A national consumer watchdog is calling for states to ban dual agency and make agency disclosures less confusing, according to a report released Monday.
A national consumer watchdog is calling for states to ban dual agency and make agency disclosures less confusing, saying homebuyers and sellers often don’t understand the role of their real estate agent, according to a report released Monday.
In a national survey, the Consumer Federation of America (CFA), a Washington D.C.-based association of more than 250 nonprofit consumer groups, found that most consumers believe agents are “always” or “almost always” (50% and 16%, respectively) required to represent the interests of the homebuyer or seller with whom they are working.
This is despite the fact that many agents actually represent the interests of the other party or the interests of neither party in agency relationships such as subagency (when the agent works with the buyer but has fiduciary responsibility to the seller), dual agency (the agent purports to represent the interests of both seller and buyer) and transactional agency (the agent works with both buyer and seller to facilitate a sale but has no fiduciary responsibility to either party).
Agents have a fiduciary responsibility to their buyer or seller client in single agency and to their buyer client in designated agency, when a listing agent recruits the designated agent to work with the buyer, according to the report titled “The Agency Mess: Home Buyer and Seller Confusion and Costs Related to Diverse and Poorly Enforced State Laws About the Role and Responsibility of Real Estate Agents.”
“Today, many homebuyers and sellers do not know whether their agent is representing their interests, those of the other party, or those of neither,” said the report’s author, Stephen Brobeck, a CFA senior fellow, in a statement.
“Given the huge expenditure of a home purchase and the conflict of financial interests between seller and buyer, it is important that consumers know who their real estate agent is actually representing.”
Moreover, the survey found that 55 percent of consumers do not understand agency terms, the differences between them or the implications of each type of agency for buyers or sellers, the report said.
The survey was conducted by business intelligence firm ORC International in October 2018, had 1,004 respondents and had a margin of error of ±3 percentage points.
While every state’s laws require real estate agents to disclose their relationship to their consumer clients, the report said such laws are ineffective, in part because most consumers don’t understand the terms that define agent roles, and the terms are defined differently in different states.
For instance, the term “designated agent” could be defined as above to refer to an agent designated by the listing agent to work with the buyer or could be used to indicate an agent designated to work with either seller or buyer by the broker.
In addition, in some states, the default position is that an agent functions as a fiduciary, working in the best interests of their client, while other states presume that the agent acts as a facilitator, remaining a neutral party.
How agents must disclose relationships also varies by state. Some require disclosure in writing while others only require oral disclosure; some use a standard form, others don’t; and rules vary about the timing of disclosure.
While some states require that disclosures be made early in a transaction, some allow disclosures to be made at closing, long after a client has been working with a particular agent, the report said.
Some agents also appear to be failing to make disclosures in a way that is a clear and understandable to clients, according to the report. More than one-third of consumers (34%) were either unsure if they had signed an agency disclosure form or sure that they had not signed one in a 1999 survey of buyers and sellers from the National Association of Realtors, the report said.
This may be because agency terms are also difficult for agents to understand, Brobeck said in a press conference call Monday. He said some agents have only been practicing for a year or two and are in states where training is “not very rigorous.”
“[States don’t have] very effective monitoring, so even if [agents are] ignorant of the law and not making the required disclosures, nobody ever calls them on it,” Brobeck said.
CFA faulted state real estate commissions for poor enforcement of disclosure laws, noting that fewer than half (19) provide consumers with information about agent roles and responsibilities on their websites.
As a result of the ineffectiveness of disclosure laws, homebuyers and sellers with subagents or transaction agents sometimes mistakenly think their agent is trying to get them, respectively, the lowest or highest sale price, the report said.
Buyers with subagents also often disclose financial information and house price ceilings that the subagents are then legally required to share with sellers, the report added.
“Consumers are harmed by the current agency system both because it is rife with conflicts of interest and because, as noted above, these conflicts are not clearly disclosed to or well understood by consumers,” the report said.
Homesellers may also feel pressured to allow their fiduciary agent to become a dual agent when buyers want to work directly with their agent and may not realize that their agent is no longer solely representing their interests in a double-ended deal, according to the report.
“They also may not understand that a 5 percent to 6 percent commission captured by one agent usually represents very generous compensation for services rendered,” the CFA said.
“[N]o agent can act as a true fiduciary for both a seller and buyer of the same house. Furthermore, serious questions can be raised about whether a fiduciary agent can effectively represent a home seller when the buyer and seller are represented by fiduciary agents from the same company,” the report added.
“However, to maximize business opportunities, many agents desire to represent both seller and buyer in the same transaction, allowing retention of the full commission.
“Moreover, almost all agents are willing, indeed are often incentivized, to work with an agent from the same firm on opposite sides of the transaction. Thus, serious potential conflicts of interest, including breech of confidentiality, are built into the current fiduciary agency system.”
