Dual agency

 

One ring to bind them all

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.

42 Comments

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42 responses to “Dual agency

  1. Anonymous

    This phrase you write is with all due respect (coming from a CF fan) naive:
    “An agent who represents a buyer, however, owes no duty to the seller”. Of course they have a duty to the seller! The seller and seller’s agent are needed to pay the buyer’s broker. The buyer’s broker wants a deal! So they need that seller and that seller’s broker. So I think, really, when it comes right down to it – the brokers work for the seller. My gripe: Why the hell is the commission 5%. That’s nuts. It should be 2% AT MOST. No way should 5% of the price of the home go to brokers. It’s beyond ridiculous. They get 1/4 million for selling a 5.0 million dollar home? One transaction? the buyer’s broker has gone to, what ,50 homes with their client – spent, what, 100 hours? and gets 125,000? That is $1,250 per hour.

    • You’re wrong about duties owed by a buyer’s rep to the seller. As for who’s paying that commission, is it the seller, who pries it out of the proceeds and forks it over, or the buyer, who’s paying more? Depends on the market, actually.

      $1,250 an hour? Less than plumbers make, but far more than lawyers. As I tell my former law colleagues when they ask how things are in the dirt trade, “it’s none of the stress, twice the money.”

      I recommend it – beats being yelled at by incompetent judges.

      • Anonymous

        Maybe I am wrong because you are the ONLY buyers broker who thinks about his client first. But I think you are an exception.

        • Eh, rare, perhaps, but not unique. Our own Mickster is a sterling example of how an agent should act.

        • Walt

          Dude –
          Now let’s just be honest, SHALL WE?? All “professional” real estate agents, be it buyers or seller agents ARE OUT FOR THEMSELVES!! Representing both the buyer and the seller? CONFLICT OF INTEREST and it should be illegal. A SIX PERCENT VIG? OBSCENE BY COS COB LEG BREAKER STANDARDS!!

          And the only one writing checks is the BUYER!! So he is paying the vig. No matter how much you snake oil salesmen say differently. The seller pays squat.

          Your “professional” Code of Ethics? It’s a JOKE. It should be “Caveat Emptor “. That is French Dude, and it means “let the buyer beware”. Because he is on his own. Your value add is driving folks around, while you tell them inane jokes and hope they don’t smell your car farts. WELL WE DO!! And they are better than your jokes.

          Then after you get your OBSCENE commission check, you send them a PLASTIC FRIGGING CLOCK!! And send them refrigerator magnets for Christmas for years afterwards!! You call that a business model? I CALL IT TORTURE!!

          This should be PRIMA FACIE TO ALL. FRENCH AGAIN DUDE!! But alas, it is not.

          You guys have a great scam going. Which is why the GAR Evil Princess lives behind a moat. You guys make Bernie look like a piker.

          And Dude, you are being modest. You are unique. Praise the Lord. Two of you would be unbearable.

          Your Pal,
          Walt

  2. John M

    Totally offtopic, but the Times is running a “Living In” piece on Old Greenwich this weekend. It’s up on the website now at http://www.nytimes.com/2014/08/24/realestate/old-greenwich-conn-a-front-porch-kind-of-place.html

  3. Mickster

    If the broker and (as follows) its 2 agents (or one, in the case of a crazy buyer who uses the listing agent) have an equal fiduciary duty to both the owner and buyer, then there can be no disclosure from one agent to the other (unless a material defect in title/property). It would be a breach, So no issue.
    EXCEPT, if I, as a buyers agent, go digging up land records to see how highly leveraged the property is and what suits are pending . Am I then, in breach of my brokers (not agent) duty to the seller?
    I believe, as an agent, my primary duty is to my buyer client. There must be a different duty level at broker level.
    I’m sure there are better minds than mine able to figure this out.

