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Agent or Real Estate Transaction Broker, That Is The Question

Real Estate Broker/Owner with Harsch Associates

While brokers and firms are devoting much of their time, attention, and resources in trying to increase their "market share", in capturing more listings and more buyers, in seeking to distinguish themselves and their firms from all the others in the marketplace and to suggest somehow they are superior to the competition, everyone else is focused on something else completely. 

There are an infinite number of blogs aimed at brokerages and agents with suggestions as to how to achieve their goals. There is considerably less content aimed at educating and informing everyone else, from buyers and sellers to attorneys, lenders, and the other key persons involved in real estate transactions. 

This blog will focus on the options available to the public for representation with the goal of peeling back the curtain and touching on the truth and the fictions within the business as relating to agent, designated agent, dual agent roles as compared to that of a neutral real estate broker, transaction broker or facilitator. 

Real estate rules and laws vary considerably from state to state across the nation and around the world. This blog will discuss the main features of each role without attempting to delve into the finer details that may exist in individual states. 

All states provide either sales or broker's licenses. No state licenses "agents". Another term that is important to separate out to avoid confusion is "Realtor(r)" Realtors(r) are licensees who hold membership in the National Association of Realtors(r) not to be confused with state licensing.

Licensees, depending on the state laws and rules, might serve in an agency role or a non-agency role. The difference is important. A licensee serving as an agent must provide fiduciary duties. In other words, they must serve the interests of only one party to a transaction and they owe that party their undivided loyalty.

Pay close attention to that prior sentence. The question is whether a real estate license can in fact devote their undivided loyalty to any individual client. 

The practice has been going on for so long that most never question this at all and just take it for granted but they also observe how agents may appear in so many ways to serve otherwise, to help both sides, to find themselves in the middle or seemingly siding with the other side to make a point, that the obligation to only serve their client and to do so with absolute fidelity to that client's wishes and interests gets lost and forgotten much of the time. 

And what of the practical aspects of the typical real estate transaction whereby the licensee, agent or non-agent, does their level best to bring about a sale because both sides really want or need to make this happen, such that the licensee works at helping the parties to compromise, to meet on common ground and does so by building positive rapport with both sides in the interest of gaining trust and cooperation from both sides. 

The skilled and experienced licensee will seem more of a referee or middle man/woman, a mediator at times than an advocate for one side over the other which as a fiduciary, they would, in theory, be obligated to do. 

Does it strike you, the reader, that while agents by definition must serve their clients just as attorneys do, that's where the similarity ends? What real estate agent behaves as an attorney? Agents strive to live and work by the Golden Rule according to NAR. Lawyers are not expected to serve the parties according to the Golden Rule, instead, they follow the rule of law. 

Lawyers don't vote on their favorite colleagues for their popularity or devotion to local goodwill ventures as Realtors pick "Realtor of the Year" and undertake all sorts of community goodwill efforts and fundraisers. Lawyers don't seek to be "liked and trusted" by the public as Realtors strive to do. 

Real estate agents are frequently in very compromising positions. For example, take the case of an agent for a firm that represents a seller client. This agent or another agent in the same firm may be working with a buyer with whom they have built a strong personal relationship over many months of house hunting. Maybe they're even related but in any case, the buyer and the agent representing the seller have built a positive rapport over time. If they aren't the actual listing agent in the firm they may have no direct knowledge or contact with their seller client. Does this seller's agent have more of a connection, emotionally, with the buyer or with their client the seller? The problem is clear and a common one in the business. It is a problem for a licensee serving under the strict definition of a fiduciary. 

The same problem of conflict of interest or breach of fiduciary duty does not apply to a licensee who fills the neutral role, that we might call a real estate broker or mediator. 

The individual who invented designated agency to satisfy the demands of real estate companies which still wanted to claim they were offering agency but which also wanted to continue to keep both sides of the transaction in-house, buyer and seller. 

To do this required a sleight of hand whereby a new definition of agency was invented artificially that would allow two different agents in the same firm to claim they were providing fiduciary duties to separate clients. They had to ensure their files were kept under lock and key, they had to guarantee not to share confidential information between them about their clients, they had to advocate for their clients without regard for the other side in hopes, it is assumed, that they might gain some sort of upper hand in the negotiations that was favorable to their client, regardless of the needs or concerns of the other client. 

What if these two "designated agents" were friends, maybe even on a team together in the firm? What if they were even family members or had worked closely over many years and could virtually read each other's minds? Is it even believable that two agents in the same firm could always guarantee to be able to provide true independence and allegiance only to a client? They may encounter their buyer client once in their career vs seeing the other agent on a daily basis, maybe even at home later in the day as spouse, sibling, or parent/child? Not credible and yet somehow the real estate industry has managed to convince licensees, legislatures, and the public that this practice is legitimate. 

But why such an effort at duplicity in the first place? Because the industry evolved without thinking things through. It was almost accidental but also self-serving.

Being an "agent" with fiduciary duties sounds pretty important and impressive. After all, lawyers have the same fiduciary duties to their clients but the comparison ends right there because the behavior, the practices, the attitudes, between attorneys and real estate agents are like Mars is to Saturn, totally different. 

The first "fix" to the broken agency model arrived in the 1970s when buyer agency came into fashion as a means of attempting to accord the same benefits to buyers that sellers had enjoyed up to then. Buyer agency by itself proved a failure since buyers still went to the firms and agents that had the listings.

The next attempted fix was dual agency, still permitted in many states. Here what happens is a client is first told that they will receive the special treatment and benefits of undivided loyalty.....unless and until their agent/listing firm develops a buyer interested in their property in which case they then have to drop the fiduciary role so they can work both sides.  They promise initially and then take away later. Odd. 

