What Is Dual Agency And Why Is It Illegal In Some States?
Carey Chesney5-Minute Read
November 11, 2021
Most people have heard of buying agents and listing agents. That’s really just the beginning though. There are agents who specialize in every type of real estate transaction from vacant land to income properties to commercial properties and many more.
There’s another type of agent who usually provides some initial mystery and questions when buyers or sellers first hear about them: the dual agent. Understanding what a dual agent is, and why dual agency is illegal in some states, can be an important part of being an informed home buyer or seller.
What Is Dual Agency In Real Estate?
Dual agency in real estate transactions involve one agent occupying dual roles at the same time. A dual agent essentially operates as the buyer’s agent (representing the purchasers) as well as the listing agent (representing the sellers).
This can create some tough decisions for the agent, as buyers and sellers are generally adversarial parties in arm’s length transactions.
When an agent is designated to represent certain clients, be it buyers or sellers, they have a fiduciary responsibility to represent the best interests of those clients above all else. When you are tasked with representing the interests of two opposing parties above all else, things can get tricky.
For example, one of the key tasks of a buyer's agent is to help their clients get the house they want for the lowest possible price. Conversely, one of the key tasks of a listing agent is to get the sellers the most possible money for their house. If you are a dual agent representing both sides, it becomes tough to represent them both equally. Their best interests in regard to the price of the home are directly at odds.
It’s not impossible to thread the needle, so to speak, in terms of representing both sides well, but this potential for conflicts of interests throughout the transaction makes it pretty hard. This is why some states have decided to make dual agency illegal.
How Does Dual Agency Work?
Ending up with a dual agent is rare, but if you live in a smaller market, then you might run into it.
One common way this happens is when the agent who has the property listed finds a buyer who doesn't have a buyer’s agent representing them. This can occur at an open house, through online inquiries or any number of other ways.
In this scenario, it’s in the listing agent’s financial interest to become a dual agent instead of encouraging the prospective buyer to hire a buying agent. That way they don't have to split the agent commissions, usually fully paid by the seller, with another agent.
This means the dual agent will get a total of 6% commission (the most common commission paid). They receive 3% for helping the buyer find the home, and 3% for helping the seller sell the home. As a seller, you can negotiate with the agent to take a commission cut if they are becoming a dual agent. The agent will usually agree to lower their commission since it’s still going to be higher than their usual 3%. It’s also important to note that they must obtain the consent of both parties before a dual agency can be reached.
As you consider whether to allow dual agency in a real estate transaction, keep in mind that when an agent does this, their allegiances become split. As previously mentioned, dual agents essentially combine both the roles of the buyer’s agent and seller’s agent into one. A dual agent also has to be neutral concerning any conflicting interest of the seller and the buyer, which often means they can’t satisfy the duties of full disclosure or loyalty to their fullest extent.
For Sale By Owner
You may be wondering how dual agency can arise when it comes to a for sale by owner property – a home listing where the seller is not using a listing agent. While it may seem like agents aren't involved in this process, they often are. That’s because even though the seller of the home isn't using an agent, most prospective buyers looking for homes are.
In this situation, a buyer’s agent might want to take on the task of representing the seller as well as their buyer at the buyer’s urging. This can create a conflict of interest when the needs of the seller and the needs of the buyer are at odds. Keep in mind that the agent already has a long-standing relationship with the buyer, making it even more difficult to be impartial during negotiations.
In areas where there aren’t many homes, there aren't many real estate agents. Makes sense, right? This means the likelihood that an agent will need to work as a dual agent increases. If they are the agent who lists the home, the prospective buyers who come through are more likely to be the same agent’s buying clients or have no agent at all.
Are Dual Agents Unethical?
Dual or not, each individual agent has the capacity to operate with the highest or lowest standards of ethics, as well as everything in between. That’s why carefully choosing your agent, whatever capacity they serve you in, is critical. In most common circumstances, there’s no reason to think that an agent thrust in a dual agency situation has done or is going to do anything wrong. Again, it really depends more on the agent than the situation.
The National Association of REALTORS® (NAR) ethics rules focus on the importance of full disclosure of agent and brokerage conflicts before entering into any kind of contract with a buyer or seller, so if you aren't properly notified that is a huge red flag.
