The new agency laws of real estate

Editor’s note: This week, Inman News continues its series, “Beyond Dual Agency,” highlighting confusion, legal problems and ongoing debates over real estate agency laws, including the widespread adoption of “non-agency” laws and the “double-ending” of real estate deals. View an interactive map showing the varied approach states have taken to agent-client relationships.

Although real estate professionals continue to debate the ethics of brokers and agents “double ending” deals, their legal right to provide services to both the buyer and seller in the same transaction is firmly established.

Over the last 25 years, Realtor associations have lobbied lawmakers in all 50 states to rewrite the laws governing agency relationships in real estate, protecting their members’ right to work both ends of a deal.

The cooperative brokerage system mandated by multiple listing services (MLSs) and Realtor associations in virtually every U.S. market allows listing brokers to either keep the entire commission paid by sellers, or split it with another broker who can bring a buyer to a sale.

If regulators insisted that brokers only represent clients in “single agency” relationships, brokers would be forced to refer buyers who wanted to make an offer on one of their listings to a competitor — or provide services to the buyer as an unrepresented customer.

For many brokers and agents, the question is no longer whether they and their colleagues should be allowed to double-end deals, but whether it’s worth the risk.

That’s a decision that hinges on the laws governing agency relationships in each state, which some academics and consumer advocates worry are now stacked in favor of brokers.

Laws in half of U.S. states — including Florida, Texas, Massachusetts, Michigan, New Jersey and Georgia — now allow brokers and agents to limit their legal liability by providing services to consumers in limited- or non-agency roles including “transaction broker,” “facilitator,” and “intermediary.”

Transaction brokers in these states owe their clients limited or no fiduciary duty to put their client’s interests ahead of their own. That’s often true even in situations when they are representing buyers or sellers individually. (View an interactive map of broker-client relationships in all 50 states.)

Although the National Association of Realtors has never endorsed non-agency representation, the practice seems to be gaining in popularity.

In its most recent survey of members, NAR reported that 18 percent of Realtors practiced transaction brokerage in 2010, up from 10 percent the year before. While NAR’s 2011 Member Profile showed 32 percent of Realtors were still double-ending deals the old fashioned way — as disclosed dual agents — that was down from 41 percent in 2009.

But problems that arise from agency representation remain the top-ranked legal issue of concern among real estate brokers, agents, attorneys and educators surveyed by NAR.

NAR’s 2011 Legal Scan showed a 36 percent increase in lawsuits involving agency issues from two years ago. Of the 159 agency lawsuits decided in 2009 and 2010, nearly half (73 cases) involved accusations that a broker or agent had breached their fiduciary duties.

That compares to nine proceedings related to transaction brokerage or non-agency representation (see related story, “Legal pitfalls of agency representation for real estate professionals“).

“I have worked dual agency in the past, but it is doubtful that I will do so in the future,” Portland, Ore.-based broker George Wiggins told Inman News. “Trying to be absolutely fair to both sides, when my stronger and longer relationship is with the seller, is very difficult and risky.”

Statistics provided to Inman News by multiple listing services in several markets suggest that brokers and agents have been double-ending fewer deals in the aftermath of the housing boom (see previous story, “Dual agency and ‘double-dipping’ still risky business“).

“I believe referring the buyer to another person in my firm, or if they wish, to another firm, is the fairest and most ethical approach,” Wiggins said. “Yes, I will make a bit less money, but I will rest better knowing that both sides are fairly represented.”

But for many who work in real estate sales, referring every would-be buyer who’s interested in one of their listings would be too great a sacrifice.

“My local market is bombarded with part-time Realtors, and if I did not represent both buyers and sellers, we would not sell anything,” said Debra Gambill, broker-owner of Century 21 Empire Realty in Portsmouth, Ohio.

Critics of dual agency say buyers and sellers are in the strongest negotiating position when they are represented by an experienced broker or agent who is an advocate for their interests.

Not only is it impossible for one agent to represent the interests of both the buyer and seller in the same transaction, critics say, but a “dual agent” may reveal information that undermines the negotiating position of one or both clients.

Defenders of dual agency say real estate negotiations aren’t a purely adversarial process. Unlike a lawyer representing a client in court, the role of real estate agents is often to help buyers and sellers find common ground.

