Agency in real estate is inherently problematic – a contrarian perspective
This title is bound to make waves and create some vigorous criticism and arguments by the establishment because this strikes at the heart of what the establishment has been trying to convince the public and the members for a long time. At the same time however, the establishment has been steadily eroding the strict requirements and definitions under common law of agency in order to conform more closely with common everyday practices.
The very reasons and basis on which there has been a nationwide adoption of alternatives and modifications to agency proves the point completely. If the model of agency had been valid, had been workable in day to day practice no changes would have been possible or necessary. The fact is the business has undergone massive changes, fundamental changes to definitions and forms, practices and options. During this same time period all this has been evolving, the largest changes of which have occurred over the past 60 years, there have been no changes whatsoever to the practice of law.
The practice of exclusive single agency simply does not work in the real world and cannot work. The industry tried to apply a model based upon the practice of law to a business that doesn’t resemble law in any respect in spite of the herculean efforts made over the past decades to make it look like it does.
The irony is however that at the same time all sorts of changes and attempts to “fix” agency have been undertaken, there has always been one option to agency that has never changed and does not need changing or fixing because it works in all situations; transaction brokerage also known in some states as facilitation.
This article seeks to explore the “realities” of agency and the common-sense alternative that has gained considerable acceptance across the nation and which it is this writer’s view, more accurately reflects the real world practice of everyday real estate by the vast majority of licensees. Agency advocates and most significantly the national trade association representing the majority of licensees continue to do all they can to promote agency while constantly having to tweak it and modify it to try to get it to work.
Let’s take as objective and dispassionate a look at the subject as possible knowing of course that real estate licensees who have been loyal to their associations and who have bought into the standard adherence to agency will still find this unthinkable. We hope they will nevertheless respond with thoughtfully and constructively.
Merriam-Webster says an agent is: “a person who does business for another person : a person who acts on behalf of another.” In other words, an agent is merely a spokesperson, taking the place of their principal. In the real world however real estate licensees frequently exercise considerably more freedom and apply their own strong views and approaches to the transactions, making decisions sometimes entirely independently of their clients.
Real estate rules and laws across the nation generally hold real estate licensees as having a “fiduciary” responsibility to their principal. Again Merriam- Webster: “Fiduciary: In law, a person in a position of authority whom the law obligates to act solely on behalf of the person he or she represents and in good faith. Examples of fiduciaries are agents, executors, trustees, guardians, and officers of corporations. Unlike people in ordinary business relationships, fiduciaries may not seek personal benefit from their transactions with those they represent”. Does the typical real estate agent not in fact behave more like “in ordinary business relationships”?
The fundamental nature of the practice of real estate is distinctly different from the practice of law. For example, the first question a lawyer must ask when approached to handle a legal matter is whether or not s/he or his/her firm has a conflict of interest, whether s/he or the firm has a client or has had a client whose interest might be contrary to the prospective new client’s interests. If the answer is yes, they must refuse to take on the new client. There are no exceptions or work-arounds.
The contrary happens all the time in real estate and frequently at the very same time. Here are typical and common examples: 1) two licensees or even the same licensee in the same firm is/are working with both buyer and seller of the same property; 2) the lister of a property represents multiple sellers of the same type of property, all competing for the same type of buyer; 3) a licensee working with multiple buyers who might have interest in the same property; 4) the outcome of a sale and thus how the licensee thinks about and directs interest in one property over another can vary with the level of compensation involved (lawyers generally work on an hourly fee basis as compared to brokers working on straight commission); 5) a licensee may work with a seller under an agency contract however they may then have a non-agency or unrepresented relationship with that same seller client when that party elects to purchase one of their firm’s other listings using that same licensee.
The Code of Ethics of the National Association of Realtors® (NAR), the profession’s trade association, explicitly states that Realtors® while competitors in business are admonished to co-operate with each other for the benefit of the public. How is co-operation inherently part of the law of agency? Do lawyers advocating in a court of law on behalf of their clients have a duty to co-operate with opposing counsel during the prosecution of the case? Of course not and yet Realtors® understand and in fact build into their day to day practice, co-operation in many ways.
Realtors routinely use Multiple Listing Services with the express purpose of encouraging co-operative selling of each other’s listings. They also offer compensation to each other for co-operative sales. They exchange information about their clients and listings in an effort to encourage co-operative selling. They mingle at professional and social events to form bonds of friendship and trust. They work in offices where information is freely provided regarding buyers and sellers. They maintain client files in common facilities where other members of the firm would have ready access to those files.
