

      Since the Broker would only be involved when a disagreement exists between the parties – and said Broker would be bound to treat all parties fairly – it works rather well. Each party gets full representation without the restriction Greg pointed out in his post.

    4. Greg Tracy November 19th, 2006 11:12 pm

      Your example doesn’t entirely hold water. First of all your buyers and sellers are living in a vacuum without any consideration of what they want. You are hypothesizing about the best time to make an offer/receive an offer as if it is a one-size-fits-all proposition, which it is not.

      The best time to make an offer is when buyers find the right home. If I show some buyers a home on Wednesday and they wait until Tuesday to write the offer and in the mean time the home sells, that doesn’t benefit the client.

      The best time to accept an offer is when one is presented. We receive offers every day of the week. FSBO sellers are a bit more desperate on Tuesdays and Wednesdays after not receiving offers and feeling the ping, but when sellers have an agent, assuming the agent is good, don’t sweat the weekends because they don’t necessarily get more showings on the weekend, or at least not so many more that they would want an offer on a Friday.

      When a buyer wants to write an offer on a home I have listed I can handle the negotiations fairly simply by letting both sides know that if I am a dual agent I will simply give them their options and explain the benefits of those options and allow them to make decisions. I can let them know that the buyers, sellers, and I, all have the same goal- to sell this property. Now we just need to work out the numbers and dates.

      The buyer asks, “How much should we offer?” and I reply, “The best way to make that decision is to see the comparables and decide your level of interest. Let’s pull up the comparables and go over them so you can decide what price you feel comfortable with. There is no right answer- if you absolutely want this house you can reflect that in your offer.” And I would counsel them as to what the market is doing.

      Procurring an offer is in the sellers best interests, no matter what day of the week it falls on.

    5. ardell dellaloggia November 19th, 2006 11:15 pm

      We have Designated Agency in Wa. The “default position” is agent for the buyer unless you are “the” listing agent. All agents represent buyers unless they have a previous agreement to represent someone else in the transaction. Only the designated brokers, IF called in, which they rarely are, would be acting as Dual Agents.

      Buyers do not have to sign agreements in order to be represented.

      As listing agent, I did two recently where I offered the buyer the fee to take or to hire an agent with. The one who took it worked great…everyone happy. I represented the seller only. The one hired an agent went very badly, very, very badly. Not sure I’m going to try that again.

    6. [...] The important word is “detriment”. I think the argument I posted yesterday eats that language entirely. The implication is that any dual agency that makes it before a judge will lose. There is absolutely no way to comply with that language. The only method even conceivable is to leave both parties flailing stupidly like FSBOs and BUBBAs. [...]

    7. [...] I determined that there is no way to practice disclosed dual representation, as it is presently unde… The only workable way even to achieve Disclosed Dual Agency is by repeated, overt agency violations against either the buyer or the seller, or each in their turn. In other words, you would have to hint at them what to “order” you to do, and each one of those hints would be a betrayal of the interests of the other party. [...]

    8. Patrick Connolly October 5th, 2008 9:00 am

      If dual agency is laid at to both parties clearly as a facilitation process and any “hints” or information given to the seller is given to the buyer as well. Granted these hints don’t have a persuasive nature to them. These are documented scenarios. The seller needs to know in writing that the comps he is given to determine what price he will accept are going to be the same comps that the buyer will be given to determine what price they are willing to pay. The closing dates and minimal interest at the end of the month strategy for the buyer will also be provided to the seller. As long as both parties understand that these negotiating strategies will not be advocated more for one side or the other by the dual agent or facilitor then the liability of dual agency is greatly reduced. We can never totally eliminate liablities with dual agency but we can minimize them. Just as we can not totally eliminate liability with single agency and exclusive rights to represent.

      Open to thoughts

      Patrick

    9. Mark Brian February 18th, 2010 11:40 am

      Excellent article and also points in the comments. I do not like dual agency myself and wish it were not legal in my state. Thank you for the food for thought!

    10. Lisa Johnson February 18th, 2010 3:24 pm

      Well written article dual agency is something I have yet to fully deal with on a personal level. I cannot say if I am against it or for it due to my lack of exposure. But your article pointed out some interesting key aspects and showed it in a new light. Thanks for something interesting to think about

    11. Susan Zanzonico February 18th, 2010 6:32 pm

      We discuss and explain agency relationships with our buyers and sellers upfront. Its common in my area of New Jersey to see dual agency.

      As I was reading this great article I was totally seeing the conflict there…but Greg T makes some excellent points as well. There have been a few situations where I have asked another agent in the office to represent me for a referral and/or got my manager involved. This topic seems to go on and on but never gets dull!

    12. Al Lorenz February 19th, 2010 1:19 pm

      Timeless and thanks for putting to the top again! I’m linking to it for my clients to read!

    13. Greg Swann February 19th, 2010 1:25 pm

      > I’m linking to it for my clients to read!

      Oh, bravo! That is how you raise standards in a way that means something to real people.

      “An educated consumer is our best customer.” –Sy Syms

    14. Ryan Ward February 19th, 2010 9:11 pm

      For me, Greg Tracy has the best argument. True representations comes in many more ways than the example outlined within the post.

      I think a better title would be: “This is an example of how not to execute dual agency”

    15. Greg Swann February 19th, 2010 11:11 pm

      > True representations comes in many more ways than the example outlined within the post.

      I didn’t respond to Greg Tracy in 2006 because I thought his argument was weak. Obviously every deal is different, but any advice I give to one party is necessarily to the disadvantage of the other party. The only way to escape this is by advising neither party, which is worse for both. Do you dispute this? If not, then Greg Tracy’s demurer is a smokescreen. There is no ethical way to represent both parties in a real estate transaction.

      I worked all this out the first time, going to the extent of writing a dual agency disclosure that actually discloses the truth of what is going on. It’s never been used, to my knowledge. I’d be amazed if it were. Fully-informed consumers abhor dual agency for obvious reasons. The only people who like it are Realtors — again for obvious reasons.

    16. Ryan Ward February 20th, 2010 6:29 am

      Well, I’m sure you have worked out your scenarios in what you consider to be representation. I believe that we are simply going to disagree and that’s OK. The argument is not that clear cut.

      If I represent a seller, I can tell anyone that the seller will accept a full price offer or under different terms of which I know the seller will agree and I have been told to disclose by the seller. You know, things like motivated seller, etc…if my seller insists I say that, I will.

      Telling someone to offer something different does not violate anything. Necessarily (although it can and this is where the difficulty exists because most agents won’t/don’t understand the difference). It would only be a violation if I told them some particular reason that I knew would force the seller’s hand or compromise their negotiating position and no, an offer on Friday afternoon is not the worst time to make an offer so those things don’t count as representation. Let me give you an example.

      If I told a buyer in dual agency that I knew the seller would take 280K for his 350K house because he told me that he would, I would be violating my fiduciary responsibility. If I told the buyer that the seller was desperate because they just got divorced and no longer had the income to pay for the house, that would be a violation. If you knowingly took an overpriced listing, some would argue that you did just as much to discard your fiduciary responsibility to the seller already.

      However, if I told the buyer that, based upon the comparables available, I think that you should offer X I haven’t violated anything. You may think I have and some others may as well. However, I haven’t.

      The fact that it is you rather than someone else doesn’t inherently violate your responsibility to represent the seller. The act of telling them something contrary does not violate anything. It is only when you disclose a compromising situation that will affect the negotiations that you violate something.

      any advice I give to one party is necessarily to the disadvantage of the other party

      This is a weak argument as outlined in my example above. It is also not true that all buyers ans sellers abhor dual agency.