Editor’s note: This article is part of a series, “Beyond Dual Agency: Many forms of real estate double-dipping,” highlighting the history, regulations, and debate over dual agency and other real estate practices in which the same real estate professional, or professionals from the same office, work with both the buyer and seller in the same real estate transaction. Read Part 1: “Dual agency and ‘double-dipping’ still risky business.”
Agency relationships are created when one person — a lawyer or an investment adviser, for example — agrees to act on another’s behalf or represent them in dealings with a third party.
Once an agency relationship is established, an agent owes their client “fiduciary duties” — they must act in the client’s best interests, with honesty and good faith, while avoiding conflicts of interest or “self-dealing” that puts their own interests ahead of the client’s.
Anyone attempting to represent the interests of more than one party generally must disclose that they are acting as a “dual agent” — if the practice is allowed at all.
The rules governing real estate brokers’ agency relationships to their clients and the duties they owe them are determined at the state level, and no two states have taken exactly the same approach.
Until about 20 years ago, agency relationships were largely determined by general statutes and common-law precedents. Few, if any, states had laws on the books that pertained specifically to the formation of agency relationships between real estate brokers and their clients.
For decades, the real estate industry had relied on the practice of subagency, in which a cooperating broker who brought a buyer to a transaction acted as a subagent of the listing broker.
Both agents in a transaction had a contractual obligation to help the seller obtain the best price for their property.
Subagency, in theory, helped protect brokers from accusations that they were acting as undisclosed dual agents. But in the 1980s, regulators and consumer groups began to question whether buyers were getting a fair shake under subagency.
State courts began siding with buyers, ruling that the services cooperating brokers and their agents provided to them could, in fact, create agency relationships.
The real estate industry, in an attempt to clear up confusion and protect brokers from lawsuits, began pushing state lawmakers and regulators to explicitly define agency relationships and the duties real estate brokers owed to buyers and sellers.
For the first time, states began adopting statutes that recognized forms of representation in real estate transactions such as single agency, dual agency and designated agency, spelling out brokers’ duties in each situation.
Although subagency and dual agency are still permitted in many states, brokers and their agents are usually required to provide disclosures to consumers informing them of how services are being provided.
Single agency: Brokers practicing single agency may represent buyers or sellers, but not both, in the same transaction.
Disclosed dual agency: A broker or agent practicing disclosed dual agency may represent the interests of both the buyer and seller in the same real estate transaction, but is usually expressly prohibited from disclosing either party’s confidential information.
Designated agency: Brokers practicing designated agency may assign separate agents to represent the seller and the buyer in the same transaction. Many states consider the broker in such transactions to be a dual agent.
The adoption of laws and regulations governing real estate brokers’ agency relationships to their clients helped clarify the rules, and provide brokers with legal defenses they could employ in court.
But lawsuits continued — often because brokers or their agents failed to provide disclosures, or because their clients maintained that they had breached their fiduciary duties.
Real estate industry lawyers developed another approach to limit brokers’ legal liabilities: Do away with agency representation altogether.
Transaction brokerage: Although never endorsed by the National Association of Realtors, 25 states — including Florida, Texas, Michigan and Colorado — now allow “transaction brokerage” and other non-agency relationships.
Transaction brokers act only as deal facilitators, providing services to buyers and sellers without representing them in a true agency capacity.
A review of laws and regulations in the 50 states and Washington, D.C., by Inman News found most, including many that have adopted transaction brokerage, also allow brokers to establish agency relationships with more than one client through dual or designated agency.
Dual agency, wherein a single agent represents both the buyer and the seller in a transaction, with fiduciary duties to both, is permitted in all but eight states: Alaska, Colorado, Florida, Kansas, Maryland, Oklahoma, Texas and Vermont.
Except for Vermont, all of those states allow either designated agency (Alaska, Colorado, Maryland and Texas), transaction brokerage (Florida, Kansas and Oklahoma) or both (Alaska, Colorado and Texas). Vermont allows a single broker to represent both buyer and seller in a “limited agency” role only when both buyer and seller are existing clients.
States that differentiate between real estate “clients” and “customers”: Vermont is one of at least 22 states that leaves open another potential avenue for double-ending deals by allowing real estate brokers to provide differing levels of service to represented “clients” and unrepresented “customers.”
An agent representing a seller as a client while providing more limited services to a buyer as an unrepresented “customer” may be able to avoid splitting the commission paid by the seller with a cooperating broker.
Some states that define “customers” and “clients” also spell out the administrative or “ministerial” services, such as showing a house, that may be provided to unrepresented customers.