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Agency Disclosure

What is agency disclosure?

Why is it important?

The agent didn't provide you with an agency disclosure nor did he or she discuss with you who they represented. As a seller's agent, the agent's obligation was to tell the seller that you really, really loved the home. That may be the reason the seller didn't budge from the asking price. The seller knew he had you and that you probably would pay his price.

Confusing and Boring but Vital!

Also, many times the agents don't know themselves who they represent or are going to represent. Many are just as confused as the consumers they supposedly represent. And, even when required by law to present a mandatory agency disclosure and have an agency discussion with a consumer it isn't done in a "timely" fashion or many times not at all.

In 1978, the FTC, the Federal Trade Commission, conducted a survey of home sellers and home buyers. The results, published in 1982 showed much confusion in the real estate industry. 75% or so of buyers thought the agent they were working with “represented” them. That was not the case in the 1970’s and early 1980’s. True buyer representation hadn’t come on the scene yet. There were some isolated examples of brokers who represented buyers only, but they were rare and perhaps only a dozen or so at the time. So, although home buyers thought they had representation, they didn’t. To underscore the confusing situation, another startling statistic emerged from the survey. Nearly the same percentage of home sellers also thought the agent was representing the buyer.

Not only were the consumers confused but the real estate agents were confused as well. A direct result of this survey was the enactment by most states of agency disclosure regulations and the requirement of an agent to have a discussion about agency and to provide an agency disclosure to consumers that they come in contact with, in a timely fashion.

NOTE: "As mentioned above, real estate agency disclosure rules and representation options vary by state. There are no federal licensing or agency disclosure requirements pertaining to real estate agency representation on the federal level. So what follows is a general description of the various types of representation, and non-representation, that you may run into.

Real estate agency disclosure is mandatory in most states but not required in others. The timing of the agency disclosure also varies. In some states the agency disclosure doesn't have to be made until you make an offer on a property. That is too late if you have already let the agent know confidential information about yourself and the agent represents the seller. The agent is obligated to provide that information to the seller, thus compromising your negotiating position.

You need to check with the particular state you are buying in for the actual representation options, that particular state's definition of such options, and agency disclosure requirements for that particular state. You can locate the contact information for a particular state's real estate regulation agency by visiting the ARELLO (the Association of Real Estate License Law Officials) website. Most state's regulatory agencies have a website where you should be able to research the various agency/representation options and disclosure requirements.

Click here to be taken to the ARELLO website to find the appropriate real estate regulation agency for your state.

General Representation Types:

Dual agency can happen when one agent has the property listed and also represents the buyer. The agent can't continue to represent the buyer and the seller exclusively.

Dual agency also can happen when one agent in a company has the listing and another agent in the same company represents the buyer. This also results in a conflict of interest and neither agent can continue to represent their respective clients if such a transaction continues.

In either case, the dual agent may not, by law, disclose confidential information about either party to the other party.

For example, the dual agent can't tell you, the buyer, what the seller might accept by way of a price (unless the seller has instructed the dual agent to do so), what the motivation of the seller is (such as a divorce or loss of job - unless the seller instructed the dual agent to do so), or what they paid for the property (although this generally is public knowledge available at the county clerk's office or sometimes online).

The dual agent also is not supposed to tell the seller confidential information about you, such as how much of a mortgage or home price you can afford, how much you are willing to pay, or how strong your motivation is to buy a particular home.

"Informed Consent"

Although dual agency results in an obvious conflict of interest, dual agency is permitted in most states with "informed consent". What is informed consent? The agent must discuss agency disclosure in general with you and "inform" you and explain to you all the negative aspects of allowing the agent to represent both the seller and the buyer in the same transaction as a dual agent.

Such explanation would include a discussion about the fiduciary duties that you won't receive in a dual agency situation (see below for a discussion of "full" vs. "partial" duties and what duties generally you give up in a dual agency situation).

It also must include a discussion of the full range of "conflicts of interest". For example, the agent and the agent's company now have a huge conflict of interest with both the seller and the buyer as their desire now is to complete the deal and make a double commission (the agents involved also may get an extra bonus for completing an in-house transaction). The dual agent(s) have a very big financial incentive to make the deal happen.

The "informed consent" also generally must be in writing and would be part of the agency disclosure written documents and agency disclosure discussion.

