Posts Tagged ‘Commercial Real Estate’

Using an Agency in Real Estate Transactions

Agency is simply the relationship between the principle (the seller or buyer) and the real estate professional. In agency, the professional has a fiduciary duty to look out for the best interests of his/her principle. The fiduciary duty is defined as the ‘duty of utmost care, integrity, honesty, and loyalty in dealings.’

There is a form that is used called the Agency Disclosure form (or AD for short.) This is the very first form that is used in every real estate transaction. It has 1 purpose: it discloses (makes openly known) the 3 types of agency that could happen in a real estate transaction.

1. Agent represents the seller only.

In this agency the agent for the seller represents only the seller. He has a fiduciary obligation to get the seller the best price possible for his home. He also has the fiduciary duty to make sure the seller understands all the forms he must sign. The agent serves to protect and promote the seller. In a fiduciary relationship the agent has an obligation to put the needs of the seller first above his/her own needs. He does not have a fiduciary duty to the buyer but does own the buyer the duty of fair and honest dealings.

2. Agent represents the buyer only.

This is the exact same as above except the agent represents the buyer only and has the fiduciary duty to get the home for the buyer at the best price while protecting and promoting his/her best interests. He only owes the seller the duty of fair and honest dealings.

3. Dual agency: agent represents both the seller and buyer

If a dual agency is formed it must be disclosed and agreed to by all parties of the transaction. A dual agency can never be done in secret. This dual status must be known because an agent will know confidential information about his principles. The disclosure forms states that an agent in a dual agency situation must never reveal confidential information to the other party without written permission.

The agency laws were put into practice to protect home owners and home buyers. It establishes that an agent must put the needs of the principle above his own. The law also makes the declaration of who represents who and in what capacity widely known. There are to be no secrets in a real estate transaction.

Dangers of Dual Agency

In most real estate transactions there is one agent representing a seller (aka sellers agent or listing agent) and another agent representing a buyer (aka buyers agent). However, at times, one agent might end up representing both the buyer and seller. This is called dual agency. It is perfectly legal but also can be filled with challenges. In many states, a dual agency status must be acknowledged and agreed to in writing by all parties.

To understand the potential challenge let’s use this as a scenario:
• The house is informally appraised and the fair market value seems to be $270,000
• The seller begins with a listing price of $275,000
• The real estate agent represents both the buyer and seller: a dual agency

It is not unusual in the beginning of the formation of a contract to purchase that the buyer will have his initial offer price and also a back up price in mind. He might tell his agent to offer $260,000 but would not go higher than $265,000.

If this agent represents both the buyer and the seller how does he approach the seller with that offer? He must tell him there is an offer of $260,000 but cannot reveal anything else without breaking his fiduciary duty to the buyer.

Now the seller does not want to sell the house at $260,000 and asks his agent what he thinks would be a good counter offer? Does the agent knowing the house is worth an estimated $270,000 suggest to him to counter at $270,000 and possibly lose the deal? This would be in the best interest of his seller. But he could also recommend the seller to counter at $265,000 knowing the deal would most likely close. This would be in the best interest of his buyer. He could even say, I cannot tell you what to counter it as which might not make his client too happy. The agents’ fiduciary duties to both of them are in conflict.

Other challenges could crop up when further in the process it comes to other concerns; for example, repairs. The buyer might want a carpet allowance. So the agent needs to represent that need. But he also has the duty to get the most money for the seller. This is just an example of another challenge in dual agency situations.

I do not write this to say that dual agency is bad, wrong, or illegal. It can be done and be done successfully. I write this so people understand that agency clarification is important; do not treat it lightly. If you are potentially in a dual agency situation you must consider all the benefits and challenges.

This is why agency clarification is the first form to be filled out in the real estate process. You want to know exactly who is representing who so you do not reveal information to ‘the other side’ accidently.

Let me finish with an interesting twist; 2 different people working for the same broker also creates dual agency. For example, it one agent is with Century 21 Award. They may have several offices in any given sales area with 100′s of agents. I work out of one office and let us say I have a listing. A person that I do not know and have never met works in another office. That agent could bring a buyer to my listing, the buyers like it, and decide to make an offer. This is a dual agency because we both work for the same broker even though we do not know each other and work out of different offices.