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In the post-NAR settlement era, real estate professionals have been inundated with information, from legal updates concerning commission lawsuits to proposed rule and practice changes. There has also been endless conjecture about how homebuyers and homesellers will react to industry changes and engage with agents in the near future.
Part of the chatter out there concerns whether buyers will continue to seek out their own representation or if they will bypass buying agents altogether and work directly with listing agents to handle their real estate purchases. Amidst this, the discussion around dual agency — the practice where brokerages represent both buyers and sellers — has gained momentum.
While the future remains uncertain and predictions are rampant, proactive education and compliance remain paramount for real estate professionals. If dual agency does indeed become an increasing trend, as some pundits speculate, then it would be especially prudent for licensees to familiarize themselves with the compliance measures required when acting as a dual agent.
Understanding agency in real estate
Before examining dual agency and its attendant rules, let’s quickly address “agency relationships,” which are fundamental in the realm of real estate. At its core, an agency relationship constitutes a legal framework where an agent acts on behalf of their principal in real estate transactions. Within this dynamic, agents are entrusted with representing the principal’s interests in dealing with third parties and are bound by certain duties, which will be explained in more detail below.
In California, for example, the law defines the real estate broker as the “agent” in the real property transaction, and in turn, the broker bears responsibility for their salespersons or broker associates who act as agents on their behalf.
Further, when a salesperson or broker associate owes a duty to any principal, or to any buyer or seller who is not a principal, in a real property transaction, that duty is equivalent to the duty owed to that party by the broker for whom the salesperson or broker associate functions.
With an agency relationship comes a “fiduciary duty” owed by the agent to their principal. According to “The Real Estate Brokerage as Fiduciary: A Summary Review of What it Means and Why it Matters,” by Wayne S. Bell, former California Real Estate Commissioner, fiduciary duties, which encompass the highest standards of care, trust, honesty and loyalty, require that agents always prioritize their clients’ interests above their own.
Analogous to the fiduciary responsibilities of trustees to beneficiaries or doctors to patients, agents must adhere to these obligations rigorously. Failure to uphold fiduciary duties can lead to legal repercussions, including civil suits and regulatory action, which reinforces the importance of ethical conduct in the real estate profession.
Dual agency in real estate, even though it may vary according to the jurisdiction, typically emerges when a single agent or brokerage represents both the buyer and the seller in a transaction. This can occur either when one agent represents both parties directly or when separate agents from the same brokerage represent the buyer and seller.
In this scenario, the dual agent is tasked with fulfilling fiduciary duties to both the buyer and seller simultaneously. Given the complex nature and potential issues intrinsic to this arrangement, discussions surrounding dual agency often spark spirited debates.
Varying opinions, and legislation
As a real estate compliance consultant and former California Department of Real Estate investigator, I am well-versed with the nuanced challenges of dual agency. While some states outright prohibit dual agency, acknowledging its unavoidable problems and liabilities, other jurisdictions permit it under stringent regulations. However, even where legal, some brokerages or agents actually opt against it, wary of its obvious complexities.
Listen, cautious agents and brokers aren’t wrong, which brings me to the title of this piece. If “dual agency” were a song, I can’t help but think Stevie Ray Vaughan’s “Tightrope” captures the cautionary message of the practice best. Dual agency requires a delicate and relentless balancing act between conflicting interests, as agents must effectively manage the divergent objectives of buyers and sellers while upholding fiduciary duties to both.
For example, one of the key distinctions in motivations between buyers and sellers, and challenges for the dual agent, concerns the price of the property; buyers seek to purchase at the lowest possible price, while sellers aim to sell for the highest possible price. Because a dual agent must faithfully and dutifully serve principals with opposing goals, this agency relationship necessitates a thorough understanding of, and compliance with, regulatory requirements.
While it’s understandable that some argue that agents cannot serve as fiduciaries to both buyers and sellers, others are willing to assume the risks involved (and do it all of the time). This brings us to the purpose of this article: to delve into the core principles of dual agency and the significant elements that licensees need to grasp and consider before embarking on this role with their clients.
Agency relationships must be disclosed
The cornerstone of real estate agency rests upon disclosure, emphasizing the crucial significance of transparency within the agent-client relationship. Across various jurisdictions, real estate professionals are bound by regulations that mandate written disclosure of agency relationships to both buyers and sellers.
For example, in California, the law dictates not only the content and format of these disclosures, but also the precise timing of their delivery.
