One ring to bind them all
Publius sends along this interesting law suit going on in California. A lower court has ruled that a brokerage firm representing both the buyer and the seller of a property owes a fiduciary duty to both. If upheld, and if the legal principle spreads east, it could screw up the business model of the ever-growing real estate firms like Sotheby’s and Coldwell Banker, who have been expanding in order, it appears, to keep all transactions entirely in-house, rather than split commissions with other firms and agents.
As the law stands now here in Connecticut, both the agent and her supervising broker – Sotheby’s, William Raveis, etc. – owe their absolute loyalty to the owner who lists her property with them. Anything that owner tells the agent must be held in confidence and not divulged to a potential buyer. A buyer who is unrepresented by an agent and who deals solely with the listing agent is considered a “customer”, not a “client”, and is owed very little beyond the disclosure of hidden defects the agent is aware of.
An agent who represents a buyer, however, owes no duty to the seller, and is free to do all the digging he wants to find out weaknesses in the seller’s position: scour the judicial dockets for pending divorces and foreclosures, Google the seller for news of pending indictments, bankruptcies, layoffs at his employer, etc. All is fair game and indeed, a buyer should expect no less from her agent, which is why I’ll never understand why so many buyers choose to forego such an advantage and work blindly with the other party’s representative.
If a buyer chooses to use a Sotheby’s or Ogilvy’s or Raveis agent to buy a house listed by that same firm, but by another agent, the law says that a Chinese Wall must be erected, so that what the listing agent knows cannot be passed on to the buyer’s agent, and vice versa. I’ve always been skeptical about the imperviousness of that wall in practice, but the law has always been good at creating legal fictions, so there you go.
What happened in California is that a court’s ruled that there can be no Chinese Wall, because the brokerage firm employing both agents owes the same fiduciary duty to the buyer as it does to the seller. If the seller tells her agent, confidentially, that her husband has been hit with an IRS claim of $5 million and the neighbors are about to sue her for molesting their 12-year-old son, the agent’s broker has a duty to disclose that to its buyer/client, and won’t that be fun?
So what will happen? As a seller, you’d be crazy to permit an agent affiliated with your own agent’s firm to represent a potential buyer, because anything you tell your agent will be passed on to the buyer, and can and will be used against you. Are you willing to take substantially less than your asking price? Do you want the buyer to know that? If so, tell your agent so, but I think you’d be a fool to do so.
The mergers going on in our local market seem, to me, to be designed to create a critical mass of agents, so large that a listing will no longer have to be placed on the Multiple Listing Service because a buyer can always be found among the client pool of the brokers own two hundred agents. From a seller’s perspective, that’s not so good – eliminating 80% of the agents in town, any one of whom may have a buyer for your property, is not a good way of assuring that you get the highest price. From the broker’s perspective, however, 5% is much juicier than a mere 2.5%, so I’ve been expecting the consolidation trend to continue.
But if California’s interpretation of agency law stands, that consolidation should slow, because the attractiveness of listing a home with a broker who must pass along your confidences to its buyer will be, er, …dubious.