“We are the facilitator who removes the obstacles and brings the negotiating to a close,” Gambill said. “Knowledgeable agents should be able to do this without the parties involved feeling a lack of representation.”

Many who say it’s possible to handle both ends of a transaction say the key is keeping everyone involved fully informed.

“The most common dilemma with dual agency I’ve experienced as a broker is, at some point in the transaction, a principal has said, ‘Wait a minute, don’t you represent me?’ ” said Steve Weiss, a San Luis Obispo, Calif.-based broker.

Consumers may also be confused if they first start working with a Realtor in a single agency relationship, only to have their broker “casually slip (them) into a dual agency practice” in order to complete an in-house transaction, said Dallas-based broker Erle Rawlins III.

Rawlins said he has little faith that brokers and agents will explain agency relationships to their clients — either because they don’t understand them themselves, or because they are afraid their clients will look for other representation if they truly understand the implications of dual agency.

It’s unclear whether consumers who agree to dual agency or other forms of limited- or non-agency representation are actually at a disadvantage in the house hunting and negotiating process. Academic studies have been inconclusive.

But it is clear that consumers don’t always get written disclosures of agency relationships. And states that allow transaction brokerage are more likely to take disciplinary action against agents and brokers (see related story, ” ‘Are you my Realtor?’ Consumer confusion in agency laws“).

The new agency laws

Agency relationships are formed when one person, such as an attorney or investment adviser, agrees to act on another’s behalf or represent them in dealings with a third party.

In real estate, agency relationships determine whether a broker or agent is allowed to represent both the buyer and the seller in the same transaction, and if they owe “fiduciary duties” to act in their clients’ best interests.

Agency relationships in real estate used to be simple. For most of the last century, listing brokers represented sellers, and agents who worked with buyers did so as “subagents” of the listing broker. All of the agents involved in a transaction owed their allegiance to the seller, and buyers were unrepresented.

Subagency was largely based on custom and rules adopted by multiple listing associations and Realtor associations. The only laws in place governing agency issues were general, state-level statutes and common law precedent.

In the 1980s, courts began finding that brokers could inadvertently create agency relationships with buyers simply by advising them during negotiations, or providing other services that might lead buyers to believe they were being represented.

If brokers or their agents owed buyers fiduciary duties, that meant brokers were liable to claims of undisclosed dual agency. Sellers might have “vicarious liability” for the actions of subagents working on their behalf. Buyers could file professional negligence claims.

“Most of the lawsuits were based on common law concepts of agency, so the real estate industry went to the legislatures and said, ‘Let’s rewrite what agency is in our state,’ ” said Katherine Pancak, a professor of finance and real estate at the University of Connecticut School of Business.

“I get very worried about changes in agency law that protect real estate professionals rather than real estate consumers.”

Today, the ground rules for “double ending” deals vary widely from state to state. Although the real estate brokerage industry has considerable influence with lawmakers, it hasn’t presented a unified front on agency representation issues.

When subagency came under fire, some brokers advocated dropping the concept of agency representation altogether, which would allow them to provide services to buyers and sellers alike as non-agency “transaction brokers” owing no fiduciary duties to clients.

But weakening the agency relationships between brokers and their clients might also undermine the cooperative multiple listing service and Realtor association system that handles the vast majority of transactions nationwide, NAR leaders warned (see related story, “From subagency to non-agency: a history“).

In 1993, NAR took an official stance against transaction brokerage, recommending that Realtor associations instead lobby for state laws defining real estate brokers’ agency relationships with clients, including provisions allowing disclosed dual agency and designated agency.

But the idea of providing services to consumers in limited- or non-agency relationships appealed to many brokers, and Realtor associations in a number of states pushed for the right for members to operate as transaction brokers.

Florida and Colorado were the first states to pass laws allowing this new broker-client relationship, now permitted in 25 states.

Today, there are five legal avenues for brokers to double-end transactions nationwide:

Designated agency. Some states allow brokers to designate two agents affiliated with the same firm to represent the buyer and seller separately, often with safeguards intended to protect clients’ confidential information.

Disclosed dual agency. The most controversial method of double-ending a sale is for a single agent to represent both the buyer and the seller in an agency relationship. In states with no provisions for designated agency, when two agents affiliated with the same broker represent both sides of a transaction, the broker is viewed as a dual agent.

