Agency...An Explanation

I know, your eyes just glazed over.  This is really a pretty simple concept that has been made complicated by the fact that all REALTORs are liable for situations where the clients do not understand their position in a transaction. This has resulted in long (and often excruciating) explanations about different types of agency that the general public often does not understand. Let me explain in a way that hopefully makes it easier to grasp.

In the "olden days" all agents represented the seller.  This is the way that many of us "grew up" in real estate.  It did not make much sense, since there was often an agent on the buyers side who acted like they were representing the buyer, but at the end of the day their loyalties were to the seller.  As you can imagine, there were many buyers who did not understand this and some who did not receive the best representation. Many buyers agents,however, behaved as if they represented the buyer in all respects, despite their obligation to the seller.

Fast forward to our current way of doing business, which is that, in most cases, each party to a transaction (buyer and seller) have their own agent who is working ONLY on their behalf.  These agents are generally called the Buyer Agent (or Selling Agent)  and the Listing Agent. Each of these agents works for a Broker. In every transaction, it is the Broker--not the agent--who is actually paid in (and responsible for)  the transaction. The Broker then pays the agent.

Buyer Agency representation is explicitly defined in a contract between the buyer and the Broker/agent.  This contract says that the Buyer Agent Broker will be paid and that the buyer agrees to pay the Buyer Agent  Broker if compensation for their work is not part of the offer of compensation in the listing.  In return, the Buyer Agent will fully represent the buyer and not the interests of the seller. Most listings will offer compensation to the Buyer Agent  Broker for bringing a willing and able client to purchase and go to closing on a seller's home.

The Listing Agreement is a contract that explicitly states that the Listing Agent will represent the seller's best interests. In return for doing this, and producing a buyer for the property, the  seller will pay the Listing Broker a commission. The Listing Broker agrees to pay a portion of this commission to a Buyer Agent Broker who brings a qualified client who purchases the seller's home.

Where this gets tricky is when 2 additional terms are introduced: Dual Agency and Designated Agency.

In Dual Agency, both parties agree to be represented by the same broker/agent.  Each party gives up their right to full representation for the advantage of having one broker/agent who is motivated to get the deal done. The main advantage to this is that the agent might be able to further reduce the sales commission if they do not have to pay another broker. The main disadvantage is that the broker/agent cannot advise either party how to structure the contract or whether to accept an offer  If both parties are willing to give up this assistance to go to closing, it can be a win-win situation.  It is not however without problems.  The agent must be careful not to disclose any information to either party that could jeopardize that parties negotiation position; agents are often privy to this information.  They are also unable to advise either party how to handle tricky situations that arise during home inspections, termite, appraisal, etc. They become, in effect, an administrative party to the transaction. This is not an ideal situation for an inexperienced client or a close friend or relative. A Dual Agency situation must be disclosed to all parties and each party has the right to refuse this type of representation.

As a Designated Agent, the buyer's agent works for the same Broker that the listing agent works for but they are not the same person.  This situation is not uncommon with large Brokerage firms.  Many of these agents, while working for the same Broker, do not even know each other.  There is  always risk that the agents might inadvertently share information about one or both of these clients. A Designated Agency situation must be disclosed to all parties and each party has the right to refuse this type of representation.

Finally, there are contracts where only one party has representation. An example of this is if a Listing Agent receives a call from a potential buyer who does not have (or want) an agent.  Without becoming either a dual agent or  a designated agent, the Listing Agent can write up the contract as a "ministerial act." They can provide NO advice on how to structure the contract/deal, simply document the offer that the potential buyer is proposing.  I have done several of these types of contracts in the past year.  The buyer often thinks they will get a better deal by asking the Listing Agent to cut his or her commission. Keep in mind, however, that the payment of the commission is established in  a contract between the Listing Agent and the Seller (the listing agreement) and any agreement to modify this contract is between those 2 parties.  I have found, at least with the potential buyers that I worked with, the offers they propose are not always fully understood, and neither case did these potential purchasers made it to settlement. One contract was rejected outright as being too risky for the seller and one contract was accepted but then "kicked out" by a more solid offer. Without someone advising these parties, each offer was strongly weighted toward the purchaser. Obviously, someone representing themselves will look out for their own interests and will have limited or no insight (and possibly limited objectivity) into how an Listing Agent will review the contract with a seller. This is a situation that can work if the party without an agent is well informed about the process and puts together a solid offer. If not, be careful here if the house under consideration is one that you really want!

Agency laws vary from State to State and common practices vary from region to region.  If you are trying to make a decision about representation and agency, I recommend that you speak with someone in your regional area who can explain how buyers and sellers handle agency representation in your area. REALTORs and Real Estate Attorneys should be a good source of information to assist you in your decision. 

As my own disclaimer, this is intended to be a simplistic explanation and will not cover every circumstance. I apologize in advance if I left anything out or if my wording was confusing.  I am not an attorney but just a practicing REALTOR out in the trenches trying to make this concept a little easier to understand!


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Comment balloon 2 commentsHolly Weatherwax • September 06 2007 02:35PM
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