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.
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…