    • As it stands now, under Connecticut law, our primary fiduciary duty as a buyers rep is to the buyer, regardless of whether we work for the same broker as the seller’s agent or not. What the California case says (or seems to, on my quick read), is that a brokerage firm with both the buyer and the seller under its roof via two of its agents, owes a fiduciary to both parties and, by extension, so too do the two agents, whose duties derive from the principle, their broker.
      So what happens if the seller is under indictment and looking at 5-7 unless he gets out of town and across the border pronto, and both agents, or even one agent know it? They have a fiduciary duty to the seller not to disclose that to the buyer, and owe a fiduciary duty to the buyer to do so.
      This will keep law students entertained for generations, I predict.

  4. anonamoo

    The headline would represented your humor more had it been Duel Agency.

  5. Anonymous

    Either way I expect the 5% to come under pressure. Ironically, even though it represents a larger dollar figure I believe the commission can be more justified on some higher ticket and more complicated transactions.

    I wonder if the big shops will try for a 3% total commission for the first month and not list on the MLS for example.

    • Anonymous

      It has to.

      Here’s what I see happening, or at least will push for in my own RE business dealings. There is absolutely no value added unless itemized advertising expense showing what was spent and what was done. If listing pulled, listing firm reimbursed by seller. For example, if a broker spends $50k advertising, staging, etc., plus detailed time (billed) then that’s ok. I’d be fine with reimbursing for that if I walked away willingly. But it’s two-way street–if I’m not happy with performance, I want an out with no liability.

      The last listing I had (while “small,” it was still several hundred thousand) I negotiated the fee down 1% from customary, and then made the brokers (listing and buyer) eat the cost of certain charges that buyer wanted. I had the power of saying FU to all of them and walking away if they didn’t agree. They opted for the bird in hand.

      RE agents are dealing with a commodity and will continue to get marginalized/commoditized in all but the trickiest/difficult of transactions. I’ve found a good lawyer (like Jeremy Kaye) is better than approximately 99.99% of agents (Fountain being the other 0.01%) in everything that matters to a seller (as well as buyer). If you’re a remotely savvy RE person, a good laywer will cover your arse with the important matters.

      • Mickster

        Lose my number. Any realtor who would be weak enough to ‘negotiate’ his/her commission down to the rate you mentioned would not be one I’d be using to list and help negotiate the sale of my home. I suspect that you got what you paid for. Caveat etc.
        The process in most places is that within 24 hours of signing a listing it goes on the MLS. The MLS then feeds all the new listings to realtor.com, Zillow, Trulia, all the brokerage sites etc. Not putting on MLS means NOBODY sees your listing.

        • Anonymous

          Mickster, Anon here, you misread–I said “down 1% from customary,” i.e., 4% was the final commission. Property sold within 30 days, it was priced properly. Buyer agent came from within the same firm, of all things, so the firm got a fatter cut.

          When M&A fees or underwriting & legal fees combined on a debt deal are (in % terms) less than it costs to sell a friggin’ home, that’s proof positive that the RE agency monopoly has had it good for a loooooooong time.

          Just putting property on the MLS–it ain’t rocket science. It’s what the firm does after that that matters. Nice pictures, open houses, advertising, etc. Is all of that worth 5-6%? To me, in my price point and with everything I do, no. To others in the multi millions and who aren’t as hands-on, that’s for them to decide.

          By the way, several years ago I was the first client (to our knowledge, per the listing agent who had to work with the firm’s IT department to make it happen) of a major brokerage to market a listing on Facebook, which we pushed for. The agent initially gave us a deer in headlight look like we were nuts, but later was fully on board. Now it’s routine for them and they have a Facebook page. Go figure.

        • Anonymous

          Clearly he didn’t need your number as he sold his place without you. In most industries in the world technology has reduced fixed commissions.

        • Mickster

          Anon at 8.09, of course he doesn’t have or need my number. Relax.
          Anon at 6.25 I did misread your commission point. Having the agents pay for cost of buyers demands is BS. I did it once when I started out. Never again. You lose respect.

  6. Chief Scrotum

    CF highlights some interesting and possible risk issues involved in dual agency. These issues will generate lots of billable hours for many lawyers.