After the flaws with single seller and buyer agency emerged followed by the dubious practice of dual agency, the next fix was designated agency which for critics is just dual agency with a creative fancy name. 

It is hard to believe that after all the years of attempted and failed "fixes", agency continues to be the dominant practice for real estate licensees. The reasons include the fact that the NAR believes that agency and the fiduciary role it provides accords a level of respect to licensees and the profession.

The NAR is to be commended for its efforts to improve the level of skill and professionalism of all its members but it has entirely missed acknowledging that agency and real estate are for the vast majority of licensees incompatible and that the alternative is just as professional, perhaps more so given that it avoids the problems that plague agency to this day including a very high number of lawsuits over agency issues. 

The good news, however, is that real estate licensees don't have to be agents. There is a highly suitable alternative that fits the daily business of real estate naturally, not artificially, which completely eliminates conflicts of interest agents unavoidably are placed in, which serves the public in a friendly manner and accomplishes the end goals of all parties with less friction, greater trust, and cooperation. It is best just called "real estate brokerage" or transaction brokerage. The term facilitator used in many states is not what is recommended as that term implies a far lesser degree of commitment, effort, skill, or expertise. 

When properly defined and performed, the real estate transaction broker provides an invaluable service that gets to the core of every real estate transaction; agreement. 

The only difference between what a properly trained and diligent real estate transaction broker provides and an agent is one thing; the impossible duty of undivided loyalty. In fact, many state forms explicitly provide the notice to buyers and sellers on their agency forms that the agent WILL have a conflict of interest in many instances and yet they still pretend they are offering fiduciary duties.

The real estate transaction broker doesn't need to backtrack or make excuses because they are providing the very same level of service and duty to the clients in every single scenario; no exceptions, no excuses, no compromises, no conflicts just consistent duties that are identical to that of an agent without that one duty that agents cannot in fact provide, in almost every case, undivided loyalty. 

An agent who in theory must give their undivided loyalty to their seller client, for example, might easily have multiple other listings that compete directly with each other or they could have buyer clients who seek the same property or similar properties and thus are in direct conflict and competition. As a real estate broker, I have been able to work with two buyers who made offers on the same property, with no conflict of interest. I could not have done that as an agent without breaching the duty of undivided loyalty. 

These insurmountable problems for an agent are excused away, overlooked, swept under the rug because they are common and cannot be fixed when serving as an agent. These problems do not exist at all for the real estate transaction broker. In spite of this reality, agents will either not question their role or they may ardently insist they can absolutely serve as fiduciaries because this is what they were taught and have come to believe. 

Every other duty of the agent is also a duty for the real estate transaction broker:  Disclosure, confidentiality, reasonable care. I add that instead of undivided loyalty to one party, the real estate broker provides loyalty to the transaction, they devote their care and allegiance towards achieving the desired outcome for both parties. They serve on one side or both sides of the transaction with equal care, disclosure, confidentiality, goodwill, and fairness. 

Some states which do not understand the proper and ideal role of the real estate transaction broker have mistakenly called the non-agent role a facilitator. This is an unfortunate and inaccurate descriptive word that fails to indicate the level of skill and dedication that a real estate transaction broker owes the parties. It should be removed and discontinued as misleading and inadequate. 

Many times in the process of gaining inclusion into state laws and rules, various interest groups who have remained fixed in their views on agency have sought to diminish the role of the alternative so as to be able to maintain a bias in favor of agency in spite of its shortcomings and failings. By providing inadequate and inferior definitions of facilitation they have all but guaranteed the dominance of agency will continue within those states.

In addition, the NAR has done everything possible to promote the agency form of representation including authorizing buyer and seller agency approved courses with official designations but they have never to this day authorized a comparable designation course for the alternative. 

To summarize, there is an alternative option available in the majority of states to licensees and their firms which is perfectly suited to all real estate situations, the neutral real estate broker. More states are considering adding this to their rules as well. If clients require independent advocacy they should turn to an attorney for advice. If they require specialized information, they need to consult with inspectors or experts in specific fields such as electricians, surveyors, engineers, etc. When it comes to value, buyers and sellers may rely on licensed appraisers if they want additional input or it is required for financing. 

As the business of real estate brokerage has changed dramatically since the 1960s with ever greater amounts and sources of information on the internet, with the inclusion of more expert input and oversight of transactions, with the scrutiny of inspectors, appraisers, attorneys, lenders, the place for an actual advocate as your real estate licensee has become less and less relevant and the place and need for an objective real estate broker fits the need far more suitably. 

Undoubtedly ardent devotees to agency will object and offer glowing praise for the role of the agent over the neutral role of a real estate transaction broker but if they look objectively at their daily activities in the privacy of their minds, they will recognize the circumstances in which they have had to compromise their theoretical duties as fiduciaries in order to succeed and close sales.

Why not, therefore, consider this alternative by which they would never have to compromise their duties or role and be as effective if not more so as a Realtor(r)? 

To change the way things are done would require a great many firms and licensees to recognize the benefits of the alternative and for the NAR to also officially recognize the inherent flaws with agency. The NAR can promote their members as well if not better by accepting the alternative and perhaps at some point in the future, by all but abandoning the outdated commitment to agency with its unfixable flaws and shortcomings.

Agency is much like the Emperor's New Clothes. Agency does not provide true fiduciary duties and does not fit with the normal day-to-day practice of real estate and yet it continues to fool the people into believing and wanting to believe that it really does.