Technology and the availability of real estate information from sites such as Zillow, Trulia, Realtor.com, broker web sites and county web sites has put more information than ever before in to the hands of consumers. This has been great for consumers as they can gather lots of data and become informed but it also gives them a false sense of confidence when it comes to the full scope of real estate transactions. No doubt consumers can become quite skilled and knowledgable about what types of features they want in a home, understanding floor plans, and even having a pretty good grasp on pricing, but what they generally are not so good at is understanding and working through the transaction. Many people overlook this aspect or just take it for granted but consumers ignore this at their own peril. By entering a real estate transaction, you are entering a legally binding contract that may obligate you to a very significant financial commitment. It’s my experience that people often don’t think they need representation…until they do. At that point, it’s often too late. And that brings us to the very important topic of Agency and representation.
What is Agency and what does it mean to have representation in a real estate transaction?
Most consumers when they think about real estate and hiring an agent, they think that agent is there to represent them in the transaction. And more often than not, that is the case. However, the consumer really should be smarter about understanding Agency and representation when it comes to real estate transactions. Inman News has an excellent article discussing “The New Agency Laws in Real Estate.” Both agents and consumers would help themselves by reading it.
Agency is really is at the crux of the transaction and yet most people have little or no understanding of the various roles agents truly play in a transaction, nor do they understand how it all works. I can appreciate that at the end of the day, you either may just want to buy a home or sell your home and so you may ask yourself why do I need to understand Agency? You need to understand Agency because it may have a very big and unexpected impact as to how you are represented in a real estate transaction whether you are buying or selling.
Buying or selling a home is much more than sticks and bricks. It’s a legal transaction. Normally you don’t hire attorneys to assist you with this as real estate agents are licensed and trained to be able to help you through the transaction and when you engage or hire a real estate agent, you will be getting involved with an Agency relationship or at least will need to make a decision about what kind of Agency relationship you desire. Most consumers don’t have any idea about Agency law when it comes to representation. The vast majority just think well, I’ll just hire an agent and he/she will represent my interests. Well, it’s not quite as simple as that.
Some think this may be just inside baseball when it comes to real estate. It’s not. Minnesota Law requires at the first substantive contact that the Agency Disclosure form be offered and discussed with the consumer. The State of Minnesota Statute 82.67 states as follows:
82.67 AGENCY DISCLOSURE REQUIREMENTS.
Subdivision 1.Agency disclosure.
A real estate broker or salesperson shall provide to a consumer in the sale and purchase of a residential real property transaction at the first substantive contact with the consumer an agency disclosure form in substantially the form set forth in subdivision 4. The agency disclosure form shall be intended to provide a description of available options for agency and facilitator relationships, and a description of the role of a licensee under each option. The agency disclosure form shall provide a signature line for acknowledgment of receipt by the consumer. The disclosures required by this subdivision apply only to residential real property transactions.
Why is this important? It’s important because even though you as the consumer may be quite knowledgable about real property, in the law you are considered sheep – unless of course you are a licensed attorney But that said, the way the real estate licensing law and regulation looks at the relationship between the licensed real estate agent and a prospective home buyer or seller is that we are the wolves and you are the sheep. And the reason the relationship is described this way is because the licensed agent has been trained and has more experience (hopefully a lot more) when it comes to real estate transactions which require knowledge of the law and customary practices with regard to real estate transactions.
What you will actually see at the top of the Agency Disclosure form is the following:
AGENCY RELATIONSHIPS IN REAL ESTATE TRANSACTIONS
Minnesota law requires that early in any relationship, real estate brokers or salespersons discuss with consumers what type of agency representation or relationship they desire.(1) The available options are listed below. This is not a contract. This is an agency disclosure form only. If you desire representation, you must enter into a written contract according to state law (a listing contract or a buyer representation contract). Until such time as you choose to enter into a written contract for representation, you will be treated as a customer and will not receive any representation from the broker or salesperson. The broker or salesperson will be acting as a Facilitator (see paragraph V below), unless the broker or salesperson is representing another party as described below.