    But the Chinaman’s issue in the lawsuit is that the property was intentionally mis-represented to him. OK, so the seller/broker/etc got back some of the dough we’ve mindlessly sent to China for washing machines, so why care?

    Because the misrepresentation issue is huge. I’ve had brokers in the last few years tell me a house (in RI) had “deeded” riparian rights (it didn’t) and in Redding , a house square footage was overstated by +/- 900 sq ft, which when the broker was told, their answer was that the owner measured it, the town was wrong etc etc – but then, mysteriously, the listing sq ft number dropped.

    The better question may be – when is misrepresentation fraud and if a pattern develops, among certain brokers, does it become a RICO issue? Should a house sq ft and the town’s, be with-in some standard? Should the lot size? Should common statements, that brokers say, such as, ‘the roof seems fine’, ‘its a recent update’, all have meaning or just marketing fluff to be disregarded? And if its just fluff, why have a buyer’s broker, who acts on what they’re told by the seller and their broker and has no responsibility after the sale closes? If a buyer’s broker acts like 007 and gives you super secret background info, how do you know its based in reality and not slander?

    I think having a lawyer do the research knowing that your conversations are privileged makes more sense than trusting a broker with undefined or even unknown loyalties and responsibilities. These types of lawsuits against real estate brokers will become common as unemployed lawyers look to make a living.

    • Anonymous

      EXACTLY.

      A good RE lawyer is worth their weight in gold.

      • Anon2

        Sure. But how many of us can afford those solid gold lawyers? Not I. I’m more silverplate. Thus, relying on a buyers broker is the best I can do. That, and a little prayer I wasn’t just screwed.

        • A good buyers agent and a good real estate lawyer make for a very strong team.

        • Anonymous

          If you’re plunking down a lot of money (a “lot” being relative to the individual), you should always budget at least a few thousand $ for a lawyer. In NYC, for example, you absolutely positively have to have one. In CA, I recently worked with an agent who also happened to be a licensed attorney, so that was 2 birds with 1 stone.

          On one transaction, my attorney in CT found some stuff going back decades that remained open, which could have presented a real issue. Not even the seller nor their attorney knew about it. In other words, the seller didn’t have the proper disclosures when they bought the place many years prior!

        • Anon2

          I get that but my point is that not all of us can afford a Jeremy Kaye. My ten bucks got me this dame.

          • If you’re spending $800,000, let alone $8 million on a purchase, and you think you’re effecting an economy by not hiring a top notch lawyer like Jeremy (or his brother Joel), I’m surprised that you were smart enough to accumulate the purchase price to begin with.

        • AJ

          Unfortunately, sometimes expensive lawyers aren’t much better, just more expensive.

  7. Mickster

    This is a rough guide for what closing costs should be in CT http://screencast.com/t/KCbCbzbF2

  8. Anonymous

    Jeremy Kaye is excellent and his fee is probably 4-5% of the average real estate commission fee.

  9. Yos

    In NYC it is (or was until recently) the law that both Agents (and their Brokers) had a fiduciary duty to the Seller.

    • Yes, that was how principal/agency law worked. Ct and other states that now recognize a fiduciary relationship between a real estate agent and his buyer revised common law and made a specify exception to the ordinary rule.

  10. Anonymous

    Anon:

    Let’s all keep squeezing each other until no one can make a living. The rare 5% commission, when it actually gets to the closing table, is well-earned compensation, a make-good if you will, for being stiffed by countless self-important jerks, who use you for information, fire you after 6-12 months of service because they haven’t had offers at the ridiculous price they “deserve.” Also, let’s not forget the dozens of trips back and forth to the house to turn on lights, turn off alarms, greet buyers, meet service-people while you are away, put the listing up on several MLS systems, host broker and public open houses, oversee the photography, and so on. I love it when the 1/10 of 1%ers explain to me how I’M not worth it. Could you be more narcissistic?