While the potential for tricky ethical decisions can sometimes increase with dual agency, there are some instances where it can make the process smoother. For example, when it comes to the sale of a home between family members a dual agent can save both parties quite a bit of money without much potential for ethical conflicts.
Why Is Dual Agency Illegal In Some States?
As defined by NAR, “A real estate broker who becomes an agent of a seller or buyer, either intentionally through the execution of a written agreement, or unintentionally by a course of conduct, will be deemed to be a fiduciary. Fiduciary duties are the highest duties known to the law. Classic examples of fiduciaries are trustees, executors, and guardians. As a fiduciary, a real estate broker will be held under the law to owe certain specific duties to his principal, in addition to any duties or obligations set forth in a listing agreement or other contract of employment. These specific fiduciary duties include loyalty, confidentiality, disclosure, obedience, reasonable care and diligence, and accounting.”
What that means is that an agent’s duty to the principal (their client) is put above all else. When it comes to confidentiality, loyalty and disclosure specifically, how can an agent achieve this when working with two clients who have opposing interests? Well, some states believe they just can't, no matter how hard they try, so they have deemed dual agency illegal.
Which States Ban Dual Agency?
Wyoming, Alaska, Vermont, Colorado, Florida, Maryland, Texas and Kansas ban or severely limit the practice of dual agency. While other states have not made it illegal to have dual agency, they have created many limitations on the power a dual agent has. This is all done to ensure your agent can fulfill their fiduciary responsibility to you. At the end of the day, regardless of the state you are buying or selling property in, picking the right agent is the most critical step in the process.
Why Do Other States Allow Dual Agency?
As previously mentioned, the practice is often limited by state law even in states that don't have an outright ban on dual agency. However, in states with large rural areas where residents often depend on a single regional brokerage to handle real estate sales transactions, the need for dual agency to keep the real estate market going is critical.
If You’re Buying, Work With A Buyer’s Agent
An exclusive buyer’s agent is a real estate agent who focuses on assisting their clients through the process of buying a home. Not only will they help you find a home, but this agent also owes the buyer reasonable care, undivided loyalty, obedience to lawful instruction, disclosure, confidentiality and accountability. A buyer’s agent must negotiate terms acceptable to a buyer and must always put the buyer’s interest first. You should be able to expect your buyer’s agent to do things like:
- Help you find your home
- Attend your home inspection
- Get you preapproved for a loan
- Negotiate an offer on your behalf
- Assist you with picking a home inspector
- Communicate with the seller’s agent throughout the sale
- Speak with the buyer’s attorney throughout the sale
- Keep an eye on your credit and loan situation
- Negotiate home inspection repair requests
- Helping you through the closing process
Unlike a dual agent, the buyer’s agent is only going to be responsible for the person buying a home. There will be no split agendas and they will only get a 3% commission to do their job.
If You’re Selling, Work With A Seller’s Agent
An exclusive seller’s, or listing, agent is a real estate agent who focuses on assisting their clients through the process of selling a home. If you are selling your home, this agent owes the seller reasonable care, undivided loyalty, obedience to lawful instruction, disclosure, confidentiality and accountability. A seller’s agent must also negotiate terms acceptable to a buyer and must always put the buyer’s interest first. You should be able to expect your seller’s agent to do things like:
- Extensive marketing of your property
- Price your home correctly
- Make sure the buyer is qualified
- Communicate with buyer’s agent throughout the process
- Negotiate the best term
- Negotiate home inspection repair requests for the seller
- Attend the home appraisal
- Finalize loose ends for closing
- Attend the home inspection to represent the seller
Much like a buyer’s agent, but unlike a dual agent, a seller’s agent is only going to be responsible for the person selling a home. Again, they will only get a 3% commission to do their job.
The Bottom Line: Be Sure The Agent You’re Working With Is Working For You
Dual agency, while sometimes unavoidable, is a conflict of interest that should be discouraged. That said, in the right situation it can be managed well and should always include full disclosure to all parties. The most important thing to remember is that when it comes to the good or bad sides of dual agency, the biggest factor is integrity of the agent.
As always, stay informed by learning as much as you can about choosing a real estate agent to work with when you are ready to buy or sell.
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