The Real Estate Profession's Identity Crises
I served tours in two combat zones while in the U.S. Air Force. One was in Vietnam and the other was at the University of California at Berkeley, where I commanded the Air Force ROTC unit. One day in the spring of 1970, in the wake of the Cambodian invasion and the tragedy at Kent State, the campus erupted. Rampaging crowds of students and street people, pursued by police, were everywhere, torching vehicles and generally wreaking havoc. I watched-from a safe distance and in civilian clothes-as U.C. Berkeley's riot de jour got really out of hand. At the epicenter in the middle of Sproul Plaza, apparently oblivious to what was going on around him, I noticed a lonely, solitary figure, sitting in a Ghandi-like pose and clothed only in cutoff jeans. His hands were stretched skyward and he was plaintively wailing, "Who am I? Who am I?" That's the question now being asked by many people in the real estate business. I'll do my best to answer it for you, since you need to know before you can fully appreciate your role as a real estate professional, and before we launch into our discussion of the specifics of listing and selling real estate.
AGENCY: WHERE WE'VE BEEN
In legal terminology, an agent is someone who represents another person in a business transaction. There are different types of agents, ranging from a "universal agent," in which the agent has the power to act in any and all matters , to a "special agent," in which the agent is authorized to act for the principal in a limited set of clearly prescribed activities. The agent assumes a fiduciary responsibility to the principal. Textbooks typically define the list of obligations that go into making up that responsibility as confidentiality, obedience, accountability, loyalty, and disclosure. In essence, it simply means that the agent puts the client's interests ahead of everyone else's in the transaction- including the agent's. If you grasp nothing else about agency, remember that. You put your client's interests above everyone else's-including yours. While teaching my real estate licensing class we role play. I am the Principal Broker and all my students are salespersons licensed under me. The company name: Golden Rule Realty. Simply another way of illustrating our guiding principle in doing business. Practical application-you're showing a property and you ask yourself: "should I disclose this fact about the house?" Your practical answer at Golden Rule Realty: "Would you want that fact disclosed to you if you were the buyer?" It's not an infallible guide line, but combined with common sense it works great almost all the time.
I can best illustrate the concept of agency as it relates to real estate if we fast-forward a bit and assume that you now have your license. Your first real shot at actually earning some money occurs when you list the home of Ed and Mary Johnson. They are highly motivated to sell, since they are relocating the family business and want to move into their new home in New Jersey to get their children in school for the fall term. That listing agreement between you and the Johnsons is a legally binding contract, in which you pledge your best efforts to secure a ready, willing, and able buyer. If you do that, the Johnsons agree to compensate you with a brokerage fee, typically 5, 6, or 7 percent of the eventual selling price. It's really an employment contract that creates an agency relationship in which the Johnsons actually hire your broker, for you are an agent of your broker. The listing you secure is called an "exclusive right to sell" listing, which means that no matter who sells the property you earn a commission. There are other types of listings about which you will learn in your real estate licensing classes, but that's the most common.
Your broker is the Johnsons' special agent, who is authorized to act for them in this limited set of circumstances. The contract typically gives the agent the authority to advertise the property, put a lockbox on it, submit it to the local multiple listing service, and cooperate with other real estate brokers in finding a buyer. You are a subagent to the Johnsons. The agent (your broker) and the subagent (you) owe that fiduciary duty to the Johnsons. Again, in its basic terms, it means placing their interests above everyone else's in any matter. The Johnsons are your clients. Your legal duty to third parties-buyers-is to deal honestly and reveal material facts. They are referred to as customers.
In the past, the standard procedure was for the home sellers to authorize the listing broker to submit the listing to the MLS, along with a unilateral offer of subagency, which meant that anyone who accepted that offer would represent the seller. The typical split on the brokerage fee would be 50 percent to the listing office and 50 percent to the selling office. The practical implication was that legally everyone represented the seller and no one legally represented the buyer. Your broker submitted the listing to the local MLS, and in the information describing the listing, included the phrase: "Sellers highly motivated-must be in New Jersey in time for school this fall."
Here's the problem that developed. Let's say Sam Snerdly, the broker at Sunset Realty and a member of the local MLS, noticed the Johnson listing and concluded it was just right for the Browns, a young couple with whom he had been working on finding a home for several months. He accepted that unilateral offer of subagency. Snerdly has never met the Johnsons. He has become very good friends with the Browns. He met them at the airport when they came to town for a house-hunting trip. He made hotel reservations for them. He got them preapproved for a mortgage loan. He took them to dinner. He offered advice on how to negotiate when buying a home. He gave them a sixmonth gift subscription to the local paper. He shows the Browns the Johnson house. They love it. He shares with them the fact that the sellers are really anxious to move. Because of Snerdly's advice, they offer $4,000 less than full price. Even though that's substantially less than comparable homes are selling for, the Johnsons accept, since they are so anxious to wrap it up and move on. The deal is done.
Question: Whom did Snerdly legally represent in this transaction? Answer: the Johnsons. He was required to put their interests first. They were his clients. He was their subagent, by virtue of accepting that unilateral offer of subagency. Question: Did he do that when he counseled the buyers to offer substantially less than full price, because he knew the Johnsons were "highly motivated?" Answer: Absolutely not. Question: Whom do you think the Browns thought Snerdly represented? Answer: Them, of course. What Snerdly did was enter into an undisclosed dual agency, since by his actions it was obvious that he was, in fact, representing the Browns, while legally and contractually obligated to represent the Johnsons. Acting as an undisclosed dual agent is illegal.
If everyone was happy with the outcome, then there was typically no adverse reaction. But let's suppose that after the Browns move in, they discover that the road bordering their home is going to be widened dramatically, which will substantially increase traffic noise. That information was not disclosed to them. They want out. They consult an attorney wise in the ways of agency. He asks the Browns to describe Snerdly's actions in the transaction. It's clear there has been a violation of the laws of agency, so that's what the attorney focuses on. All sorts of interesting things could result, including a revocation of the contract and perhaps even damages being levied against the sellers and the real estate agents involved. In an interesting sidelight, it became apparent that although agency violations were not typically the reasons that buyers were unhappy (generally it was nondisclosure of material facts), it became the focal point of the majority of lawsuits.
On the national level, how serious a problem was this? In 1984, the Federal Trade Commission conducted a study revealing that:
1. Of buyers (the Browns) who worked with cooperating agents (Snerdly, the subagent), 71 percent believed that agent represented them.
2. Of the buyers who worked with the listing agent (if the Browns came directly to you and bought the Johnson listing), 31 percent felt that the agent (you) represented them (the Browns).
3. Seventy-four percent of the sellers (the Johnsons) thought that the selling agent (Snerdly) represented the buyers.
This was the landmark study that forever changed the agency landscape in real estate. As a result, states started passing laws that made agency disclosure mandatory. When you take your licensing class, your state's requirements will be a major topic of discussion, so pay very close attention. If you log on to your state real estate agency web site, it's likely you will find pertinent state regulatory guidance.