Transaction brokerage. One agent or two agents at the same brokerage may provide services to the buyer, the seller, or both, in a non-agency relationship, owing limited or no fiduciary duties such as loyalty and obedience.

Subagency. Although no longer widely employed because of legal liabilities now associated with the practice, agents working with buyers are considered subagents of the listing broker. Buyers are unrepresented.

Provision of “ministerial” services to unrepresented “customers.” A listing broker may avoid splitting a commission with a cooperating broker by providing limited services to an unrepresented buyer.

The laws of every state in the union currently provide avenues for brokers and agents to “double dip.” Of the eight states that ban dual agency outright, four allow designated agency (Alaska, Colorado, Maryland and Texas), three allow transaction brokerage (Florida, Kansas and Oklahoma), and three allow both (Alaska, Colorado and Texas).

Defining transaction broker

Although the introduction of transaction brokerage caused some controversy at the time, the new broker-client relationship was perhaps not as radical a departure from previous practices as sometimes portrayed.

“Some commentators have erroneously assumed that the transaction broker, if not a fiduciary, owes no duties to the parties involved in a real estate transaction,” law professor Ann Morales Olazábal noted in a 2003 review of the sweeping changes in agency law to date.

“If this were true, the transaction broker might be dangerous indeed. Fortunately for consumers, however, most states that permit transaction brokers have vested them with at least a few statutory duties.”

Florida law, for example, requires transaction brokers to provide services “honestly and fairly,” exercising “skill, care, and diligence” and to disclose all known facts that materially affect the value of a residential real property that are not readily observable to the buyer.

But other states, such as Michigan, don’t spell out the duties of transaction brokers.

In a 2006 study, Pancak and another academic researcher, C.F. Sirmans, used disciplinary actions taken by state real estate licensing boards as a “proxy” for the quality of real estate services.

They found that states that allowed transaction brokerage and other forms of non-agency representation had higher rates of disciplinary action (see: “The Effect of Agency Reform on Real Estate Service Quality,” by Katherine Pancak and C.F. Sirmans, Journal of Housing Research, Volume 15 No. 1, 2006).

Margy Grant, corporate counsel and vice president of law and policy for Florida Realtors, said she had not read Pancak and Sirmans’ study and so could not comment on it. But she said it would be “irresponsible” to make any judgment about how well consumers are served by transaction brokers today based on a study published in 2006.

“We work very closely with the real estate commission, and I’m not aware of any increase in complaints from consumers in Florida,” Grant said. “I’d say the opposite — that transaction brokerage is working well in Florida, and that if consumers want a different relationship, single agency is available, as well.”

Florida law presumes that real estate brokers and their sales associates will provide services as transaction brokers. Since 2006, transaction brokers are no longer required to provide consumers with agency disclosures.

Disclosures are only required if brokers are representing clients in a “single agency” relationship, or if they are converting a client they had been serving in a single agency relationship to transaction brokerage.

When moving from a single agent relationship to transaction brokerage, licensees no longer owe their clients fiduciary duties of loyalty and obedience.

Regardless of whether or not consumers actually understand agency representation issues, Grant maintains that they are well-served by Florida’s agency and non-agency rules.

“The majority of consumers don’t even understand what ‘fiduciary’ means,” Grant said. Florida’s statute “is so well-written, it protects consumers and real estate licensees equally,” she added. “If there was a consumer concern, we would have seen problems that haven’t shown themselves.”

In 1988, California became the first state in the nation adopt laws specifically defining agency relationships in real estate, along lines later advocated by NAR. California allows disclosed dual agency and is one of a number of states that’s also left the door open to subagency.

But it’s “highly unusual for a California buyer not to be represented by a buyer’s agent in an agency capacity,” said June Barlow, vice president and general counsel for the California Association of Realtors.

“We’ve watched with interest as the rest of the nation (has moved to allow) transaction brokers and designated brokers.

“We’re not sure if there’s a difference in civil liability. There could be some advantages, but we haven’t seen enough to cause upheaval. Our member seem to like the way (agency representation in California is) working — and consumers, too.”

The strictest approach

As a practical matter, it would be problematic for regulators to insist that brokers always represent clients in “single agency” relationships.

Brokers would have to work with either buyers or sellers on an exclusive basis, or be prepared to refer clients to their competitors if a dual agency situation arose.

A broker who had already expended considerable effort in helping a buyer locate a suitable property, for example, would have to refer that client to another broker if, at the end of the search process, the buyer decided to make an offer on a home represented by that broker.