Note: so when a REALTOR® provides this to you early on in the relationship – i.e. when you come through in an open house or make inquiries on the internet – please don’t think that agent is trying to pull a fast one over you to get you to accidentally sign some kind of contract. They are not. (Some may be trying to pull a fast one on you so please be careful…I have seen situations where agents pushed the consumer to sign Buyer’s Representation Agreements without ever discussing, seeing or signing an Agency Disclosure form). Agents that provide this disclosure upfront are being more honest and trustworthy in my opinion than those who don’t. Those who also offer it early on are following the requirements in the law. (Note, there is a separate form that is usually 3-4 pages for the Buyers Representation Contract which is a contractual commitment and not just a disclosure form. That is a separate document from the Agency Disclosure).
“Why is this important to discuss and understand the role of Agency and particularly Dual Agency? I just want to buy a home for my family?” This discussion is important because I believe many people do not understand this very important part of a real estate transaction. It has to do with who is representing you in this transaction. You’re not buying a car from a dealership where there are no licensing requirements or legal obligations via Agency and representation. In many transactions today, particularly in new construction, but also with any transaction with the three of the biggest real estate brokerages in town, you may find yourself in Dual Agency. While the agent you encounter may discuss this briefly with you if he or she is upfront, this is often no more than a very brief conversation or comment. Many of us in the business know that consumers do not fully understand Dual Agency and what it means. You may not fully understand the consequences of choosing Dual Agency. You should.
So what is Dual Agency? Again, let’s go back to the Minnesota State Statute 82.67.
82.67 AGENCY DISCLOSURE REQUIREMENTS.
Subdivision 1.Agency disclosure.
Dual Agency-Broker Representing both Seller and Buyer: Dual agency occurs when one broker or salesperson represents both parties to a transaction, or when two salespersons licensed to the same broker each represent a party to the transaction. Dual agency requires the informed consent of all parties, and means that the broker and salesperson owe the same duties to the Seller and the Buyer. This role limits the level of representation the broker and salespersons can provide, and prohibits them from acting exclusively for either party. (emphasis added) In a dual agency, confidential information about price, terms, and motivation for pursuing a transaction will be kept confidential unless one party instructs the broker or salesperson in writing to disclose specific information about him or her. Other information will be shared. Dual agents may not advocate for one party to the detriment of the other.(3) (emphasis added).
Within the limitations described above, dual agents owe to both Seller and Buyer the fiduciary duties described below.(2) Dual agents must disclose to Buyers material facts as defined in Minnesota Statutes, section 82.68, subdivision 3, of which the broker is aware that could adversely and significantly affect the Buyer’s use or enjoyment of the property.
When you walk in to a new construction home and start to share with that listing agent or builder’s agent what it is that you are looking for, your budget, and/or reasons why you are considering moving, at that point for sure Agency should be presented and discussed by that agent. It should be acknowledged that they represent the builder and that you as a consumer have a right to choose or decline the type of representation you would like. In other words, you do not have to hire that agent who is the builder’s agent.
It is my experience that throughout the new construction marketplace as well as open houses across the Twin Cities, Agency is not discussed up front with consumer. With new construction, by the time you say you are ready to commit to a lot hold or purchase a home, perhaps at that point Agency may be discussed and they may offer or encourage Dual Agency. You can choose to agree or you can choose to not have any representation. But again, this discussion of Agency and representation should have occurred at the first substantive contact which usually is considered when you walk in the door and start talking about yourself, your needs, your desires in a new home. As you disclose those items please be aware that you are sharing all of that information with the builder’s (or seller’s) representative – not your representative.
So why should you be concerned about Dual Agency? After all, many transactions today are done in Dual Agency. You should think twice about Dual Agency because of what is required in the law and is disclosed on both the Agency Disclosure as well as in the State of Minnesota Standard Purchase Agreement. Remember what Minnesota State Statute says…this is also repeated on the Agency Disclosure form and the purchase agreement:
Dual agency requires the informed consent of all parties, and means that the broker and salesperson owe the same duties to the Seller and the Buyer. This role limits the level of representation the broker and salespersons can provide, and prohibits them from acting exclusively for either party.
