Real Estate Agents: Get Your Money's Worth
Glasheen, Maureen F., Consumers' Research Magazine
Will the real estate agent you hire work for you? This is a question that has the real estate industry in a state of crisis these days and, of course, bears directly on what you can expect this year when you enter the housing market.
At issue is to whom the agent owes loyalty in a real estate transaction. Centuries of common law--the legal rules that courts hand down, case by case--have set down an unambiguous rule: agents owe undivided allegiance to their client whether the client is a buyer or seller. The recent growth of buyer brokers--companies that represent only the buyer in a given transaction (never buyer and seller)--signifies growing consumer understanding of these issues. But questionable arrangements persist in customary practice.
The customary practice of residential real estate in the United States has, for decades, ignored this common law rule. As a result, consumers seeking to buy or sell a home today face a confusing array of arrangements, many of which disregard the need for an agent's undivided loyalty to the client and expose unwary consumers to unnecessary financial and legal risks.
To make matters worse, a number of states have enacted legislation that rewrites common law; essentially to legitimize customary practice. Although technical and legalistic, the issue goes to the heart of what you should expect from your agent when you seek to buy or sell a home.
Consumers assume significant financial risk for their agents' acts in exchange for services their agents provide. Consumers also dish out sizeable sums for those services, mainly because of what they entail--not only access to the housing listings, but expert advice and representation when making a deal. Historically, commissions for residential broker services have run between 6% and 7% of the sales price for the home: typically between $5,000 and $14,000. Have you ever paid this much money for services in connection with a single transaction to anyone else?
This is not to say you should avoid real estate agents. When you cannot take care of yourself in a real estate transaction, an agent can save you a fortune. And, on balance, having a good agent working on your behalf will lead to a better deal than going without, particularly if you are a home buyer. But you must know that to get a good agent, you need one who understands his legal obligations to you.
Conflicts of Interest
Law firms wouldn't represent different parties in the same financial transaction because the conflicts of interest between the buyer (who seeks the lowest price possible) and the seller (who seeks the highest price possible) are so fundamentally incompatible as to make it impossible to represent both sides fairly. Throw in the fees for "representing" both sides at once and the potential for unfair dealing intensifies. That is why this conduct has always been wrong for fiduciaries.
Agents are fiduciaries; they are required to act solely in their clients' best interest, subject to their control. Agents, such as brokers and attorneys, have the same six fiduciary duties as trustees or guardians: confidentiality, obedience, undivided loyalty, full disclosure, reasonable care, and accounting for property received. This is what you pay for when you hire an agent to work on your behalf.
You don't hire an attorney, trustee, or accountant to work only partly in your interest, for the risk of self-dealing in financial matters is obvious. Likewise with real estate agents. You cannot have partial loyalty; an agent either works for you, or works for someone else.
Until the 1980s, relatively few real estate consumers or brokers gave much thought to the legal significance of the term real estate "agent." Many brokers called themselves agents with no understanding or concern for whether they were agents, subagents, dual agents, or not agents at all. As long as they had access to the Multiple Listing Service, which lists homes for sale, they could put together deals without the uncomfortable issue of loyalty ever arising. …