Any real estate agent would jump at the chance to receive a double commission. But at what cost? What are you willing to sacrifice for that paycheck?
Dual agency comes with many pitfalls and potential risks that real estate licensees need to realize before considering representing both parties to a transaction.
Real estate agents owe certain duties to their clients. Anyone with a real estate license has a fiduciary duty to protect and promote their client's interests, and to deal fairly with all parties to a transaction.
Pitfall #1 - Written Consent
In most states, a licensee may be a dual agent, provided they obtain the prior written consent of both parties. This requirement is usually strictly enforced by courts. Quite simply, if you do not have written consent from both parties before the transaction begins, you probably won't get paid and you may wind up losing your license.
Pitfall #2 - Who is Responsible?
It depends. Dual agency rules can be applied at the broker's level or at the salesman's level. In most states, the broker is considered to be the agent of the party being represented. The salesman is simply an agent of the broker, who is assisting the broker in fulfilling their duties to the client. Consequently, the dual agency rules get applied on the broker's level rather than on the salesman's level.
Example #1 - Applying the rules on the broker's level
A-1 Brokerage Co. (ABC) hires 2 salespeople (D & E). D represents the Seller and E represents the Buyer. Since D & E both work for the same brokerage firm (ABC), both the Seller and Buyer are represented by ABC and the dual agency rules come into play and prior written consent is required. The same result would be reached, even if ABC had multiple branch offices and D & E worked in separate offices.
Example #2 - Applying the rules on the salesman's level
A-1 Brokerage Co. (ABC) hires 2 salespeople (D & E). D represents the Seller and E represents the Buyer. Even though D & E work for the same brokerage firm (ABC), they are considered to be separate agents. Because the Seller is represented by a different agent than the Buyer, there is no dual agency.
Applying the rules on the broker's level makes it much more difficult for large brokerage firms with multiple offices. Each state applies the dual agency rules either on the salesman's level or on the broker's level. It is the responsibility of each agent to be aware of the rules of the state in which they are licensed.
Pitfall #3 - Perspective
Broker's Perspective - Brokers and salesmen usually love dual agency, as it allows them to get a full commission without having to split it with any outside parties. However, the problems that can occur are not always worth the payout. One needs to learn to recognize dual agency situations and to get informed, written consent of all parties before the deal is negotiated and finalized. Some brokerage firms put dual agency consent language in their standard representation agreements so that they “automatically” get the consent of the parties to dual agency. One could potentially argue that consent received in that manner is not “informed” consent, unless the agent makes the extra effort to specifically explain it to the client at the time they are signing the representation agreement.
Seller's Perspective - Many Sellers feel that brokers should owe them a greater degree of loyalty, as it is usually the Seller who pays their commission. In dual agency situations, the broker must walk a fine line between the parties and the Seller frequently winds up getting a lesser degree of loyalty than what he would prefer.
Buyer's Perspective - Many Buyers feel that since they have talked with the broker and negotiated with them, that they are being represented by the broker. However, nothing could be further from the truth. Most brokers are in fact representing the Seller.
Consumer's Perspective - No matter how it is phrased, in dual agency situations, brokers are actually required by the law, to provide a lesser level of service than in pure representation situations. Consumer groups tend to take the position that dual agents provide less, not more.
Pitfall #4 - Client Reaction
Agents who ask their client to give written consent to dual agency should expect to be asked several difficult questions, such as:
- What exactly is dual agency?
- Can you please tell us the benefits of consenting to dual agency?
- Please explain how the fiduciary duties you usually provide as an agent are limited by dual agency.
- Given a choice between working with a dual agent and one who represents us solely, which service choice best serves us and why?
- Considering dual agency seems to be a reduction of service, would you be willing to reduce the commission you receive if we get into a dual agency transaction?
- Are you aware of any law firms in your area that permit their attorneys to represent adverse parties in the same manner, and can you tell us which firms allow that dual representation?
- Does your company allow a service choice of single agency only?
- Will you refer us to a knowledgeable attorney who can honestly advise us about the risks of dual agency?
Dual agency increases the level of complication of any real estate transaction. All real estate firms desiring to serve as dual agents should make sure they get informed, written consent from all parties, PRIOR to the start of the representation. Firms should also review their listing and representation agreements to make sure they disclose possible dual agency situations that can arise from representing multiple sellers or multiple buyers.
Lawsuits involving dual agency are becoming more and more common. Real estate brokers and agents should give serious thought to all potential consequences before entering into a dual agency situation.