Dual agents may not advocate for one party to the detriment of the other.(3)
So now think about this. Let’s say you’re selling your $300,000 home…or perhaps it’s $500,000 or a million dollars – the financial stakes just get hire…you have agreed to pay the real estate broker you’ve hired 6% or 7% commission based upon the sale price of the home. You expect that agent and broker will be your agent representing you in the marketplace and certainly during the critical negotiations once you attract a buyer. However, because the listing agent either has the buyer or an agent from the same brokerage as the listing agent brings a buyer, you are now going to be in Dual Agency. Those agents are in Dual Agency and the buyers and the sellers have agreed to Dual Agency (provided everyone has agreed in writing) and thus the principals in the transaction, in what is likely their largest, most important purchase of their lives, have agreed to a limited form of representation and neither of their agents can advocate for their clients to the detriment of the other party. The reason they can’t do that is that both buyer and seller are equal parties – equal clients – to that one broker.
Okay, great, so what does this mean? Can you provide an example? Sure. Let’s say you are listed with ABC Realty and your home has been on the market for 60 days at a price of $475,000. Another agent from ABC Realty has a buyer for the property but they aren’t quite sure what to offer. The buyer asks the agent from ABC Realty, “what do you think? What should we offer?” That agent is not allowed to recommend a price or a strategy to that buyer that will be detrimental to that seller. So the buyer comes up with his/her own price and the offer is submitted. Let’s say it’s $420,000. The listing agent who is now acting as a Dual Agent talks with the seller. Remember, the seller has agreed to pay the listing broker a commission which could be 6-7% of the sales price. The seller asks the listing agent what do you think? How should we respond? What price should we counter back at? Because the listing agent is now acting as a Dual Agent, they cannot advocate for one party to the detriment of the other. That seller needs to come up with their own price to counter that buyer. And so this is how it goes and hopefully the price can bounce back and forth until both parties agree. The seller is still on the hook for the full commission even though they have limited representation.
When you sign a Listing Agreement ( or a Buyers Representation Agreement) you will need to accept or decline Dual Agency upon that signing. If you discuss this part for more than 30 seconds, I’d be shocked. It’s usually skimmed over. If you question it, the agent will say but if you don’t agree to Dual Agency you will miss out on 20% of the potential agents who could bring a buyer for your home. And that may well be true because if you don’t agree to Dual Agency, other agents from that same brokerage will not be able to bring a buyer for your home. So the brokerages are forcing your hand if you will to agree to Dual Agency. So who’s benefit are they operating under when this is the case? Remember, brokers and their agents are supposed to provide you with fiduciary duties…your interests over theirs. But in Minnesota the brokers and the board of Realtors seem to be fine with Dual Agency because frankly, the public does not understand how it operates.
How might you avoid running in to Dual Agency? If the marketplace wasn’t so dominated by three big brokers, but instead was more fractured with smaller, more boutique real estate brokers like what is found throughout much of the U.S., then you wouldn’t have this issue much. The real estate laws could also be changed to protect the interests of the home buyer seller instead of the big brokers. Such a change seems unlikely in Minnesota, but many states have moved to something called Designated Agency. So if you want to avoid Dual Agency, you may want to consider hiring a broker who doesn’t have hundreds or thousands of local real estate agents.
It’s unclear why Minnesota continues to keep Dual Agency. In Wisconsin, and in many states across the U.S., they have instituted Designated Agency which allows agents from the same brokerage to truly represent their clients even if both the listing agent and the buyer’s agent are from the same firm. You may say that this is a technicality, but it is not. Real estate agents and brokers love double ended deals because they get paid the full commission and don’t have to split it with another real estate broker. Given the uniqueness of the Minnesota real estate market where there are three large brokerages, it doesn’t seem likely that this will be changed. It’s too lucrative for the brokers and their agents even though when we sign a contract to represent a buyer or seller, we have fiduciary duties that require us to put our clients’ interest first. Does that happen in Dual Agency? Can that happen in Dual Agency? I’m not sure that it can based upon the law.
In many other parts of the country the real estate market is more fractured so you have many more brokers each with smaller marketshare so that you can get the kind of representation that you likely expect when you hire an agent or broker to be your representative.
Let’s put this another way. Let’s say you are involved in a law suit. If you were running a company in Minnesota and you had a dispute with a customer, supplier or partner that led to a law suit, you certainly wouldn’t hire the same law firm that represents the accused party to represent your interests, would you? And yet, we do this all the time in Minnesota when it comes to real estate. Think about it.
Many who read this who are part of the big firms will try to discount this because it’s in their financial interests to do so. But I ask you, what’s in your best financial interests as a home buyer or seller?