Since the controversial Federal Trade Commission report, The Residential Real Estate Brokerage Industry, was released in 1983 as an expose of the real estate industry's sub-agency practice, the NAR has responded to increased consumer litigation by exploring other means for brokers and agents to conduct the real estate transaction besides sub-agency. But, there was a dilemma. How can a broker or agent "represent" the consumer and justify collecting the "double dip" from both sides of the transaction? Brokers looked to the NAR to come up with a solution.

Although many practitioners can agree on the surface that sub-agency is consumer-unfriendly and somewhat deceptive toward buyers, the practice continues in some parts of the United States. Some brokers such as Jackson Simpson Real Estate Inc. in Hampton, New Hampshire refuse outright to pay buyer's agents co-op fees out of the proceeds of the transaction, making coop agents sub-agents by default. Other brokers, such as Bryant D. Keefe with Capital Insight Company Real Estate Consultants in Tucson, Arizona, pay buyer's brokers, but would prefer not to. "Let the home buyer hire and pay for representation. This situation is the same as me hiring an attorney to sue me. It just does not work," says Keefe.

But what is the solution for the buyer, who brings enough money to the seller to cover both agents' fees in the form of the sales price? Doesn't the buyer deserve to be represented in the transaction? Few buyers have enough for a down payment, much less the money to pay their agents. Neither do sellers. That is why the device of paying the agents out of the transaction proceeds was developed. But, if sellers don't have to pay their agents up front or separately from the transaction proceeds, why should the buyer have to? And isn't the buyer already paying for representation in the form of coop fees to the buyer's agent? These questions have been debated endlessly.

Brokers who participate in both sides of the transaction are in an ethical pickle. They know that consumers on both sides of the transaction have an equal right to be represented in the transaction, but they are reluctant to give up the sub-agency or the "double dip" business models to accommodate them. With over one-third of transactions occurring "in-house," brokers who serve both buyers and sellers believe they would be committing economic suicide if they had to represent only one side or the other. How can brokers make money and serve the consumer at the same time?

Adding to the pressure, state legislatures are eliminating dual agencies and sub-agencies from their statutes, and some states such as Massachusetts and Oklahoma have voted down designated agencies. Other states such as Florida are going the opposite direction - eliminating the practice of agency disclosure to the consumer. States are clearly coming down on opposite sides of the issue.

Since 1992, the NAR has responded in two ways: by exploring non-agency relationships through its Non-agency PAG and other means, and by modifying its Code of Ethics and standards of practice to include buyer's representation. What it has not done is promote exclusive agency to its members. The exclusive buyer's agency agenda was eliminated when the NAR purchased REBAC. Instead REBAC was retooled to teach traditional agents how to represent buyers while avoiding liability for their brokers. REBAC's ABR designation can be obtained in two days, making it far less prestigious than the CRS, CRB, or other difficult-to-obtain designations. Single agency was not the focus of the NAR's Presidential Advisory Group on Buyer's Representation Liability Issues. In fact, the PAG recommends that single agency be arrived at by "written agreement" between the consumer and licensee.

Promoting buyer's agency is not the NAR's agenda; protecting brokers from liability is. Buyer's agents or single agents may be the sacrificial lamb on the alter of maintaining the status quo for traditional brokers. Buyer's brokers, such as Tom Early, tomearly@infinet.com, maintain that they are.

Although he has offered to chair or serve on a PAG committee for over ten years, Early, a prominent exclusive buyer's broker, has yet to be selected. He accuses that the NAR discriminates against buyer's brokers and agents. On the buyer liability PAG, there was not one exclusive buyer's agent, says Early.

"The mere idea that a PAG on Buyer Representation should be put together without inviting those of us that do it exclusively for a living is an insult to the intelligence of every NAR member," accuses Early. "What reason could there be to purposely exclude the most experienced buyer representatives in the country without so much as a 'Thanks, but no thanks?'"

According to Maryann Bassett, CRB, CRS and chair of both the non-agency PAG in 1992 and buyer's agent liability PAG in 1998, says there were exclusive buyer's agents on the PAG, but she declined to name them. Single agency vs. buyer representation wasn't the agenda, she says. The purpose of the PAG was to "review judicial opinions and foster reasonable standards of care for buyer's representatives."

