Dual Agency Is a Crock OR Why You Should Beware If Your Realtor Represents Both Sides

I've alluded in several posts to my disdain for dual agency, and the agents who practice it. First, let me define dual agency as practiced in real estate. This is the practice whereby a single agent represents both the buyer and seller as clients in a sales transaction. If done "properly," the agent has disclosed the situation to both parties, and received the informed, usually written, consent of both parties to act as a "dual agent."

Why do I disdain the practice so much, which is, by the way, still legal in Virginia? See Va. Code Sec. 54.1-2139. I am a lawyer by training and past practice, and dual agency as practiced by Realtors on a regular basis is almost absolutely prohibited in legal practice. In fact, in the legal context, acting as a "dual agent" just might get me disbarred. What would you think about the legal services being provided by a single lawyer representing both the plaintiff and the defendant in a personal injury lawsuit? I think dual agency should not be permitted, is unethical and self-serving, and is a significant contributing factor to the public's not-uncommon perception of Realtors as self-serving, skeevy shysters. [Check out my alliteration!].

Here's my analysis of the practice. In real estate "dual agency," the agent (i) has equal fiduciary duties to both the buyer and the seller; and (ii) has almost certainly received confidential information from both parties. My question is: How do you maintain EACH client's confidences, and still discharge your fiduciary duties to BOTH clients? My argument: You can't. There is no way humanly possible to advise either or both clients, without violating your fiduciary duty to one or the other or both, because you cannot "unring the bell" of the confidential information in your brain, and you cannot advance the cause of the seller unless it is at the expense of the buyer, and vice versa. The interests of the buyer and the seller are inherently opposed. Quite the sticky wicket, isn't it?

Let's walk through an example to illustrate my point. Say you represent a seller, listing his home for $300,000. You know he needs to sell his house because he has just lost his job and is having financial difficulties. You also know he will take at least 10%, or $30,000, less than his asking price. Then, you end up representing the buyer of the house also. How would that happen? Consider a typical real estate scenario: A potential buyer calls on the sign, or comes through the door at an Open House. The listing agent "picks up" this buyer, who is not represented by a buyer's agent and who decides they want to buy the house. In fact, the potential buyer loves the house so much, (s)he wants to write an offer right this minute!

[ASIDE: Why would ANY buyer EVER do a real estate deal without (i) a good, competent, ethical (ii) buyer agent (iii) who specializes in the sub-market where the buyer plans to buy? People, for 99% of you out there, your home is going to be the most significant investment you ever make, meaning the purchase of the home is the most significant commercial transaction to which you will ever be party. So why do people use agents they barely know, or who have little experience in the area, or who have as their main recommending feature that fact that they are a second cousin twice removed, or a business colleague's wife, or someone that lives in the neighborhood? I just don't get it. But that is yet another topic to be added to my long list of things I want to cover someday, I digress....].

So, what happens next?

Well, most Realtors, if we are honest, start salivating over the possibility of taking home the entire 6% listing commission, which would otherwise be split 3%-3% between the listing agent and the "selling," i.e., buyer's, agent. Let's be real. Especially in difficult economic times, you'd have to be pretty daggone immune, or pretty daggone rich, not to get excited about the idea of getting paid essentially double on a single deal. On a $300,000 house, with the standard 6% listing commission, you'd go from a $9,000 gross commission to an $18,000 gross commission. For most anyone I know, that's real money.

So many agents would try to seal the deal, convince the potential buyer to buy and to use them by talking up all the benefits of buyer agency - NONE of which will this poor person get, BTW - and then will write the contract, including all the standard disclosure forms, which most buyers will sign without reading, much less understanding.

Now, now the buyer has become your client, and not just a customer, which is an important distinction that will be addressed later. What happens if in the course of this representation, the buyer tells you they L-O-V-E the house so much they would pay $15,000 more than the list price? Then they ask you what price they should initially offer. What do you do?

Well, if you do dual agency correctly, you are supposed to say "I'm sorry, I cannot advise you on price, terms, or any other elements of the offer, but I can commit whatever you decide on your own to paper and I can transmit it to the other side." Say this buyer is okay with that, and decides to offer $45,000 below list price, 15% below the $300,000 list price, thinking in this market (s)he might get a steal. Then when you transmit the offer to the seller, your original client, what can you do when the seller asks you how he should respond?

If you answer "NOTHING," ding, ding, ding! You are a winner, and you should go to the head of the class.

If the seller accepts the buyer's offer, IMHO you have violated your fiduciary obligation to the seller, which is to maximize the value the seller receives for his property. You KNEW the buyer would pay $45,000 more, but did not share that information, because it was confidential information provided by the buyer. If you advise the seller to ask for more money, because you know the buyer is willing to pay more, IMHO you are violating your fiduciary duty to your buyer, which is to help her/him purchase the property at the lowest possible price. If you say nothing to either party, which is probably the best of several bad options, I think there is an argument that you have violated your fiduciary obligations to BOTH parties, because you are advising no one, therefore not discharging the fiduciary obligations owed to either.

There are ways one could ethically earn the entire listing commission. For example, if (i) the buyer is merely a customer, not a client, (ii) the buyer acknowledges that (s)he will be unrepresented in the transaction, and (iii) the buyer understands that you represent the seller, the listing agent would be entitled to the entire 6% listing fee. However, in that scenario, why in the world WOULDN'T the buyer use a buyer's agent? Failing to do so doesn't save him/her any money in the transaction, unless the agent's fee is both specifically negotiated AND the agent agrees to reduce the fee to which (s)he is contractually entitled. It just means the buyer is navigating an extremely complex business transaction without professional advice.

I expect lots of agents will object to this post. Fine, asbestos suit on, I'm ready for the flame-throwers. I am actually curious, and would love to hear a defense of dual agency. Anyone, anyone?