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You are about to enter into the confusing world of "real
estate agency". Many real estate agents are as confused about "agency" as
buyers and sellers are. Many agents, buyers, and sellers take the attitude
that agency doesn't matter and that buyers want to buy and sellers want
to sell so don't confuse me with this agency stuff.
Well, if you really want to be protected when you buy your
next home, you had better become knowledgeable about agency. If you don't,
you may very well end up, unknowingly, in the wrong relationship with a
real estate licensee and end up paying too much for a home, buying the wrong
home, getting the wrong financing, or end up with unexpected repairs and
surprises.
In November, 1986, the National Association of Realtors®
published a booklet titled: "Who Is My Client? - A Realtors® Guide to Compliance
with the Law of Agency". This guide still stands today as one of the most
comprehensive and accurate sources of information concerning real estate
agency. Our discussion of agency will begin with quotes from this guide.
The following discussion is detailed and involved and you won't read or
hear about any of this stuff probably anywhere else. But, if you really
want an understanding of how real estate agency should work, you need to
take the time to read and understand this material.
From the PREFACE: "The legal concept of "Agency"
with which this booklet is concerned is beyond question the most fundamental
of all the legal concepts applicable to the real estate profession and professional.
It is the very nature and function of the real estate broker, appraiser
and manager to be an agent. The law of agency literally defines the "species"
and gives real estate practitioners their identity."
From Section II. WHAT IS AN AGENT?: "An agency relationship
is defined under the common law as follows:" (1) Agency is the fiduciary
relationship which results from the manifestation of consent by one person
to another that the other shall act on his behalf and subject to his control,
and consent by the other so to act.
(2) The one for whom action is taken is the principal.
(3) The one who is to act is the agent.
From Section III. HOW ARE AGENCY RELATIONSHIPS CREATED?:
"Agency relationships are created when the principal (the buyer or seller)
delegates authority to the agent to perform acts on behalf of the principal
and the agent consents to the delegation. An agency relationship does not
require a writing, a contract, nor compensation paid by the principal to
the agent. An agency can also be created by the conduct of the parties toward
each other regardless of what label the parties use, or do not use, to describe
their relationship. Thus, agency relationships can result unintentionally,
accidentally, or inadvertently."
The basic agency choices in New York State, and most other
states as well, are: Seller Agent, Buyer Agent and Dual Agent.
These are pretty self-explanatory and the definitions in
the NY State Disclosure Form are fairly clear and understandable. We have
made copies of these available elsewhere on our web site.
A Seller Agent represents and owes client level services
to sellers, works "for" sellers and works "with" buyers as customers, not
clients.
A Buyer Agent represents and owes client level services
to buyers, works "for" buyers and works "with" sellers as customers, not
clients.
Dual Agency, however, becomes less clear. Many agents will
have you believe that dual agency is in the best interest of buyers and
sellers. Nothing could be further from the truth. Dual Agency is in the
best interest of the agent and the real estate company, not the seller and
certainly not the buyer. Because of the confusion surrounding the concept
of Dual Agency and the latest option in New York State, "Designated Agency",
we have devoted a separate section to a discussion of these.
New York State currently adds another agency option called
Broker's Agent. A new disclosure form is in the works and I suspect that
Broker's Agent will no longer be on it. Very few seem to really understand
what a Broker's Agent is or isn't and to compound the confusion there is
no place on the current disclosure form to indicate that an agent is acting
as a Broker's Agent.
A Seller's Agent or a Buyer's Agent can hire Sub-agents
or Broker's Agents to assist them in representing their respective clients.
The difference is that Sub-agents are agents of the Seller or Buyer, whereas,
Broker's Agents are agents of the Broker. The significance has to do with
"vicarious" liability for for the actions of the Sub-agents or Broker’s
Agents. With Sub-agents, the Seller or Buyer are “vicariously” liable for
the actions of the Sub-agents. With Broker’s Agents, the Broker is “vicariously”
liable for the actions of the Broker’s Agents.
What is “vicarious liability:? It means that a seller or
a buyer would be at least partially liable for misstatements or wrongful
actions of Sub-agents hired to assist them in selling a home or buying a
home. If the agent making the misstatements or wrongful actions were a Brok3er’s
Agent, the Broker is responsible, not the Seller or Buyer. It is in a seller’s
or buyer’s best interest to have Broker’s Agents, not Sub-agents, assisting
in the process of selling or procuring property in order to avoid potential
liability for the actions of agents they don’t even know.
Currently, when a property is placed in the MLS, (Multiple
Listing Service), there is a blanket offer of Sub-agency to all members
of the MLS. Supposedly, blanket Sub-agency was eliminated from most MLS
systems, however, in reality it still exists because many agents continue
to operate as "implied" Sub-agents.
An agent showing a home can be a Seller's Agent (this is
the agent who took the listing and the buyer would be considered their customer
as opposed to being a client), a Buyer's Agent (the buyer would be a client
of the Buyer's Agent), a Broker's Agent, a Dual Agent (if the buyer started
out as a buyer client of the agent and the listing is an in-house listing),
or a Seller's Sub-agent. As no one operates as a Broker's Agent (and there
is no place on the disclosure form to indicate that one is a Broker's Agent),
if the agent showing the home isn't the listing agent, a Buyer's Agent or
Dual Agent, the agent is an "implied" Seller's Sub-agent due to their actions.
