Any real estate transaction is complex, requiring a lot of paperwork and an in-depth knowledge of its legalities. This is the reason why before buying or selling a house, it is best to have a licensed and experienced real estate agent in your corner. As in the case of an advocate who will always have your best interests in mind in a court of law, a real estate agent will do so also when you are buying or selling property.
The work of a real estate agent is to represent the buyer or seller and protects their interests in any real estate transactions.
The question now is can a real estate agent represent both the buyer and seller? Yes, there is a possibility and this practice is known as dual agency. It is the third angle in the real estate industry after buyer’s and seller’s agents. However, there is a problem in this arrangement as a dual agency raises questions about fairness and conflicts of interest.
This post will take readers through the intricacies of a dual agency and its various legal implications.
- Understanding the Basics of Dual Agency
- What is a Dual Agency in Real Estate?
- Types of Dual Agency
- Single License Dual Agency
- Dual License Dual Agency
- Financial Aspects of Dual Agency
- Who Pays Commission in Dual Agency?
- Legal Perspectives on Dual Agency
- Is Dual Agency Illegal in Some States? Which Are the States?
- Ethical and Practical Implications
- Can a Real Estate Agent Represent Both the Buyer and Seller?
Understanding the Basics of Dual Agency
A dual agency arrangement is when a single agent represents both the buyer and seller. It can also happen when a single agent represents both the landlord and the tenant or when a real estate company or brokerage firm acts on behalf of both the seller and the buyer in a buy-and-sale deal.
A single agency, on the other hand, is when one agent represents one party, either the buyer or the seller. In a single agency transaction, an agent acts on behalf of the client without fear of any conflict of interest.
What is Dual Agency in Real Estate
When hiring a real estate agent, it is the discretion of the buyer and seller whether they want to work with individual agents or a dual agent. If agreeable, do they understand the implications and the trade-offs involved here? In such cases, the clients must sign an agreement and official disclosure from the related state department of real estate.
A dual agency agreement says that the agency will represent both the buyer and the seller and will work as per permissible state laws.
The agreement also lays down how the agents must conduct themselves when representing both parties. It stipulates that the agent without permission from both parties disclose confidential or sensitive information about one client to another.
Advantages and Disadvantages of a Dual Agency
- Quicker interaction: Since a single agent represents both parties, there will be faster communication between the two regarding price negotiations or any clarifications.
- Potential savings: The agent might accept a lower commission as it can be earned from both parties. This leads to savings for the seller who pays the commission and who can now agree to a lower price from the buyer.
- Conflict of interest: Greater financial incentives make it difficult for an agent to remain neutral when representing both the buyer and seller of a landlord and tenant.
- Complex negotiations: An agent who represents two clients having opposite interests should not advocate for either. Hence, negotiations can be tricky between the buyer and the seller.
Types of Dual Agency
Single license Dual Agency
A single license dual agency is a situation where a single agent working for one broker, acts on behalf of both the buyer and the seller. An equivalence in law is like both parties being represented by the same divorce lawyer during the case.
Single license dual agency mainly arises when an unrepresented buyer meets the listing agent about a specific property. The concerned agent then handles the entire transaction on behalf of both the potential buyer and the seller.
However, the role of a single license dual agency agent is rather limited as they cannot negotiate on behalf of either client to avoid a conflict of interest situation. If the transaction is complex, buyers and sellers do not have anybody advocating for them. On the other hand, a dual agent quickens things up as communication is through a single channel, and decisions are made faster.
Dual License Dual Agency
Dual license dual agency situation is when two agents from the same brokerage or real estate company represent a buyer and seller. It is also known as a designated agency or appointed agency. In this situation, the same brokerage represents both the buyer and the seller even though the parties might work with different agents from the same firm. might be
The agents have full freedom to represent and negotiate on behalf of their clients but the broker cannot intervene in the deal or help the agents it supervises and must remain neutral. This arrangement is significantly more ethical than a single license dual agency role.
In large brokerages with hundreds of agents, the two agents might not even know each other but even then, the risk of collusion between agents cannot be ruled out. The conflict of interest in this case concerns the broker since it will get two commissions instead of one.
Financial Aspects of Dual Agency
Who Pays Commission in Dual Agency
The commission is usually paid by the seller in real estate deals. However, in dual agency cases where the agent represents both the buyer and seller, the terms of the commission must be negotiated and settled by both parties involved.
The agent might negotiate a different commission structure or have individual contracts with both parties. What is important is that everybody should understand the financial implications of a dual agency case before agreeing to it.
The commission payable is usually 5 to 6 percent of the purchase price. Thus, when different agents represent the buyer and seller, they will have to split the commission and each agent will get between 2.5 to 3 percent.
For a dual agent, there is the incentive to go through the whole transaction and claim the full commission payable. Therefore, clients must exercise caution in a dual agency situation as the seller’s interests do not always align with that of the buyer.
Legal Perspectives on Dual Agency
State laws mandate the broker to disclose whether they are acting as a dual agency in a real estate transaction and if written consent has been obtained from the buyer and seller. But what happens if a single license dual agency or a dual license dual agency fails to do so?
The California Supreme Court in 1917 ruled that an undisclosed dual agency was sufficient grounds for cancellation of a contract even though the broker acted in good faith and there was no injury to either party. The broker stands to lose the commission for failure to disclose.
In another case where a dual agency situation was withheld from the court, a court ruled that the broker was not entitled to a commission even though the ultimate deal favored the party. There might be other serious consequences for failure to disclose such as suspension of a real estate license under the Business and Professions Code 10176(d).
Contract laws formally regulate state licensing in states where dual agency is legal. Every state has regulations that guide agents on the maintenance of their fiduciary duties in a dual agency environment.
States Where Dual Agency is Illegal
Dual agency is illegal in some states in the USA. This is because agents cannot represent the best interests of both parties simultaneously in a real estate transaction and will not fulfill their fiduciary responsibilities. Alaska, Colorado, Florida, Kansas, Maryland, Texas, Vermont, and Wyoming are these states.
Ethical and Practical Implications
The nature of single license dual agency is such that conflicts of interest can arise. An agent’s commission, as in the cases of all real estate agents, depends on how much price a home sells for. The higher the price, the higher the commission, and hence, dual agents are incentivized to bid up the sale price which goes against the buyer’s interests. Hence, dual agency inherently works in favor of the seller.
On the ethical front, both the buyer and seller might get the impression that the dual agent is working in favor of the other. This gives rise to anger, mistrust, and suspicion.