"Full vs. Partial Fiduciary Duties"

I mentioned "full" vs. "partial" fiduciary duties above. It is important to remember what that means. A true agent owes the fiduciary duties of Confidentiality, Accountability, Reasonable Skill and Care, Undivided Loyalty, Obedience to Lawful Instruction, Advocacy, and Full Disclosure of material facts. A state's agency disclosure regulations may include a list of these duties and their definitions.

If the agent is representing a buyer exclusively or a seller exclusively the agent can provide full fiduciary duties. However, if the agent is a dual agent, attempting to represent both the seller and the buyer in the same transaction, some fiduciary duties can't be provided. For example, a dual agent generally can't provide Undivided Loyalty, Advocacy, or Full Disclosure of Material Facts. These are pretty important duties, especially for a first time home buyer. I would think long and hard before giving up these important duties by working with a dual agent.

"Dual Agency is Risky"

Because an agent or real estate company can't possibly think of all the negative aspects or conflicts of interest inherent in a dual agency situation, operating as dual agents in a transaction, although financial rewarding due to the double commission, entails great financial risk. Real estate companies get sued all the time and proper agency disclosure is often an area that the company and the agent(s) don't function well at.

Working with a dual agent also has its inherent risks for you, the buyer. You aren't fully represented and may be lulled into believing that you are. You are giving up a lot by buying a home through a dual agent.

The National Association of Realtors® had it right in 1986. From the NAR, National Association of Realtors® - Legal Liability Series, "Agency and Real Estate", First Edition - November, 1986:

"…an agent acting as a 'disclosed' dual agent assumes the obligation to disclose to each principal all facts relevant to the principals decision whether to consent to the dual representation."

"Thus, it is insufficient for an agent merely to disclose his dual representation to each principal: he must further disclose to each principal all facts that would bear on whether the dual representation should be permitted."

"Failing such comprehensive disclosure, an agent will still be judged to have breached his fiduciary duties by acting as an undisclosed dual agent."

"As a practical matter, real estate brokers should avoid dual agency relationships at all costs. Creation of lawful disclosed dual agency relationships is so difficult that a real estate broker who attempts to conduct his day-to-day business in this manner is living on 'borrowed time'."

"Dual agencies are best avoided if real estate brokers are careful to create only "single agencies": a real estate broker should represent one and only one principal per transaction; he should loyally and diligently pursue the legitimate interests of that principal; and he should scrupulously avoid accepting or exercising any authority on behalf of the other party to the transaction."

"Home Buying TIP"

As a buyer, especially a first time home buyer, you should never, never, ever accept dual or designated agency. Don't do it!

If you end up in a dual agent situation "fire" the agent and company you are working with and go find another buyer agent with another company so you receive full fiduciary duties from that agent.

Make sure that any "buyer agent contract" that you sign gives you an out for exactly that situation and cross out any provision that automatically lets the agent and company convert you to a dual agency relationship for in-house listings. This is known as the renege clause - that is, you sign up for buyer agency representation and now the agent and their real estate company want to renege on their obligations to you and force you into a dual agency form of representation.

Also make sure you have a full agency disclosure discussion with an agent and receive a written, completed agency disclosure form upon first contact with the agent regardless of whether it is required in your state or not. You must know up front who the agent is representing and whether or not they want to renege on that relationship to dual or designated agency.

Of all the representation types this is the most convoluted and ridiculous form of representation. This has come about due to the successful lobbying efforts of NAR, the National Association of Realtors, and their Realtor members on a state by state basis. It is a deliberate attempt by Realtors to water-down the concept of fiduciary duties and true agency.

As discussed above, dual agency is risky. But if the real estate company gives up practicing dual agency they give up the potential of the double-ended commission. So they needed a way to avoid the risk of dual agency and designated agency was born.

But, what changed? Nothing!

All of the conflicts of interest still remain for the buyer and seller.

Can we honestly believe that the agents so designated won't use confidential information against their respective clients in an effort to make more money?

Are agents going to ignore confidential information shared in company sales meetings or around the office water cooler or coffee pot?

If I'm designated to represent the seller and your designated agent told everyone in a sales meeting that you are qualified to pay $200,000 for a home and the asking price is $200,000 do you think I'm going to tell the seller to take less if you really like the home?