Most seller's don't realize that they are therefore responsible for and
have "vicarious" liability for the wrongful actions and misstatements of
any agent who shows their property as a Seller Sub-agent. Interesting situation
isn't it?
Some states have other agency, and non-agency, options.
Florida, for example, has a "non-agent" status, where the real estate "licensee"
isn't an agent and owes no client level services to a seller or a buyer.
Oklahoma is actually in the process of eliminating the ability of a real
estate licensee to operate as an agent. A law is in the works to make it
illegal for one to act as an agent in a real estate transaction. Talk about
extremes. Other options around the country include, "transactional broker"
and "facilitator". These have different meanings in different states. If
you are considering buying in a state other than NY, get a hold of any agency
disclosure forms that are in use to see how they define these particular
forms of agency or non-agency status.
Any way that you look at these, they are "watered gown”
forms of representation, promoted solely for the benefit of the real estate
industry, and not the consumer. Any changes in the common law of agency
as it pertains to real estate is real estate industry driven in the name
of consumer protection, but the opposite is actually reality. The motives
are reduction of risks and liability and in the process responsibility of
on the part of the real estate industry to consumers. Yet agents till want
the full compensation that they have been used to getting. Hopefully more
and more consumers will catch on and seek true representation whenever it
is available to them.
Your course of action should be to seek out true common
law of agency representation. Seek out those agents who remain true to common
law of agency fiduciary duties and true client level services. Avoid at
all costs any relationship which results in less than full representation
by the agent.
“A real estate broker should have one and only one principal per transaction.”
From Section IX. THE ALTERNATIVES TO DUAL AGENCY:
SINGLE AGENCY OR SUBAGENCY: "As a practical matter, real estate brokers
should avoid dual agency relationships. Creation of a lawful disclosed dual
agency relationship is so difficult that a real estate broker who attempts
to conduct his day-to-day affairs as a disclosed dual agent is playing the
professional equivalent of Russian roulette. The obvious alternative to
dual agency is single agency: A real estate broker should have one and only
one principal per transaction; he should loyally and diligently pursue the
legitimate interests of his principal; and he should scrupulously avoid
accepting or exercising any authority on behalf of the other party to the
transaction."
From Section VIII. Part D. The Seller's Agent Leads
the Buyer to Believe the Agent Is Representing the Buyer: "Real estate brokers
representing sellers cannot perform their obligation to procure a ready,
willing, and able buyer for their client's property unless they seek out
qualified buyers. A real estate transaction by definition requires a seller
and a buyer. Thus, it is perfectly natural and necessary for real estate
brokers representing sellers to do everything they can to attract buyers.
Buyers are attracted to brokers with whom they feel comfortable and are
able to develop rapport and communication. This is no surprise because this
is the essence of selling."
"Too often, however, brokers in their zeal to arrange a
sale satisfactory to both parties encourage the buyer to believe that the
broker is working "for" him rather than "with" him. Simply put, the broker
allows or even induces the buyer to believe that he is the broker's client,
when, in fact, the broker has already established a client relationship
with the seller by executing a listing agreement or by acting as a subagent
of a listing broker."
"The broker who permits the buyer to believe he is acting
as the buyer's agent when the broker has already formed an agency relationship
with the seller is a classic example of the "accidental" dual agent. But
he is a dual agent, nevertheless. The accidental dual agent creates an express
agency with the seller by executing a listing agreement, and he creates
an implied agency with the buyer by allowing him to believe the broker is
acting on his behalf."
Examples of words or phrases often used by real estate brokers
that can create implied agency relationships with buyers are the following:
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"I'll take care of everything. I'll handle the sale
for you."
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"This listing has been on the market for six months.
That tells me it's overpriced. Let's offer $80,000 and see what they
say."
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"Trust me. I'm sure the seller won't counter at that
price."
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"If the seller is going to insist on a full price sale,
I think you should tell him no. Then we can try an offer on the Maple
Street house your wife liked so much. I'm sure those sellers will be
more realistic."
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"If they insist on the full $100,000, I'll remind them
that the furnace is 15 years old and the carpet if fraying. That should
justify at least a $3,000 reduction."
OK, enough of the detailed stuff. What does all this mean
to homebuyers? Simply put: " A real estate broker should have one and only
one principal per transaction ". In other words, if you want your interest
looked out for, the agent you are working with cannot represent sellers
of homes that you might be interested in. Otherwise they will encourage
you to let them be a dual agent. If you consent to such an arrangement,
you give up their undivided loyalty and full disclosure of all material
facts concerning the seller and the property you wish to buy.
Any agent or broker who truly had your interest in mind and found themselves
in the conflict of already representing the seller of a home you are interested
in, should refer you to another agent with another company to represent
you. They generally don't because they would lose out on both sides of the
commission split. Dual agency is dollar driven. If you have stayed with
me up to this point and have digested the excerpts from the National Association
of Realtor's® own publication for it's members, it becomes very clear that
dual agency is very risky for a broker to practice. Financial incentives
are the only reason that such practices have proliferated in recent years.
Many firms even offer a higher commission split to their agents who sell
in-house listings.
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