    • Mickster

      could not have put it better…

      • Anonymous

        I thought this website was a haven for free marketeers, not Liberals who want fixed commissions. Look at how the internet and technology has changed the following industries: finance, travel, music, retailing, newspapers, television. It is a trend we ignore at our peril. There are certainly excellent real estate brokers in Greenwich and elsewhere who provide a high quality service, but the fact is that products like Zillow and Trulia have made the first inroads to removing some of the value added that a real estate broker provides, namely information about comps, etc. Over time commissions will drop, it is unfortunate. It happened in financial services where I work. We adapted.

        • Mickster

          Real estate is LOCAL. Zillow doesn’t know the difference between Keofferam and Sound beach Ave when giving comps. There is NO ONE that can give you the ‘inside track’ on the local market more than a good realtor. If you can’t understand that, you’re lost

        • housecat

          If would-be buyers are relying on Trulia and Zillow for accurate comp data, they’re clueless. I looked up our house on both sites a few months back: Number of bedrooms: Wrong. Number of bathrooms: Wrong. Square footage: Wrong. Date of most recent renovations: Wrong – by eight years. Both sites contained the same inaccuracies, although ironically, there was a $500k difference between their estimates. This isn’t a rare occurance. Whether you use a realtor is your own business, not mine (I’m not one, btw). But, accuracy is everything when it comes to valuation. They may be making inroads, as you say, but I wouldn’t consider either of them a reliable source of information.

    • Chief Scrotum

      Dear 10:07PM Anon,

      You do realize that the ‘work’ you describe (and feel) is worthy of $1,000/hour wages, the rest of the Western world pays minimum wage for, right?

      • Anonymous

        When people realize the amount of time a real estate agent spends NOT getting paid, the compensation is a far cry from the $1,000/hour you suggest. Save for a few all-stars, who the public believes are delivering something special (usually based on sales VOLUME, which tells little about actual performance, i.e. what they are selling your home for), it’s hardly a high-paying profession.

    • Anonymous

      This is off topic but you mentioned the ridiculous prices that sellers demand for their homes but why do some realtors agree to their unrealistic expectations? I would prefer a realtor who will tell me what they can honestly get for my home rather then ask me what price I “believe” my house should sell for. Unfortunately, I’ve heard the latter countless times from friends and personal experience. Also why can’t some realtors walk away if the seller demands an outrageous sale price? I guess it might be only me but if the realtor backs it up with comps and hard facts about my house then I would respect he/she more then cave in to my unrealistic expectations.

      • That’s what I do, others don’t. Even worse are those agents who “buy” a listing by telling a homeowner they can get some ridiculous price when they know damn well they can’t. (Some) naive homeowners go with that price and agent because they think he’s somehow magically found extra money where other agents cannot.
        The technical term for such owners in the real estate profession is “chumps”.

  11. Anonymous

    Nobody’s forcing you to stay in the industry. Evolve with it, increase your own service level and build your clientele accordingly (so you can pick and choose and not have to deal with those nasty self-important 1/10 of 1%’ers), and negotiate strong contracts that spell out roles, responsibilities and expectations from all sides.

    Otherwise, don’t like it? Leave. Do something else that pays an industry-mandated fixed 5% commission on transaction volume. What business would that be, exactly?

    • Anonymous

      Commissions are negotiable, by law. Generally speaking, as the asking price gets above certain levels, the commission gets lower (as low as 4% where I come from)—this isn’t a recent development.

  12. AJ

    Oh, that Publius. A true Gow say gwan (Cantonese for shit disturber, or literally, he who stirs the shit with a stick).

    • Publius

      AJ,

      I would fit in well with the Feguson crowd no?

      • AJ

        Which crowd? Homeland Security’s brick throwing provocateurs or useful idiots like the government backed new Black Panthers? My guess would be neither.

        Of course there are sincere protesters at Ferguson for far too many people have been shot dead by cops for no particular reason other than that the guy behind the badge was the real criminal thug. But it’s beginning to look like this was not the case with Michael Brown though the police have done much to inflame the situation. Much of the anger is misdirected and should be laid at the feet of Obama if for no other reason than because he’s facilitated the import of millions of illegals and in the process has deprived millions of blacks of any hope of an economic future.