"Our research was for the purpose of fostering reasonable standards of care," explains Bassett. "What are the duties expected of someone who holds themselves out to be a buyer representative? There are some states that recognize a buyer representation relationship that does not include an agency relationship. It is contractual and the laws have certain statutory requirements that are owed to the consumer by that licensee.

"There are many different types of broker relationships. What we recognized is that judicial decisions vary widely is because the laws and the relationships identified within the laws vary so much."

Bassett believes that common law of agency, that case law handed down over hundreds of years, serves neither the consumer nor the licensee as well as statutes do. Statutes outline statutory duties more clearly than the common law of agency which is open to interpretation and to being overturned by the judiciary.

"If you have a complaint against an agent and go to an attorney, s/he will check the case law that we could sue on the basis of. If there isn't any case law, then s/he will say, 'Let me do some research,' and a judge renders a decision. Everyone is different," supposes Bassett. "The perspective of the statute is that it is clearly defined and the consumer can expect what it is. It provides clarity for the consumer and avoids the lengthy legal process of agency."

"I feel strongly that there is a misperception that the common law of agency is an easily understood book of rules that you can go to. The common law is built on judicial decisions. When you go to court, they render decisions based on other decisions. To go through the lengthy and expensive process - is that pro-consumer?" asks Bassett. "The other thing that is misunderstood about common law, is that liability works both ways. Most clients don't understand they have liability for the agents they hire - for their acts, misstatements, omissions. The master is responsible for the acts of the agent."

Critics of designated agency, particularly buyer's agents, decry transactional brokerage/designated agency as a device to reduce liability to the broker by reducing services to the consumer.

Bassett disagrees. "You still have the legal and regulatory and licensing issues and a managing broker is still in the position of being responsible for what takes place in the office. When you talk about designated agency, the broker still has the same obligations to maintain the confidentiality of the contract.

"What designated agency does accomplish is it clarifies for the consumer that the person they have hired as their agent is the only person in that firm that is working for them and representing them," emphasizes Bassett. "This is an important distinction the common law misapplied - when an agent represented them that every other agent in the company also represented the client. There isn't a consumer in the world that sees it that way.

"Why do consumers choose a certain real estate licensee? They want to be represented, per se, the reason they choose you is 1. Can I see myself doing business with this person? 2. Are they knowledgeable? and 3. Can they do what they say they can do, and do they care about me? If they don't like you, they aren't going to work with you."

"When I hear the argument that we need to protect the consumer by maintaining the common law of agency, I am confused. The process the consumer must go through to obtain a decision based on common law is time consuming and expensive. Who is being represented? Is this the trial lawyers employment act?

"It is not in the consumer's best interest to go through the legal process -two years and 15,000 to 30,000 dollars.

"Having clarity in the law in the statute that clearly says - this is what a licensee owes you in this relationship - that is what the licensee and the consumer needs. So our conclusion was that the NAR should create a early warning system about pending litigation, that the NAR should develop nine points from the facilitator PAG report, and that elements of legislation should specify the specific duties of the licensee as defined in the adopted statute.

"Our PAG reiterated the need to mandatorily disclose the forms of brokerage relationships. Our recommendations are meant to provide clarity for the consumer, and guidance for the licensee because there isn't a Realtor who isn't involved in these issues."

"It is a two-way street. It has to be a win-win. It can't benefit the licensee to the detriment of the consumer. The NAR is committed to making certain the consumer gets what they think they are getting: the disclosures, informed consent, etc."

"We live in a mobile society, this happens across the country. It doesn't serve the consumer well that there is a difference in the state laws. The default that the consumer has to fall back on is common law agency and fiduciary duties. But what do those words mean? We don't know until we go to court.

"That is why we need something that is more clear, more defendable in the courts. A state statute is clear, specific, and measurable, and provides for accountable duties and obligations owed by a licensee to a consumer."

Bassett's charge over the summer is to implement the PAG's findings so that the NAR can gather statutes or create statutory language and find ways to decimate it, she says.

"These recommendations that are defendable in the courts will be simple enough to be understood by the consumer and the licensee," vows Bassett.

Published: June 16, 1999

Use of this article without permission is a violation of federal copyright laws.