Although some brokers who specialize in representing buyers don’t accept listings, they operate their businesses that way as a matter of principle, and to differentiate themselves from their competitors — not because they are required to.

If all forms of double-ending were outlawed, buyers who might want to work with a broker or agent in a limited- or non-agency capacity would be prevented from making that choice.

Vermont — a state with a tradition of strong consumer protection laws — has the strictest policies in the nation against brokers and agents double-ending deals, prohibiting dual agency and designated agency.

In that state, a single broker can represent both buyer and seller in a “limited agency” role only when both are previously existing clients.

If a buyer with a signed representation agreement with a broker is interested in a home that is represented by that broker, both the buyer and seller must give their informed consent to limited agency representation.

Buyers are unrepresented “customers” until entering into a written agency agreement, which provides another avenue for double-ending deals.

Vermont is one of at least 22 states that allow brokers to represent sellers as clients, while providing only limited services to buyers as unrepresented customers.

The way agency law currently works in Vermont, “It’s a pretty limited range of choices,” said Thomas Heilmann, a real estate attorney and educator whose clients include the Virginia Association of Realtors.

“Once the dual agency specter comes up, the antidote our real estate commission likes is capital punishment for the buyer or the seller — you have to go somewhere else.”

While Vermont’s rules may be the strictest on paper, brokers do seem to be testing the limits.

Vermont Real Estate Commission Chairwoman Maretta Hostetler expressed concerns during a commission meeting that large brokerage firms are designating new agents to work only with buyers, “a limited form of designated agency (that) can cause potential dual agency situations.”

Contacted by Inman News, Hostetler confirmed that she believes that “it is a problem within the big agencies — particularly if they have branch offices in a different area.”

The way Vermont’s regulations are written now, “everybody working for that agency is working for the seller. If a buyer walks into another office (operated by the same agency), technically they would need to do the limited-agency disclosure,” Hostetler said.

“In theory, they’re not practicing designated brokerage, but in actuality, I believe that’s what’s happening.”

John Robert Sullivan, an exclusive buyer’s agent, says MLS reports in Vermont’s Chittenden County show that it’s common for a single broker or agent to represent both sides of a transaction — or for separate branch offices or teams working under the same broker to represent both the buyer and seller. Sullivan notified the Vermont Real Estate Commission of his concerns in a July 2010 letter.

“If I went into those offices, would I find all of those (limited agency) disclosures (had been signed) in a timely manner?” Sullivan said when contacted by Inman News.

“It’s very clear that limited agency is supposed to be of last resort,” Sullivan said. “Either person can refuse it. The problem is, most real estate firms in Vermont try to represent both buyers and sellers — that’s what their business model has been for years.”

Hostetler said the Vermont Association of Realtors may have sown some confusion by sponsoring a “Designated agency discussion,” presented by Heilmann at a March 2010 broker summit. The discussion was part of a day of instruction that was advertised as qualifying for two continuing education credits.

The Vermont Real Estate Commission reminded licensees in its spring newsletter that designated agency, “is not a lawful practice in Vermont,” and that such courses were not approved for continuing education credits.

Heilmann called concerns about his presentation on designated agency “basically much ado about nothing.”

The Vermont Realtor Association “asked me to put together a program for the leadership conference — not a continuing education program — for leaders of the association to understand, ‘Here is what’s happening in other states, and here’s what Vermont does,’ ” Heilmann said. “We emphasized over and over that designated agency is not something that Vermont recognizes.”

Heilmann said that in his view, the limited agency option offered by Vermont “is a very tricky type of relationship, and you need to be very cautious about that.”

Designated agency “is not the worst thing in the world — I’m not advocating it, but I’m saying it should be a choice,” particularly if brokers and agents are properly trained to provide services that way, he said.

“Commissions around the country should give consumers the ability to select the type of brokerage services that are best for them and the transaction,” Heilmann said. “But brokers shouldn’t go out there and say ‘I can do anything.’ Some of these delivery services are more sophisticated than others.”

In September, the Vermont Real Estate Commission announced that its “Green Book” of rules governing licensees was up for a “complete review.”

“Please be advised that everything is on the table,” the commission announced. “To this end we are researching how other states handle various other forms of agency that are not currently allowed in Vermont.”