Certainly most real estate professionals are exactly that, professionals. Still, there are real estate arrangements that you should avoid just to prevent the temptation for professionals to manipulate the deal. The most prominent is dual agency. Dual agency is when one real estate office represents both the seller and the buyer in the same deal.
Even when two different agents are involved, having the same agency represent both the buyer and seller is not a good thing. It creates the strong possibility of in-house collusion to close the deal so that both agents and the broker collect their maximum commissions. Further more, the broker, might encourage closing the deal or collusion because he or she is in the position of doubling his or her portion of the commission.
Avoid Big Brokerages
The dual agency issue transcends individual offices. If the buyer and seller are independently represented by separate agents in different offices of the same national real estate chain, the issue of collusion is real. More specifically, it’s the buyer that is most likely to be manipulated, although the seller might be talked into selling at too low of price. In most states, the buyer is not paying the commission, the seller is. The selling agent has a fiduciary responsibility to the seller. Although legally, the buyer’s agent has a fiduciary responsibility is to the buyer, their higher fiduciary priority is to their own bank account and obtaining the highest selling price. The temptation to misinform the buyer becomes too great.
Consider the fact that in almost every other profession dual agency is fully illegal. Would you hire your adversary’s attorney to represent you in a legal case? Common law assumes that dual agency involves fraud. However, real estate brokers have lobbied long and hard to keep dual agency a viable option in real estate. No wonder why, when you consider that dual agency can add an extra $7,000 to $15,000 to the commissions of the agents and broker in a typical deal.
Real Estate Brokers are Obsolete
Real estate brokers were established to protect consumers from less ethical and less trained agents. Brokers require more training and are assumed to be more ethical. So why then, do they lobby to retain dual agency? Here is what New York Secretary of State, Cesar Perales, has to say about dual agency:
“Dual agency typically arises in the following way: a real estate broker employs two salespeople, one who works for the buyer as a buyer’s agent and the other who works for the seller as a seller’s agent. The real estate broker and his salespeople are “one and the same” entity when analyzing whether dual agency exists. As soon as the buyer’s agent introduces the buyer to property in which the seller is represented by the seller’s agent, dual agency arises.”
I contend that major brokerages frequently engage in dual agency. I’m not referring to when it only involves one national agency. Dual agency is so tempting that I believe it crosses company lines at the national level and very likely at the local level as well.
As a buyer, investor, or seller, it’s in your best interest to hire an independent agent not associated with a national firm. You want to take this one-step further by requiring your representative to sign an agreement that he or she only represents your fiduciary interests. Still this doesn’t guarantee you’ll be fully represented but it does give you legal recourse if it can be shown that collusion occurred. Always do your own due diligence in every real estate deal.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.