The seller’s agent shall provide the agency disclosure form to the seller before entering into the listing agreement. The buyer’s agent shall provide the agency disclosure form to the buyer as soon as practicable before execution of the buyer’s offer to purchase (or if the offer to purchase is not prepared by the buyer’s agent, the buyer’s agent shall present the disclosure form to the buyer not later than the next business day after receiving the offer to purchase from the buyer).
In addition, the agent must also obtain a signed written acknowledgment of receipt from the seller and/or buyer.
Although they may differ, depending on the locale, agency disclosure forms usually identify the different agency relationships (e.g., seller’s agent, buyer’s agent, and dual agent) and their respective duties to the parties. It is critical that agents and brokers possess a thorough understanding of agency, their disclosure obligations and statutory duties, treating this information as essential knowledge in their profession.
Mastery of when and how to execute agency disclosures, as well as diligent documentation of these interactions, is vital to ensure compliance. This vigilance extends to cross-checking practices with brokerage policies to guarantee alignment with industry standards.
Notably, if the NAR proposed settlement is approved by the court, agency disclosure practices may change as well as compliance in this arena. For example, if MLS participants are required to execute buyer representation agreements with buyers prior to touring a property, then licensees may have to provide agency disclosures to buyers a lot sooner than they have historically done in the past.
Additionally, listing agents will have to be sure that they complete their due diligence when approached directly by buyers. They must ascertain whether buyers have existing representation agreements with licensees, as well as communicate their own agency relationship with the seller transparently.
Equally noteworthy, listing agents should elucidate the possibility for dual agency if the buyer expresses interest, ensuring all parties understand the implications within the transaction’s scope.
Dual agency and required consent
In jurisdictions where dual agency is permitted, buyers and sellers must be informed and consent to this arrangement, often requiring written acknowledgment, as seen in states like Arizona, Nevada and California. Proper disclosure forms should clearly define dual agency and outline the fiduciary duties and the standard of care owed by the dual agent to both parties.
I can attest from my own experience as a former Department of Real Estate investigator who was tasked with investigating myriad consumer complaints filed against real estate licensees, failure to disclose a dual agency arrangement can pose significant enforcement risks for agents and brokers.
Similarly, as a real estate compliance consultant and expert witness, I am often confronted with clients who are involved in civil suits for breach of fiduciary duty in connection with dual agency. Of course, if asked, any real estate attorney will quickly explain the multitude of legal challenges that a dual agent faces and the massive compliance lift dual agency requires in terms of risk management.
Given that dual agency mandates loyalty to both parties, buyers and sellers must understand the conflicts of interest and limitations involved from the outset of agent-client interactions. As a matter of best practice, and to mitigate risk, listing agents should transparently communicate the possibility of dual agency when working with sellers, and directly inform buyers of the same implications.
While state-mandated forms may outline dual agency, as fiduciaries, licensees have a duty to thoroughly explain these details to their clients rather than merely presenting documents for signature.
Even in states where it’s legally sanctioned and all parties provide consent, real estate agents must carefully confirm if dual agency is allowed within their brokerage. It’s not uncommon for brokerages to either prohibit dual agency outright or require written approval from the broker before agents elect to act in this capacity, reflecting the risks involved.
Engaging in dual agency without proper consent can lead to a range of consequences, from termination to disciplinary action if the agent violates any laws governing real estate activities. Therefore, it’s imperative for agents to adhere to brokerage policies and obtain explicit authorization, if required, to avoid myriad repercussions.
Double duty
The dual agent shoulders a doubled burden in a real estate transaction. They must uphold fairness and honesty with both the buyer and the seller, ensuring no preference is shown to either party, and maintain this balancing act throughout the entirety of the agency relationship.
The dual agent is bound by fiduciary duties to each party, necessitating equal loyalty, care, honesty (including full disclosure of material facts), fair treatment, and confidentiality to both the buyer and seller.
Confidentiality is particularly significant, varying in application depending on the state. For instance, in California, licensees representing both seller and buyer are legally prohibited from disclosing confidential information without express permission, covering aspects such as financial position, motivations and bargaining power.
This prohibition extends to offering advice on pricing, limiting the dual agent’s ability to advocate effectively and impartially on behalf of both parties. Consequently, dual agents must exercise caution when providing pricing advice to their principals.
The California Department of Real Estate’s “Reference Book – A Real Estate Guide,” discusses the limited utility of the dual agent when it comes to the negotiation of price and other terms in a real estate transaction. For example, when it comes to the offer process, it states:
“The broker should present to the buyer the listed price and terms requested by the seller and ask the buyer to make whatever offer the buyer deems appropriate. Equally, the broker should present to the seller the price and terms set forth on the buyer’s written offer to purchase. The seller should be asked to accept the offer or counter the price and terms as the seller deems appropriate.
