Most people have some concept of agency, although a lay person may not understand completely the legal definition and ramifications of agency. To confuse the issue, many people refer to a licensed real estate professional as a real estate agent, without considering or appreciating the legal significance of the term "agent."
In Colorado, not all real estate brokers or sales associates are agents. There are 2 relationships a real estate broker can have when working with a buyer or seller, that of agent or transaction broker. Transaction brokerage is unique to Colorado and a handful of other states. Actually, I know of only one other state, Florida, that has transaction brokerage. There may be others, so please inform us if some of you are in states that recognize this legal status. Also, just to clarify, in Colorado, "broker" is used for all real estate professionals licensed to engage in real estate brokerage activities and services, whether they be owners, managers, employing brokers, supervising brokers or associates (called "broker associates' or "associate brokers"). Still, the public or consumer generically and broadly refer to all real estate brokers as "agents," which adds to the confusion.
So, what the heck is a transaction broker? Well, let's start with agent, whose duties are derived from Common Law. An agent "represents" only one party, either a buyer or seller, by advocating, directing, negotiating on the client's behalf and advising the client as to the benefits and risks of a proposed transaction. The agent represents the interests of the client above the interests of the other party. If an agency relationship exists, then the buyer or seller is the real estate brokers "client."
A transaction broker, on the other hand, "assists" a buyer or seller. Taking the definition directly from the Colorado Real Estate Manual, a transaction broker "means a broker who assists one or more parties throughout a contemplated real estate transaction with communication, interposition, advisement, negotiation, contract terms and the closing of such real estate transaction without being an agent or advocate for the interests of any party to such transaction. In other words, a transaction broker assists a party or both parties to the transaction without representing either of them or being their agent. A buyer or seller that has a transaction brokerage relatinship with a broker is also a client. There, that's clear as mud, isn't it?
I think the best analogy I've heard to help distinguish between an agent and a transaction broker ("TB") is that an agent is more like a coach whereas a transaction broker is more like a referee. A coach can tell his or her client what to do or what they should do. A TB is a neutral, observer, and just interprets the rules and calls the shots without any obligation on the part of either side. In the situation of a real estate transaction, a TB will give out information, explain procedure, supervise and facilitate the transaction, while assisting one of the parties or both, without taking sides.
If a real estate broker is an agent for a party, then the broker has no relationship and, hence, no obligation toward the other party, who is considered to be and referred to as a "customer." So, if a real estate agent or broker calls you a customer, then you know that the broker has no professional or working relationship whatsoever with you, and hence no duties or obligations, and that the broker will be acting on behalf and protecting the interests of his or her buyer or seller only.
In Colorado, the default relationship is that of TB. The only way a real estate broker can become an agent for a buyer or seller is under a written contract. So, unless you, the consumer (buyer or seller), is willing to enter into a written contract (usually the listing agreement or buyer agency agreement), or you've been advised that you are just a customer and the broker is the agent for the other party, then the relationship you will have with that broker is one of transaction brokerage.
Because the consumer may be confused or assume agency when working with a broker, Colorado law requires that the broker reveal to the buyer or seller at the outset what relationship that broker has with the buyer or seller. This is done in writing, as either set forth in the proposed written contract (e.g., listing agreement) or by way of a mandatory disclosure form promulgated by the Colorado Real Estate Commission (CREC). Click here to view the broker disclosure to buyer/tenant form. There is a separate, similar disclsore form for sellers selling their home by owner (FBOSs) or bank or REO sellers who do not use the CREC listing agreement. The broker will ask the buyer or seller to sign the disclosure just to confirm its receipt. It is not a contract and does not obligate the party to the broker in any way, which fact is spelled out in the form. so, if you are asked to sign such a disclosure form, don't be afraid of it. We need to have proof in our files that we made this disclosure to our prospective buyers, tenants, sellers and landlords.
A few other things to keep in mind about transaction brokerage in Colorado are as follows:
- A broker who, under a written agreement, is an agent, may change his or her status to that of a transaction broker if the broker has or enters into a transaction brokerage relationship with the other party. The ability to change status will be specified in the written listing or agency contract. This usually happens when an agent has a buyer that becomes interested in a property the agent has listed, or an agent representing a buyer later gets a listing that the existing buyer client wants to buy. If that happens, then the broker is required to give both parties a written notice of the change in status.
- A broker within a multi-person company who is designated to assist or represent the buyer or seller is the only one that has the defined relationship with the client. It does not extend to the other brokers in the office of company.
TB's and agents share certain "uniform duties" with their clients, including, among other things, not to share confidential information that has to do with the other party's motivations or willingness to accept a certain offer. Click here for a fuller explanation from the Colorado Real Estate Manual about these duties and the different brokerage relationships.
So, now the question is, who decides what relationship a broker and buyer or seller may have? Well, it's negotiable between the consumer (buyer or seller) and the broker. However, some brokerage companies have a policy establishing the relationship they will have with a buyer or seller. Most of the time, it's transaction brokerage. That's because most real estate companies work with both buyers and sellers and, also, because they believe there is less liability involved as a TB than as an agent. That may be true, unless a TB acts like an agent. If a company has a policy, it doesn't mean they can't make exceptions, but if they don't, then the buyer or seller will not have the option for agency with that company or one of its broker associates, even with a written contract.
This is unquestionably a confusing concept, especially for those that do not regularly buy and sell in Colorado, whether you are a consumer or real estate broker. I hope, however, that this post helps explain and clarify what is transaction brokerage and how it differs from agency in Colorado. Your Colorado real estate broker will, of course, be happy to explain further and answer any questions.