Many real estate agents work as part of larger brokerages. At times, this can introduce a conflict of interest that buyers and sellers might not be aware of.
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Most buyers and sellers would say they don’t want their real estate agent working for the other party. A buyer doesn’t want their agent representing the seller of their dream home, nor does the seller want that agent helping the buyer negotiate. It’s just not in anyone’s best interest.
But what if the agent’s boss does?
The reality is that many real estate agents work as part of a larger brokerage (think RE/MAX, Compass, Keller Williams, etc.). These brokerages serve both buyers and sellers, with the overseeing broker taking a cut of each agent’s commission.
At times, this means a broker’s agent might be representing the seller in a transaction, while another one of their agents represents the buyer. In the end? The broker makes money off both parties.
According to a recent study by non-profit consumer advocacy group Consumer Federation of America, “in-house sales” like these account for about 20% of all home sales. In some cases, brokers even provide incentives to keep sales in the fold.
“To expand their sales and income, firms desire in-house transactions and provide incentives to encourage these sales,” the January 2019 study reported. “These incentives range from favorable commission splits to bonuses to referrals to preferred treatment in the office to in-house praise and recognition.”
Designated agency
In legal terms, the practice is called “designated agency.” But according to consumer advocate Doug Miller, it’s “serving two masters.” And though Miller helped shoot down legislation allowing the practice in Minnesota earlier this year, it’s still legal in 34 states.
“In states that allow designated dual agency, the broker is still a dual agent getting a double fee, but the agents get to claim that they are somehow magically ‘exclusive’ agents,” he said. “It’s legalized fraud. Keep in mind that the double-fee brokers are still are supposed to be supervising these free agents. They have access to all the private negotiating information of the buyers and sellers.”
Miller is the executive director of Consumer Advocates in American Real Estate, a group working to protect both buyers and sellers in real estate transactions. He’s also a class action lawyer (typically on real estate-related cases), a title company executive and a licensed real estate broker of more than 20 years.
In 1993, Miller helped more than 6,000 home sellers win a case against Minnesota-based Edina Realty which, according to the courts, breached its fiduciary duty to the clients by failing to disclose that its agents represented both sides of the deals.
Despite the class action win more than two decades ago, designated agency is still in wide practice today. Most states now require brokerages to disclose these relationships—though the disclosure forms are often presented in a flurry of paperwork and given little attention. According to the same Consumer Fed study, more than a third of recent homebuyers weren’t even sure if they’d signed one.
Michael Walsh, president of Exclusively Buyers, says the forms are confusing to most consumers, too. Though many assume they’re signing an agreement with the agent they’ve come to know and trust, they’re actually entering into a legal relationship with that agent’s boss—the broker.
“The issue is that all contracts for representation—both listing agreements and buyer representation agreements—are legally binding contracts signed between a brokerage and a consumer, not between the individual Realtor and the consumer,” Walsh said. “The Realtor is simply an employee of the brokerage. This being the case, there is a massive conflict of interest for any brokerage that attempts to represent opposing interests in the same transaction.”
Still, not all brokerages try to slip the warning under the rug. Many of them—even larger ones—have policies in place to stave off conflicts of interest. At Seattle-based RE/MAX on Market, for example, managing broker John Manning has strict processes in place to ensure transparency. Every case of possible dual or designated agency must be evaluated and approved in advance.
“Once we are satisfied that all parties are comfortable and empowered, we proceed to sign agency agreements with both sides,” Manning said. “Each client is advised to seek legal counsel, and our own attorney provides guidance on anything that could lead to misunderstanding or inadvertent misrepresentation.”
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Going exclusive
For many brokers, avoiding conflicts of interest is much simpler: they only represent one side of the transaction. That’s what Walsh, a real estate broker and financial executive, opted to do in late 2013. Rather than serve both sides of the deal, his agency focuses exclusively on buyers. He hasn’t accepted a single listing or seller in his nearly six years of operation.
“I always want to be able to negotiate in my clients’ best interests, no matter the home in question,” he said.
But Walsh isn’t the only broker staying on just one side of the fence. Timothy Brown, a longtime commercial real estate broker, is on his way to doing the same.
Brown calls designated agency a “widely practiced phenomenon of absurdity” and “an absolute patent flaw in the way real estate brokerage was designed.” And like Walsh, he’s launching a single-sided residential real estate agency—this time just for sellers. Aptly dubbed Exclusively Sellers, his brokerage is set to launch later this year, once a few regulatory details are sorted out.
To Brown, working on only one side of the transaction was a no-brainer.
