Whether a listing agent or broker ends up scooping up both sides of a real estate commission may well depend on his or her own actions when accepting the listing, according to a new academic study.
Dual agency is a controversial topic in the real estate industry — last month a consumer watchdog group called for a nationwide ban — but many attribute its occurrence simply to agent greed rather than examining the conditions under which it happens.
A working paper titled “Causation of Dual Agency Transactions? Buyer Choices or Broker Manipulation: Theory and Evidence” authored by real estate finance professors Lingxiao Li of California State University-Fullerton and Bennie D. Waller of Longwood University, aims to do just that. The paper was peer-reviewed and presented at the American Real Estate and Urban Economics Association (AREUEA) conference in January.
Li and Waller found that the chance of a dual agency transaction increased if the listing broker made the listing less appealing to buyers or buyer’s agents, by offering a lower-than-typical commission or holding back property details, for instance.
“The findings suggest that there is evidence that some listing brokers engage in debatable practices that increase the likelihood of dual agency transactions such as offering the cooperating broker a lower commission split, negotiating longer listing contracts and limiting the amount of information provided in the MLS listing to the public and/or cooperating brokers,” Li and Waller wrote in the paper.
According to the paper, more than 20 percent of residential real estate transactions in North America are doubled-ended, with that figure going up to 48 percent in at least one previously studied market (Long Island, New York).
For this study, Li and Waller analyzed 313,192 listings — of which 202,993 were successful transactions — marketed for sale between January 1999 and October 2015 on the Central Virginia Regional MLS.
Properties listed for less than $45,000 or more than $1 million, those with less than 400 or more than 15,000 square feet, and properties that were greater than 100 years old were not included. The typical property had an average listing price of $244,848 with a selling price of $229,027 and was 26 years old, with 2,040 square feet, two full bathrooms and 3.5 bedrooms. About 6.5 percent were new construction.
Among the studied group of listings, 12.7 percent overall were dual agency transactions, though the share of such deals has declined over time: 28 percent in 2000 to 9.19 percent in 2015.
The findings
Li and Waller found that if a listing broker offered a commission of between 2.5 and 3 percent to the buyer’s agent in a market where 3 percent was customary, the likelihood of a dual agency deal would go up 43 percent. If the buyer’s agent commission was between 2 and 2.5 percent, that likelihood went up by 54 percent; if the commission was lower than 2 percent, the likelihood went up by 84 percent.
More than three-quarters (77 percent) of deals that resulted in cross-agency cooperation (where separate brokerages represented buyer and seller) offered a 3 percent commission to the buyer’s agent or broker, while 68 percent of dual agency deals did, according to the paper.
This is because buyer’s agents have less incentive to show a property that offers them a lower split, the paper said.
“These findings provide evidence that the listing broker can significantly influence the probability of dual agency by manipulating the commission rate offered to cooperating brokers thereby positively (negatively) influencing the efforts of internal (cooperating) agents,” Li and Waller wrote.
“Decreased search efforts by cooperating agents as result of a lower than normal commission rate offered to selling agent will decrease the arrival rate of buyers and therefore impact the likelihood of dual agency and as such the listing broker benefits by collecting both sides of the commission.”
Li and Waller also found that if the listing agent or broker made it harder for the buyer to learn more about a listing — such as by offering few descriptive remarks on a listing, limiting the number of photos, or requiring that the listing agent be present at showings — that the chance of a dual agency deal rose.
For instance, for each additional photo or remark describing the property, neighborhood or amenities provided, the probability of dual agency decreases by 0.64 percent and 1.5 percent, respectively, or 6.4 percent and 15 percent for an additional 10 photos or remarks, the paper said.
“If there are no pictures in the MLS for the potential buyers or the other brokers to see, it’s likely to get overlooked because they’ve made it difficult for me to see [whether] I like this property or not,” Waller told Inman in a phone interview.
“The more information provided, the less likelihood of a dual agency [deal] because other people are going to see it and I’m going to be drawn to it, so it’s making it easier for other people to see the property.”
List price and contract duration also have an effect, according to the paper. For higher-end properties, the listing agent is likely to prioritize selling the listing and put more effort into finding a buyer (whether internal or external) rather than on collecting both sides of the commission from an internal buyer, Waller told Inman.
