Dual agency can cost you: Beware of “double agents” when buying a home

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“Dual agency” occurs when one agent represents both the buyer and seller in a real estate transaction. It can create problems and cost the buyer more.

1. Conflict of interest is unavoidable. At some point, the interests of the seller and buyer always diverge
2. Dual agents tend to favor sellers because higher sales prices mean more commission income
3. Dual agency is illegal in some states

This form of representation may be preferred by some agents because they feel it’s more efficient when everyone works in the same office. But studies show that dual agency can harm buyers.

Is a dual agent really your agent?

It sounds innocent enough. You walk into an open house and the agent asks if you have a buyer’s agent. You say, no, and she offers to be your agent. Sounds good so far.

Then you make an offer on that house. Suddenly, the agent who is supposed to represent you is also representing the seller. That could be an issue.

If you file a lawsuit, do you want the same lawyer to represent you and the defendant? Probably not. But this situation happens every day in the real estate industry. Many home buyers and sellers allow one agent to represent them both — without knowing the risks.

Do I need a real estate agent to buy a home?

Dual agency occurs when a buyer and seller let a single real estate agent (or two agents from the same brokerage) represent them in a transaction.

Dual agency is illegal in eight states: Alaska, Colorado, Florida, Kansas, Maryland, Oklahoma, Texas and Vermont.

The other states have different laws governing the disclosure of dual agency and the behavior of dual agents.

Sometimes it works...

Some buyers and sellers see advantages to dual agency.

For example, because dual agents keep the entire commission — a.k.a., “double ending” — some will agree to reduce their commission.

But many experts believe that a dual agent can’t really serve as your agent — not in the legal sense.

At best, they say, dual agents can’t fulfill their fiduciary obligations to both parties. They can’t advance the best interests of both buyer and seller because those interests always diverge.

At worst, dual agency creates a harmful conflict of interest.

When one person serves the buyer and seller, the conflict of interest is obvious. A dual agent has a strong incentive to favor the seller. The higher the sale price, the higher the commission.

In theory, this conflict of interest is reduced when one agent from a brokerage represents the seller, and another agent from the same firm represents the buyer.

In practice, one or both clients are likely to suffer.

According to a study first published in The Journal of Real Estate Finance and Economics, “on very fast deals, list prices and sale prices are significantly higher on houses sold via dual agency.”

The study also found evidence that some dual agents practice “first-resort selling.” The agents prod the seller to set a higher price and then try to convince “in-house” buyers to accept it.

In other cases, dual agents do the opposite. They convince the seller to set a lower price than the home could actually fetch. This is known as “strategic pricing.”

The study found “little difference between dual-agent (same agent) and within-agency (same agency, but different agent) deals.”

In both situations, the researchers discovered “evidence of distorted outcomes associated with dual agency.”

Why an “exclusive” agent is best

The easiest way to avoid dual agency is to hire a real estate agent who always works in a “single-agency capacity.”

If you’re a buyer, hire an agent who exclusively works as a buyer’s agent, never a seller’s agent.

If you’re selling, seek out an agent who exclusively represents sellers.

Related: Millennials rely more on real estate agents when they buy a home; Gen-Xers are more independent

Buyer’s agents will usually have you sign a buyer’s broker agreement, which spells out the agent’s legal duties and obligations.

Seller’s agents will ask you to sign a listing agreement, which lays out the same kinds of duties and obligations.

These fiduciary responsibilities are sometimes summarized with the acronym OLDCAR:

• Obedience: The agent is obligated to follow your instructions
• Loyalty: The agent must put your interests ahead of any other party’s, including their own
• Disclosure: The agent must disclose any “material facts” to you - i.e., facts that might influence your decisions regarding the deal
• Confidentiality: The agent cannot disclose anything they learn about you to anyone else without your permission
• Accounting: The agent must account for, and report on, any and all documents and funds pertaining to the transaction
• Reasonable Care: Essentially, the agent must do his or her best to protect and advance your interests

A dual agent can’t advance your best interests

The biggest problem with dual agency is this: a dual agent cannot — by definition and sometimes by state law — represent your best interests. The person is more of a referee than an agent.

For example: if you’re a buyer, you may want your agent to advise you on what price to offer for a home. But a dual agent can’t do that because it would violate their duty of loyalty to the seller.

You also can’t ask if nearby properties might negatively affect the value of the home, or how much the agent thinks the home is really worth.

Related: Buying agents versus listing agents

As the seller, you can’t expect a dual agent to provide advice on a counter offer, or whether the buyer’s repair requests are negotiable. That would violate the duty of confidentiality to the other party.

In short, when one person represents the buyer and seller, you can’t expect the kind of advice and counsel you’d normally get. For many people, this lack of advice and “intel” defeats the whole purpose of hiring an agent.

To avoid dual agency, some agents work as “transaction agents.” Here, the agent’s official role is to facilitate the transaction without representing either party.

Read the fine print

When two agents from the same firm represent the parties, the agents can fulfill their OLDCAR duties. But you must then hope that the agents are “Honest Johns” who won’t engage in strategic pricing or first-resort selling.

Before you sign a listing agreement or a buyer’s broker agreement, check the fine print.

Some agreements allow the agent to become a dual agent if the situation arises.

Both parties must consent to dual agency. Make sure you’re not consenting, in advance, to something that could harm your interests.