In short, the real estate business has been built over time and out of custom on a high degree of co-operation and information sharing. Indeed, this very practice of sharing and co-operation are essential to the success of any real estate business.
Real estate licensees do not operate, except in theory in textbooks, like lawyers, not even close. The real estate practitioner who operates like a lawyer, as a strict agent, following all the laws and definitions of agency to the letter would be a very lonely and most likely not very successful agent. The most successful agents ironically are the least likely to behave like agents although they would probably disagree vehemently since their self-image is built on the idea of agency without scrutiny.
These are just some of the very obvious instances proving unequivocally that licensees in real estate transactions commonly cross the lines all the time, and cannot possibly serve the public in a true agency capacity but do so in name only, because they are convinced that sounds better than just being a broker.
The NAR has devoted decades to promoting the notion of agency in an effort to try to counter the less than complimentary perception by the public of the average real estate licensee. Agency therefore sounds professional whereas broker or facilitator to the NAR does not. I applaud the efforts of the NAR to improve the quality and caliber and standards of the profession but this can be done without the need to insist on agency. It is a matter of higher standards of entry into the business, increased training and constant emphasis on ethics. The NAR and the state associations have and continue to do so with positive effect but insisting on agency over brokerage and non-agency roles is not the answer because it is inherently not accurate, not in the strict sense possible and not even necessary for a high standard of practice.
Stock brokers do not serve as agents. They perform a function as requested by a customer, to buy or sell stock. They have industry standards of conduct. A real estate licensee has a similar degree of responsibility to insure the public is treated fairly and honestly and has the benefit of full disclosure when purchasing or selling real estate. These responsibilities are not confined however just to agents. All licensees have the same obligation, regardless of the nature of their relationship with the consumer.
The one primary distinguishing characteristic of an agent is the concept of absolute fidelity, fiduciary. This however as mentioned above is wonderful in theory and is fundamental to the practice of law but is impossible in real estate as it is commonly practiced every day. A real estate licensee, to be a true fiduciary to a client would need to do three things to follow the letter of the definition; 1) serve only one client at a time and never ever serve two that had any conflicting interests, past or present and 2) would follow the precise instructions of his/her client and 3) would be paid only on an hourly basis so they had no thoughts of personal gain depending on the price paid or property chosen. (see A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure (Unabridged)
By Mark S. Nadel* Cornell Real Estate Review)
It is safe to say that with the exception of those rare individuals who claim to serve only as buyers’ agents or only as sellers’ agents in their entire practice and who work as sole, single practitioners, not in an office with any other licensees, there are no licensees who can claim by the definitions above to be acting in true “agency” capacity. For a brief time, a few firms here and there thought they could hang out a shingle as strictly buyer agents. Most have since closed. That model almost never works but for a very tiny minority of lone persons who probably are earning very modest incomes at best.
Realistically, to survive in real estate financially, a firm and a licensee needs to accept any and all the business that comes their way, to serve buyers and sellers alike, even in the same transaction. It is this real world practical reality that confuses many and gets them into trouble not infrequently.
There are all sorts of contrivances that have evolved to help deal with the pure agency role and permit licensees and firms to work in the real world. Those go by the names of “dual agency”, “disclosed dual agency”, and “designated agency”. These permit the licensee and firm to serve two clients who have potentially conflicting interests and to trade confidential information and in so doing, compromise some of the basic laws of agency. A fiduciary cannot “serve two masters” however by these contrivances, they can call themselves agents but with lesser levels of duty to the respective parties. They are now non-agent agents.
Half the states in the nation now have admitted into law transaction brokerage/facilitation and some have even made this the initial or “default” relationship between licensees and the consumer and for obvious reasons. All the others have some form of dual agent or designated agent provisions that make it possible for agents to be non-agents in the strictest sense and thus deal with what would otherwise be conflicting interests within the same firm and same transaction. In other words these states have made it legally possible for agents to serve two parties and not call it a conflict of interest.
There is a genuine option to all this confusion and contrivance of trying to pretend licensees are agents when they are not and in the strictest sense, cannot possibly be in any circumstance. This is called transaction brokerage or facilitation.