“When the benefit to complete a sale dominates the benefits from selling own listing for high priced property, the selling agent is less likely to promote his own listing, therefore a less likelihood of dual agency transaction. These results are not surprising given that higher priced properties generate more revenue for brokers even so at a lower commission rate,” the paper said.
Longer listing contract durations increase the probability of a dual agency transaction, according to the study.
“When the contract duration is longer, the selling agent has a higher chance of receiving full commission from sale of own listing. So he has a stronger incentive to promote own listings, increasing the likelihood of a dual agency sale,” the paper said.
“For every 1 percent increase in listing contract length, the probability of dual agency increases by 1.5 percent, which would equate to a 15 percent increase in the likelihood of dual agency for a listing contract extended by just over two weeks based on the sample contract length mean [of 177 days],” the paper added.
Other factors the paper said increased the likelihood of a dual agency transactions include not putting the listing in the MLS, thereby keeping other buyer’s agents in the dark; agent bonuses for selling in-house listings; and properties that sold for less than $140,000, which could be due to less informed buyers.
New construction properties, newer properties and tenant-occupied properties are more likely to result in double-ended deals. Larger brokerages with larger inventories are more likely to be involved in dual agency. However, the more experienced a listing agent is, the less likely he or she will get involved with such transactions, according to the paper.
An agent with 10 years of experience is 1 percent less likely to be involved in a dual agency deal, while an agent with 20 years of experience is 2 percent less likely, according to Waller.
“Even though [dual agency is] allowed in all 50 states to some degree … [it has a] bad connotation associated with it,” Waller said.
“I think that most agents who are in it for the long haul … they work very hard to to keep their reputation capital strong.”
Where do we go from here?
Waller told Inman he hoped the study’s findings will inform the behavior of buyers, sellers, agents and policymakers.
He stressed that not all dual agency is necessarily bad if it creates efficiency in terms of bring a buyer and seller together. For instance, with some pocket listings that are entered into the MLS for statistical purposes after they’ve been sold, it could be that the listing broker has a buyer that somehow matches the listing perfectly and the double-ended deal is a “win-win for everybody,” he said.
He personally believes that an agent that does his or her job well and represents both sides of a deal deserves a full commission.
“I’ve said it under a direct testimony in court: an agent who lists the property and zealously markets it and brings in a buyer — they deserve every penny of 6 percent. I’m not suggesting anything otherwise, ” he said.
But the problem is that some agents that will do unethical things to get both sides of a deal, such as lowering a listing price to better match an internal buyer, Waller said.
So what should consumers do based on his findings? His advice may seem counterintuitive during a time when discount brokerages are all the rage.
“A consumer should encourage the commission to be no less than standard for the area,” Waller said.
He recalled selling a property a few years ago when his listing agent insisted on earning a 4 percent commission while only offering 2 percent to the cooperating broker.
“That’s just ridiculous. But most people who are listing a home are not incredibly educated in terms of the real estate market. They’re very infrequent participants,” Waller said.
Sellers should try not to negotiate less than the typical commission rate and should insist that the buyer’s agent get at least half, according to Waller.
Because consumers don’t tend to sell real estate often, “they think that negotiating against the commission rate is what they have to do, but they just don’t understand … how important it is to offer at least market rate,” Waller said.
Moreover, he said, offering 3.5 percent to the buyer’s agent, rather than 3 percent, would encourage more showings. Does that mean sellers would end up paying more than the typical commission?
“Not necessarily. They could say, ‘I’m going to give you 6 percent, but I want you to offer 3.25 percent to the cooperating broker to encourage other people to show it,'” he said.
“[Or] yes, they could say, ‘I’m going to pay 6.5 percent and I want us to offer 3.5 percent to the cooperating broker. That one half of 1 percent could be very significant.”
Moreover, consumers could also influence many of the factors that could affect the chances of a double-ended deal such as contract length, list price and the information available about the listing to potential buyers.
Agents should do a better job of explaining their role and what agency is and disclose agency relationships as soon as possible, according to Waller. The law in Virginia says that agents should disclose at “the first significant meeting,” but evidence suggests that often disclosures aren’t given until the parties reach the closing table, he said.
“I think that policymakers need to increase continuing education in that area and I think everybody has an opportunity to benefit from it,” Waller said.
“I don’t think getting rid of dual agency is the answer. I don’t know what the answer is. I just think that more education on everybody’s part would be beneficial.”
He plans to submit the paper to a peer-reviewed journal in the next three months or so.
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