If I'm your designated buyer agent and I over-heard the seller's designated agent say on the phone that the sellers of the property you are interested in buying are going through a divorce and willing to accept much less than asking price don't you think I'd tell you and use that against the sellers?

Nothing changed. The office didn't get rearranged to protect confidential information. Phone calls are still over-heard. Faxes are still shared. Discussions still take place around the water cooler or coffee pot or in sales meetings or over lunch. Its business as usual except the law now protects them from lawsuits. Dumb and totally anti-consumer.

"Home Buying Tip"

Don't get sucked into a dual or designated agency arrangement. NEVER sign any agreement allowing designated agency. EVER! Unless of course you have no problem giving up your right to full representation. You always have the legal right to be fully represented. ALWAYS!

A further note about designated agency. Attorneys fall under the same trust/custodian agency laws as real estate agents and brokers. Ask an attorney if they would ever practice designated agency as it is written for the real estate industry. I have and they just shake their head.

In fact, it is a rare situation that you will get a law office to practice dual agency. The only situation in which they might do that is in family situations where there is a minimum or no conflicts of interest. And, even then, they will carefully explain the potential for conflict and what will happen in the event of a conflict and have the family members so involved sign a dual agency agreement that they have been informed and consent to the dual representation. But, designated agency in a law firm - NEVER!

They help the seller and buyer by assisting them in writing the offer or referring them to other professionals, such as home inspectors, mortgage brokers and attorneys. They must remain absolutely neutral and may not support one's position over the other nor offer any negotiating or other advice.

This is available in a number of states but not in all states. This may work for experienced home buyers who are savvy enough to do their own research and negotiating but certainly would not work for a first time home buyer.

We need to discuss one more aspect of real estate representation before leaving this subject. It will help you decide on what real estate company to search for and to work with based on their choice of "operation".

Real Estate Companies have a number of choices when deciding how they will operate:

They can operate as "Traditional" real estate companies by offering the entire range of representation options including dual and designated agency as allowed in their particular state. We have already discussed the dangers of a buyer accepting a dual or designated relationship with a real estate company. To avoid such a situation happening simply don't start working with an agent from such a traditional company. Or, if you do, make sure it is a very small company so that the chances of you wanting a property they might have listed is very remote. That reduces the potential that you would find yourself in a dual agency conflict and the company's desire to continue with you as dual or designated agents.

They can operate as "Exclusive" real estate companies either representing buyers only or representing sellers only. This is the absolute best form of representation for a seller or a buyer. Unfortunately, there aren't many of either available in most markets. The lure of taking listings and the potential of double commissions keep most real estate companies operating as with the traditional method of operation. In the "Find an Agent" section of our website, we provide a search option for you to find exclusive buyer agents or if none available, what we refer to as "next best", that is agents who are well versed in buyer representation and are with smaller companies.

They may operate as "Single Agency" real estate companies representing both sellers and buyers but never in the same transaction. This is even more rare than exclusive buyer agencies but yet very viable. It allows the company the option of representing both buyers and sellers but with the caveat that they not practice dual or designated agency. In other words if you are their buyer client and you want to buy a home they have listed they will release you from further obligation and let you buy the home through another real estate agent/company or by using a real estate attorney to represent you in the purchase.

Or they may choice to operate as "Transactional Brokers or Facilitators" not providing representation to either sellers or buyers but merely facilitating the transaction on behalf of both. This is very prevalent in some states and far less risky for the real estate company and agents. The big problem, however, for agents is "not to act or sound like an agent". That is very difficult for agents trained to sell homes and at least represent sellers. Yet, many real estate companies choose this option.

Conflict-Free:

You should seek out a real estate company that has built their business model around being "conflict-free". That is what I've done with my own company, Home Buyers Best Realty LLC. We are "conflict-free". We don't represent sellers so we eliminate three huge conflicts there. And, we have a written office policy that discloses three more and states that we can not and won't attempt to represent a buyer when we are faced with conflicts in so doing. We choose to release the buyer from any further obligation to our company and let them negotiate directly with a seller or use another agent or an attorney to represent them, as we can't in certain circumstances. Click here for more information that you won't get anywhere else.

I've attempted to provide you with explanations as detailed as possible, yet in understandable format and jargon. If you still don't understand something about real estate representation, agency disclosure, etc. please ask us your question(s) by filling out the form available at the below link.

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