The Perils of Dual Agency

I list a home on Main Street for $500,000. I go about marketing the property. Someone calls me from seeing it online and asks me to show it to them. I show the buyer the property, the home and they love it.

The buyer says, “Bill, I want to make an offer.” I say that’s great. The buyer says, “so what should I offer?” I say sorry I can’t help you with that, remember I am a dual agent.

The buyer is on their own. After a few blank stares, the buyer says I want to offer $490,000. I then take the offer to the seller, and they tell me, “Bill, what do you think?” “Should I give them a counteroffer, and if so, what should it be?”

My legal response should be, “I can’t help you with that as I am a dual agent.”

Legally, no party has any proper representation when practicing dual agency. It is a LOSE-LOSE situation for both buyer and seller. At $490,000, the potential buyer could be significantly overpaying for the property. They might also be underpaying as well. Nobody has any guidance. One of these parties could be making a big mistake. In this situation, the only person making out is the real estate agent.

This is just one example of how dual agency is bad for both the buyer and the seller. And just think; the transaction is just getting started. (Credit: https://www.maxrealestateexposure.com/dual-agency-why-avoid-it/)

It sounds innocent enough. You walk into an open house and the agent asks if you have an agent, a buyer’s agent. You reply with a polite “no, we’re just looking” at which point she offers, “oh that’s ok, we’ve been handling everything in-house for over (fill-in-the-blank) years” usually adding something like, “that’ll make things so much simpler if you like our place…and I know you will; you seem like ‘our kinda people’ “; and, knowing nothing about real estate, you figure, “Sure“. The next thing you know, you’re being escorted on a walk-thru tour or encouraged to “explore…we’ll be right here to answer any questions” with the seller’s agent extolling the beauty and convenience of living here. You’re enamored with the place. You love it. Your spouse loves it. The kids love it. Even the dog is turning circles in the backyard and the agent says, “So, how about making an offer? I know you’re only ‘looking’ but we only have a few left, you know.” And just when you’re about to say, “OK, let’s do this!“, something clicks inside and you slam on the brakes. Thankfully, the experienced, logical, pragmatic left brain kicks in and you you think, “This is a huge purchase. How do I know if what this seller is saying is true or not. I know nothing about real estate. I know nothing about these people”; and a dozen other logical questions come to mind. In psychology, this is called the left brain-right-brain conflict and in real estate, sellers and their agents attempt to exploit this conflict with every utterance, reinforcing the “I deserve it” argument that’s going on in your head while suppressing the “This makes no sense whatsoever” side by trying to hurry everything along with as much positive reinforcement as possible; using the “being under one roof“and “that’ll make things a whole lot easier” and “we do this all the time for folks like you” blurbs. You’re not alone. This situation happens thousands of times every day in the real estate industry when the “what’s-wrong-with-this-picture” left brain hopefully overpowers the “I-gotta-have-it-right-now-I-deserve-it” right brain and somehow you stop your “I deserve it” self from taking over.

Think about this analogy for a second. You’re involved, for whatever reason, in a dispute with another party. Would you agree to be represented by the same lawyer that’s representing the other side? I would argue that this strategy is, at best ill-advised and, with limited exception, prohibited by the state bar associations of 41 of the 50 states; and yet everyday, that’s exactly what happens when people blindly approve a “dual agency” in real estate sales and acquisition; the seller’s agent representing the interests of the seller AND the buyer despite it being illegal in nine of our United States but discouraged in all fifty.

The Realtor’s Code of Ethics defines the duties that real estate agents owe to their respective clients in various ways, all amounting to the same thing. If the agent represents the seller or the buyer, he or she owes a “fiduciary” responsibility to that seller or buyer; a duty of “the highest moral, ethical and legal responsibility”. So what type of duty does that same agent owe the the opposing buyer or seller and their respective agents? Only a duty of “fairness, honesty and disclosure”. Now, if this sounds like “the same horse only a different color“, it is most assuredly not. Even without a legal education, the average, thinking, moral and ethical individual should be able to see that, either way, the situation poses a moral dilemma for the agent involved in representing, to the best of his or her ability, the best-interests of of both the buyer’s and the seller’s client. It comes down to simply this rather rhetorical question; If the seller’s agent’s obligation to the seller is to get as much money for the seller as possible and the buyer’s agent’s obligation is to negotiate the best possible price for the property, how can their interests be aligned”?

We work with a number of reputable real estate companies in California, Canada and Mexico, each with their own unique positions on things like “dual agency”. MaxExposure Real Estate is one of those companies with their viewpoint offered here for your consideration.

For decades, the 6% commission has been a staple in the real estate industry and, like it or not, it probably always will be; this besides the well-advertised and wholly-unrealistic claims of the current wave of internet-based, “discount” real estate companies that extol the virtues of not having to pay a 6% commission. Why? Because people need to be compensated for their counsel. We have all worked hard to gain our respective levels of competence in our chosen fields and deserve the right to charge a competitive rate for our services, especially when those services includes safeguarding you and your money. The mission is to secure the best possible counsel for your money or, in the alternative, do it yourself which, if you think about it, is never really  a good idea. A lawyer never represents him- or herself; a doctor doesn’t practice on his or her own family and why, aside from “saving” money, would you entrust the success of the probable, single-largest investment in your life to yourself; an expert in your own field certainly but probably not in real estate investment;  or, entrust it to perhaps the worst choice possible, the seller and his or her agent?

So let’s take everything from above and go buy a property. Let’s  see how the “savings” add up.