“How can you act for both?” he asked. “Can you serve two masters? Can you work for the prosecutor and the defendant at the same time? How can you do it in real estate? Pick a side. That’s all.”
Protecting your interests
Choosing an agent like Walsh or Brown is one way consumers can protect themselves from potential conflicts of interest in real estate transactions—and it comes with other benefits, too. As Dallas agent Lindy Chapman explains, “Specializing allows someone to become an expert. And if you are entrusting your largest asset with someone, why not choose a specialist? If you need hand surgery, you go to a hand surgeon. It should be the same in real estate.”
Chapman is currently closing out her last listing, so she can focus on relocation services and represent only buyers—much like Walsh. She’s worked for traditional brokerages before and says that while these companies do occasionally practice designated agency, they aren’t “scheming” to work against the consumer.
According to Chapman, it’s largely a lack of transparency and understanding about commissions that’s at fault.
“Buyers need to know what they don’t know,” she said. “The lack of transparency—and increasing number of agents and options—creates confusion, and consumers often do not understand how the industry or commissions work.”
Opting for an exclusive selling or buying agent can prevent possible conflicts of interests, but it’s not the only way consumers can protect themselves. According to Miller, sticking to smaller brokerages can help, too.
“Consumers need to seek out small, highly qualified brokerage firms,” Miller said. “They should hire the broker directly, so the broker doesn’t have to split his or her fee with other agents.”
Consumers can also inquire about a brokerage’s policies on designated agency and dual agency, as some may not allow it or might have strict controls to police it. Manning’s RE/MAX on Market is just one such example.
Here are some other ways experts say consumers can protect themselves:
Be wary of coming soon, pre-listings and broker’s opens.
According to Miller, “These services serve to increase the chances of a dual agency transaction and waste the most important marketing time of the house—the first two weeks.”
If an agent suggests a pre-listing, coming soon listing or broker’s open, consumers should make sure that listing will be marketed to agents at outside brokerages and the public. At real estate brokerage Compass, for example, these listings are shared widely for added exposure.
As Tomer Fridman, global director of international markets at Compass, explains “Coming soon and pre-listings are a fantastic way to begin generating digital traffic for the property and a pre-market buzz. These are not only marketed through our in-house technology platforms but shared amongst and viewed from any web browser—agent or buyer. The additional pre-launch interest for our properties is extremely valuable for the seller.”
Make sure your agent isn’t inflating the price.
Chapman recently lost two listings to a brokerage agent who over-inflated the homes’ prices in order to get the business. In the end, both properties sold for far less than market price and after months on the market.
“Unfortunately, there can be pressure for agents to generate a certain level of business in order to maintain favorable commission splits with their broker—but telling a seller what they want to hear to get a listing not only hurts the seller but the agents and brokers who are working hard to do the right thing,” she said. “Trust, but verify. There is no oversight on home pricing. Agents offer an opinion of value, and I’m not the only agent who will tell you they’ve encountered experienced agents overpricing to get the listing. Always get the agent to show you neighborhood comps, especially if the agent representing the seller is also representing you.”
Negotiate your listing contract.
Miller recommends sellers negotiate their listing agent’s commission and, ideally, ask for a flat fee. He also encourages sellers to talk to their agents about unrepresented buyers. If an unrepresented buyer is interested in the home, will their boss (the broker) take commissions from both sides of the transaction?
“Listing agents will claim that they do more work when there is no buyer agent involved,” he said. “If they don’t want to do the work, then tell the buyer to get an attorney. Don’t ever allow the broker to collect the double fee. Give it to the buyer or share it with the buyer.”
If you’re doing all the work, ask for a rebate.
Technology is allowing more and more buyers to find and tour homes and even negotiate on their own. In these cases, when buyers only need help submitting their offer or executing the contract, Walsh recommends asking for a rebate on the agent’s commission.
“The agent is doing nothing other than putting the offer on paper and maybe helping out with the home search, which is easily done via an internet search,” Walsh said. “Since the fee for the buyer’s agent is baked into the price of the home, the buyer is indirectly paying for the services of their agent. I can’t think of any reason for a buyer to pay full fare for an agent to do a simple administrative task.”
Make sure your “exclusive” agent is actually exclusive.
If an agent’s brokerage represents both buyers and sellers, there’s an opportunity for conflicts of interest—even if it’s not intentional. Opting for brokerages that focus on one side of the transaction can eliminate this possibility.
“When a brokerage does not accept sales listings, there cannot be an occurrence where the brokerage is already representing the interests of the seller,” Walsh said. “An exclusive buying agent is able to offer unconflicted financial advice and to pursue an aggressive negotiation on behalf of the buyer.”