Should either principal require professional assistance to ascertain the price and terms to request or offer, or the price and terms to present in the form of a counter-offer, the real estate broker who is the dual agent is not in the position of offering that assistance. Rather, the broker who is the dual agent should recommend that the principals seek independent advice from qualified professionals to assist the principals in determining what price and terms are appropriate in the fact situation. The limitation placed upon the real estate broker as a dual agent, pursuant to Civil Code § 2079.21, does not preclude the broker from providing both principals with the same comparative market data (including a BPO prepared by the broker) upon which the principals may independently rely.”
In my opinion, this limitation is notable and sets the dual agent apart from an agent who only represents, and advocates for, one party. If other states are like California in this regard, and enforce similar restrictions, agents opting to act as dual agents should be very knowledgeable about such intricacies and how to successfully execute compliance in this area.
It should be noted that if an agent finds themselves at odds with these limitations or feels they clash with their fiduciary duties to one party, dual agency may not align with their ethical framework.
Effective communication in real estate
Clear communication with clients is tantamount. From discussing agency relationships to outlining compensation structures and sources, transparency is key — and even more now in light of ongoing commission settlements and evolving industry norms. It’s pivotal to address the possibility of dual agency and its implications for both agent and principal during these discussions (and as soon as practicable).
Alternatively, if a brokerage does not practice dual agency, clients should be promptly informed, and suitable referrals to external brokerages for representation should be provided.
Regardless of the approach, meticulous documentation of these conversations is best practice. By utilizing the appropriate forms and ensuring comprehensive dialogue, agents can streamline the process and set a solid foundation for the agency relationship.
Importantly, when listing agents engage in transparent communication with sellers, or buyers who directly approach them, clients may choose to opt out of dual agency — a valid decision that underscores the agent’s effective and unbiased communication of the associated pros and cons.
Speaking of communication, but outside the scope of agent-client relations for a moment, responsible brokers also have a duty to communicate to their agents about agency relationships, disclosure and related requirements.
To ensure compliance within the brokerage, and to best shield the firm from civil liability or license discipline, responsible brokers should have training and other education-based modules in place to help agents gain a better understanding of how to actually fulfill their duties as agents, and in particular, the expanded duties bestowed upon dual agents.
It’s one thing to read about dual agency in a disclosure form or book, but it’s quite another to comprehend what this means and looks like in practice fully. This is an important point because if dual agency does gain traction in real estate transactions, becoming a more utilized option by buyers and sellers, then licensees who are willing to take on this assignment will need to be purposeful in their actions, confident in their commitment as a fiduciary to both sides and extremely familiar with legal restraints covering dual agency in their state.
Responsible brokers, on the other hand, have both an opportunity and responsibility to help their licensees achieve success as dual agents by providing consistent and sound guidance and supervision.
Navigate dual agency with finesse
When the NAR settlement and its proposed changes come to fruition, the prominence of dual agency may rise, requiring listing agents — particularly those less familiar with this charge — to grasp its complexities fully.
Professionals electing to take on the responsibility of a dual agent should possess not only the requisite knowledge and experience but also the aptitude to maneuver the intricate legal terrain governing this practice. Central to their achievement is the fulfillment of fiduciary duties to both buyer and seller, a task that demands careful consideration to avoid inherent risks and legal disputes.
For those inexperienced in dual agency, a conservative approach is warranted and may involve refraining from assuming this type of agency until sufficient education, training and experience have been acquired. Seeking guidance from responsible brokers or seasoned mentors can offer invaluable insights into effectively managing the challenges innate in dual agency scenarios.
Through this process, agents might even find that dual agency is not for them, and that is a valid outcome of this learning expedition, too.
In closing, while dual agency itself is not novel, the evolving real estate environment warrants heightened preparedness from agents and brokers. Licensed real estate professionals must take the time and effort required to fully understand the laws and regulations governing dual agency before “walking the tightrope,” and approach this agency relationship with careful attention and unwavering commitment.
Summer Goralik is a real estate compliance consultant. The opinions, suggestions or recommendations contained in this article are based on Summer Goralik’s experience working for, and knowledge of the laws enforced by, the California Department of Real Estate and must not be considered legal advice or relied upon as legal advice. Licensed real estate professionals should consult with appropriate legal counsel for further clarification.
