Dual Agency Smack-Down: Real estate in real life . . .
By: Greg Swann,
Phoenix Real Estate,
Post Archive,
RSS FeedPosted: Sunday, November 19th, 2006, 3:39 pm MST
Category: Dual Agency, Marketing, Real Estate
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…
Technorati Tags: arizona, arizona real estate, dual agency, phoenix, phoenix real estate, real estate marketing
Bookmark this to: del.icio.us • Digg it • StumbleUpon • Subscribe to RSS feed
Related posts:8 comments
8 Comments so far
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.
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.
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.
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.
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.
[...] 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. [...]
[...] 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. [...]
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