What is Dual Agency?
In a hot seller's market, a homebuyer will try just about anything to get a leg up on the competition and – when possible – strike a deal in their favor. Talk of escalation clauses, appraisal contingency waivers and cash offers becomes the norm. Some people even look into dual agency as a way to appeal to the selling side.
But dual agency is one way to make a transaction work less in your favor, and in some states it isn't even legal. Here's what dual agency is, and why you may be inclined to use or avoid it.
What Is Dual Agency?
Dual agency occurs when a single real estate agent represents both the buyer and seller in a transaction. Because there is not another agent to split the commission with, the agent keeps the full commission (often 5%-6% of the sale price), minus brokerage fees.
Related to dual agency is designated agency, which is when the buyer and seller are represented by separate real estate agents, but both agents work for the same broker.
Another similar situation is transactional brokerage, which means the agent representing, for example, the seller, assists the buyer in completing the transaction without legally representing the buyer. Essentially, the agent helps to ensure any offers and contracts meet legal requirements while still legally representing only the seller of the deal.
The Case for Dual Agency
Dual agency may be floated as an option for trying to beat out other, more traditional homebuyers who are represented by their own agent.
"In a hot market, you've got consumers in general trying to go straight to the listing agent," says Nobu Hata, CEO of the Denver Metro Association of Realtors. Dual agency is not permitted in Colorado, but Hata previously worked as a real estate agent in Minnesota, where it is permitted.
"It's a preconceived notion that you're going to get a deal, and that's just not the case," Hata says.
In the case of an experienced buyer or seller who is confident in his or her ability to negotiate, dual agency may feel like a way to streamline the real estate transaction. But knowledge that the agent cannot exclusively work in your best interest while also representing the other side of the deal is key.
John Manning, broker and owner of Re/Max On Market in Seattle, gives one example where dual agency could be a good fit: "If I'm selling a house and the seller says to me, 'Oh gosh, I didn't realize this but my neighbor's daughter wants to buy the house, and we really want this to happen and we've already agreed on the price. And I want you to help this happen.' That might be a case where dual agency can work, because the sellers themselves have determined the terms that are acceptable to them."
If you want to move forward with a transaction that involves dual agency, Hata recommends having a professional of some sort in your corner to exclusively represent your best interests. "Have a lawyer to at least check over the contract," he says.
The Case Against Dual Agency
Before you take the leap into a real estate deal with dual agency, you need to know the downfalls of the situation as well.
Many states that allow for dual agency in real estate transactions still require strict documentation to guarantee that both parties involved are fully aware of the real estate agent's double role. Buyers and sellers have to fully understand the conflict of interest being disclosed – and that the professional they're working with isn't exclusively representing their best interests.
This can lead to a loss of faith in the agent before the deal closes, or buyer's remorse afterward.
In May, a report on dual agency titled "Double-Dipping By Real Estate Agents: Risks and Costs to Home Buyers & Sellers" was published by the Consumer Federation of America, a nonprofit organization focused on advancing consumer interest. The report, which looked at nearly 6,000 recent home sales in different parts of the U.S., found dual agency was more likely in deals where the homes sold for low prices, and were more likely to have been on the market for a longer period of time.
With that information in mind, pursuing a dual agency transaction for the sake of beating out competing offers for an in-demand house isn't a proven route for success. "You're not going to get a deal," Hata says. "You're not going to get that agent sending you back any cash. You are entering a deal with no fiduciary, while the seller has a fiduciary working on their behalf. You're almost walking into a transaction with two strikes against you."
The report also noted that many real estate agents appear to steer clear of dual-agency transactions for fear of a lawsuit in the future, and the threat to their finances and professional reputation should one party feel they were not properly represented. The report found that, on average, dual agency sales (what the report refers to as double-ended sales and double-dipping sales) made up 9.4% total transactions, though the percentage varied between 2.6% and 14.8%, depending on the housing market.
"The general industry attorney advice is to avoid (dual agency) wherever possible," Manning says. He adds that once one party loses trust in the agent involved in dual agency, "that can turn into a failed transaction at best and a lawsuit at worst."
Is Dual Agency Illegal in Some States?
To avoid potential predatory actions toward consumers and regrets from buyers or sellers who agree to dual agency, some states have outlawed the practice. At the close of the Consumer Federation of America's report, it recommended all states adopt policies prohibiting dual agency in real estate.
States with laws or statutes that make dual agency, where both parties are represented by one agent, illegal are:
Many of the states that outlaw dual agency do allow transactional brokerage and designated agency or similar single-brokerage representation to occur, as long as it is properly disclosed to both parties in the transaction and each party has a separate agent working on his or her behalf.
Even in states where dual agency is permitted, some brokers make it a policy that their agents are not permitted to be a part of dual-agency transactions. However, the Consumer Federation of America's study found that real estate agencies, on the whole, don't tend to particularly encourage or discourage dual agency transactions.
Referring to his own brokerage in Seattle, Manning says: "We rarely do dual agency, and when we do it's after really investigating the risks of the situation." He also says that he, personally, is unlikely to agree to represent both sides of a deal with dual agency. "I'm at the stage in my career that I would turn them down nine times out of 10 – it's not worth the risk," he says.