There are many benefits of this option over agency and someday these benefits will be seen as outweighing the reasons for agency which will diminish over time or else the rules of agency will be ever more watered down so as to be virtually like facilitation only without the name. A dual agent is in reality a facilitator except they still expose their agent client to vicarious liability and invariably fail the other tests of agency as well. The risk of vicarious liability is a major drawback of agency that one state recognized and altered the law specifically to eliminate that exposure. I know of at least one other state considering altering the law once again, to protect the client from vicarious liability. Silly. Why not simply convert to facilitation where no such liability exists.
The incredible variation state to state across the nation between license rules and laws pertaining to agency practices is another reason why consumers and licensees are often confused and frequently in trouble over these issues.
Ironically the more NAR and state associations and regulatory bodies attempt to modify and adjust rules and laws to “fix” the problems created under agency, just like our nation’s tax code, the more confusion and problems are often inadvertently created. The complexity breeds more complexity in an endless effort to fix what can’t inherently be fixed because of the fundamental contradictions within agency in real estate.
Ironically too, there is an alternative, an incredibly simple approach that makes perfect sense which involves no complexity and never changes from the start through the end of a real estate transaction which avoids conflicts of interest, avoids risks to clients and greatly reduces law suits. It is called variously transaction brokerage or facilitation.
There is absolutely no benefit a dual agent provides to a client over what is provided by a transaction broker however there are distinct disadvantages in the agent relationship as mentioned above.
Here are some of the benefits of the transaction brokerage or facilitation model of real estate practice.
One, it is so simple, everyone understands it.
Two, confusion of roles and functions doesn’t occur since the licensee’s role remains the same unlike agents who may morph from agent to dual or designated agent at any time
Three, no conflicts of interest, ever
Four, the consumer is freed of the vicarious liability that is inherent in the agent relationship.
Five, law suits when the licensee is serving as a facilitator or transaction broker are far less frequent than under agency
Six, the parties, buyers and sellers may work with the same licensee and feel confident that their interests are treated equally, without prejudice one over the other
Seven, like a mediator, the transaction broker’s role is akin to a mediator, assisting the parties to reach accommodation and compromise to arrive at an equitable outcome
Eight, games power plays and manipulations often associated with agents are not part of the transaction broker’s method or behavior
Nine, clients are encouraged to consider both sides’ interests and needs unlike agency where clients are encouraged to only emphasize their own wants and demands
Ten, facilitation and transaction brokerage operate on the principal of the Golden Rule and appeals to the higher instincts and aspirations of both sides.
In conclusion, the vast majority of real estate licensees are doing their best as best they know how, to assist buyers and sellers of real estate in transacting business. The vast majority do so with the best of intentions. They are frequently friends or even colleagues of the buyers and sellers they deal with, they are members of the same clubs, churches, religious groups or civic organizations of their clients. The vast majority care little about and don’t give a lot of thought to the kinds of questions raised in this article and the definitions of agent. The vast majority just want to help people buy and sell and do so with the best of intentions with the best of their abilities and the training they have received. For most, the entire array of options under agency is as confusing as it is to the public they serve and if the average transaction was dissected and scrutinized start to finish all sorts of infractions of the law would be easily discovered but with no malice of intent at all.
Real estate licensees can enter the business with a minimum of course hours. In many states 40 hours is all that is required to become licensed. Compare this with law school for example where to apply one must have a bachelor’s degree to begin with and then spend two or more years studying the law and then passing a rigorous qualifying exam. Even a cosmetology license requires 1,400 hours or more.
Why do we think it’s even possible for licensees who need no formal education above high school and no more than 40 hours of class room work prepping for the brief exam to grasp and to adhere to the strict rules of agency let alone all the variations of dual agency and designated agency? Why haven’t more states turned to transaction brokerage/facilitation as the obvious solution? Same reason the nation hasn’t simplified its tax code you might say or is it because the term “agent” is linked in many minds with “attorney” and the practice of law even though the two couldn’t be more dissimilar as discussed above.
Agency and its variations are inherently impossible in the real world and flawed at best and downright misleading and dangerous to the consumer at worst.
Transaction brokerage is simple, straightforward and never changes. Transaction brokerage and facilitation serve the consumer and the licensee highly effectively without confusion or conflict and without the changes in the nature of representation that necessity has forced agency to adopt in order to work in the real world.
When the authorities and the central powers finally accept that agency and real estate are not a natural or even suitable match and that transaction brokerage is the logical, natural, suitable and most easily understood and applied function for real estate transactions, then the business will reflect the real world. Agency is like forcing square pegs into round holes. That takes force, effort and some damage to the peg. Facilitation offers the round peg.
Paul Harsch
@HarschAssociatesBerkshireReal Estate
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