You decide to purchase a property. You look on Zillow or any one of a dozen other discount brokers on-line these days and you find just the right house for $459,500. So you schedule an appointment, round up the family and head out to tour your prospective next home knowing that one of the very first questions the seller’s agent is going to ask in her most practiced, friendly voice is, “So, have you got an agent?”,  to which you reply, “No.” “Oh, that’s really OK” she says; “I’ve been with this company for (x) years and we can handle everything in-house. Isn’t that convenient?” she finishes with a smiling, lilting, friendlier-than-a-florist-on-a-spring-day voice. And, after touring the property, the sales agent says, “So, whadda ya think? Great house, huh?” to which you reply by listing the things that you didn’t like about the property and offer her a flat $450,000 adding, “and not a penny over“. She frowns for a moment and replies, “Well, that’s a really low offer but let me see what the owner says. I’ll do my best. After all, that’s what I’m here for!“; and after an appropriate period of time passes for her to “present the offer” to the owner, she returns with the “good news”; your offer’s been accepted. Hooray!!!………………Wait. What just happened?

Well, get our your pencil and paper out and follow along here. If the “sale” price was $459,500, you can bet there was that 6% commission already baked-in which means that the seller’s starting price was, at best, $431,930 ($459,500-6% or $27,570= $431,930). Now if the offer was full price, the seller’s agent would have received $27,570 but your offer was only $450,000 meaning the agent only received $27,000 (the difference between 6% of $459,500 and your offer of $450,000), just $570 short but still a handsome payday for doing NOTHING to protect the interests of the buyer (YOU) while getting the owner and the agent TopDollar. The seller still got his or her top asking price for the property which was inflated to begin with, so your “not a penny more” haggling actually cost the seller nothing. In fact, because everything is going to be handled “conveniently in-house” anyway because the seller is also the broker, the seller can also earn the fee-money that really keeps him or her in that Bentley; the title fees, the escrow fees, the mortgage origination and discount fees, numerous recording fees, notary fees and, since the seller owns the property, the listing fee of typically 3%, all of which can add up to more than 10% of the selling price of the property. You see, this is why brokers give their agents 60%, 70% even 80% for top producers of the earned commissions. They can afford to take so little compensation for the sale because their money is made on the back-end with all those fees.  But you probably didn’t know all this because the years that you’ve invested in your education and your chosen field of expertise didn’t include real estate acquisition and financial affairs. And one more thing and this is just one of those dirty, , back-room secrets of the real, real estate world;  there’s a very good chance that the seller’s agent will never see that extra 3%, the buyer’s agent’s commission since there was no buyer’s agent. It’s a bargaining chip the owner keeps in his or her hip pocket as a last resort. “The owner wasn’t going to do the deal but I got him to throw in the 3% that would have gone to your agent if you would have had one.” So you’re thinking, “Whew, good thing!” WRONG. That 3% was never part of the deal in the first place. The seller’s agent only expected to make 3% anyway so the owner just pocketed that other 3%, the 3% that would have gone to your agent if you had one on top of everything else he or she made on the deal. It was a chip of last resort to be used only in case you weren’t going to do the deal at at-least his original asking price known only to him or her and the agent!

The AmesGroup, if the client isn’t personally well-familiar and comfortable with the developer or seller and his or her agent, takes an exceedingly-hard line stance where dual-agency is concerned because it is, again, wholly antithetical to our core principles of honesty, integrity and hard work; and our clients know, accept and appreciate that.

Dual agency is simply a no-win situation for the buyer. It has to be because it attempts to place a fallible individual “in a position to derive personal benefit from the actions or decisions made in their official capacity” by both parties. The acquisition of real estate involves a thousand moving parts, each inter-connected, wholly- multiplying the complexity of the process; and in foreign acquisition, the process is even more involved. The prudent investor may begin the process with his-or her right-brain but will inevitably invest with the left-brain, retaining competent counsel to represent his- or her interests be it The AmesGroup or another, competent real estate counsel, agent or attorney.

As with everything, there are always exceptions to the rule; and the exceptions here where dual agency is concerned are in three instances. The first instance is personal knowledge where the buyer or investor either knows the seller or the seller’s agent personally and is wholly-secure in the seller’s or agent’s integrity or, in the alternative, a trusted friend can vouch for the integrity of the seller or the agent. The second instance is when the seller or the seller’s agent has such a lengthy record of performance AND, you have taken the time to investigate AND sit down and talk with that person in-person or via video conference and believe the seller or representative to be trustworthy.  Neither are guarantees or a substitute for competent counsel but it’s the next best thing. A false persona can’t be maintained indefinitely; “cracks in the armor” will always appear and the truth always comes spilling out. The third is self-education where you are personally so secure in your own counsel in real estate and investment matters that you’re comfortable looking out for yourself; again, ill-advised as most professionals don’t care for themselves in professional situation but still better than the alternative.  Barring these three instances, with 34+ years of experience, we can find no instance where “dual agency”, with the investor’s money riding on the advice of the opponent’s representation, can be acceptable. And make no mistake; we make no apologies for using the word “opponent” because where the very definition of the word is, “a contestable situation where the objectives of the involved parties are diametrically-opposed”, there is no better word.  We at The AmesGroup will routinely refer our clients to developers whom we’ve known for many years; people and corporations with whom and with which we’ve had past dealings and people and companies whom and which we’ve come to trust. We routinely recommend cases, for various reasons to other agents, brokers, lawyers and professionals with whom we’ve been previously adversarial many times over because “adversarial” doesn’t mean “objectionable”; it simply means we’ve been on opposite sides of the issue representing our respective clients to the best of our professional and personal abilities; and they have referred their clients to us, again for myriad reasons. And we, and they, put our reputations on the line with every recommendation we make, secure in the knowledge that the developer or the representative is of sound moral character and professional ability. Our clients trust our judgement and, with 34-years in a business where reputation is everything, we will not violate the sanctity of that trust.