The report described a situation in which a listing agent would be “sorely tempted” to convince a seller to accept an offer of $290,000 from a buyer the agent would also work with directly as a dual agent rather than an offer of $300,000 from a buyer working with another agent.
“In this situation, the buyer also often does not fare well. Listing agents do not always make it clear to buyers who contact them, even when there is a dual agency disclosure, that they are effectively facilitators to buyers, providing no fiduciary representation,” the report said.
CFA pointed to the results of its own mystery shopper survey of agents, conducted earlier this month. Posing as a potential buyer, a CFA researcher called 30 randomly selected listing agents in eight local markets to find out whether the agents would discuss the issue of representation, and 19 of the 30 indicated they would work with the caller but said nothing about representation, according to the report.
“Another four agents alluded to the representation issue but stated or implied they could provide representation. Only seven agents stated or implied that they could not represent us. In sum, more than three-quarters of the agents called addressed the representation issue inadequately. Moreover, several of the agents asked us what we were willing to spend on a house,” the report said.
In the conference call, Brobeck made clear that he was not attributing “nefarious” intentions to real estate agents or the industry.
“I would say it’s a complicated system with conflicts of interest that can tempt agents to act against the interests of their clients,” he said.
CFA’s proposed reforms
The CFA made several recommendations, including that:
- Dual agency be prohibited, and agents should not be allowed to change their role as a fiduciary agent or facilitator during the course of the transaction.
- There should be clear written and verbal communication from agent to consumer at the first “substantive contact” about whether the agent will function as a fiduciary to buyer or seller, or as a facilitator and the agent’s role, should be disclosed to both buyer and seller if the agent is working with both.
- States develop a written disclosure form in consultation with industry and consumer groups that is as simple as possible, using common language and not in small print. The CFA pointed to Massachusetts’ new disclosure form, adopted in 2017, as a possible model.
- States make an effort to enforce disclosure requirements. “State officials have made little effort to enforce the disclosure laws. Violations usually only come to light when agent practices are so egregious that they lead to litigation,” CFA said. The watchdog group suggested enforcement would “be much more effective if strongly supported by the NAR and affiliates,” but that if they refused, state attorneys-general should take the lead.
- Regulators, in consultation with industry and consumer groups, work out rules to minimize conflicts of interest when the same firm represents both the seller and the buyer. “To expand their sales and income, firms desire in-house transactions and provide incentives to encourage these sales. But the incentives bias and limit the range of potential buyers of the property and also the property options effectively available to home buyers,” the report said.
- States approve certain basic duties required of all agents, such as the disclosure of known material adverse facts and reasonable care to non-clients.
“These reforms would benefit both consumers and real estate agents,” CFA’s Brobeck said. “More informed homebuyers and sellers will make better decisions. They will have a higher regard for, and complain less about, real estate agents. And agents will not face the risks and ethical dilemmas of dual agency and undisclosed subagency.”
Asked what NAR thinks of the proposed reforms, NAR President John Smaby did not address any of the specific recommendations, but rather said that the trade group and its 1.3 million members “understand and emphasize the importance of effective consumer protections,” including a “clearly defined relationship between real estate professionals and their clients.”
“While dual agency practices are legal in many states, NAR has consistently worked to encourage professionalism and proper disclosures when working with consumers,” Smaby said in a statement.
“In addition, we continue to strive to improve and modernize consumer protections throughout the industry. As we work toward that goal, NAR and our members remain focused on ensuring relationships between clients and real estate professionals are as transparent and equitable for each party as possible.”
CFA’s report asserted that the current agency system and related consumer confusion play a key role in keeping commissions at a relatively high level because the typical commission of between 5 percent and 6 percent “is based on the assumption that two fiduciary agents, one working for the seller and the other for the buyer, will split this commission. Yet, this is not the case when agents work as a facilitator to both parties (or as a fiduciary to one party and facilitator to the other).
“Since facilitators have less responsibility and liability than a fiduciary agent, they should be compensated at a somewhat lower commission level. But we could find no evidence that facilitators are ever paid lower commissions than fiduciaries. The industry itself has been mum on this issue.”
The report acknowledged that conflicts of interest in regards to agency are somewhat mitigated by “the strong interest of all parties” in the completion of a home sale.
“Sellers want to sell, buyers want to buy, and most agents only receive compensation after a sale. This interest tends to moderate the desire of sellers to receive the highest price, the desire of buyers to pay the lowest price, and the willingness of fiduciary agents to push for either,” the report said.
“This factor helps to explain the lack of conclusiveness of research on whether sellers or buyers tend to benefit from in-house sales.”
CFA’s advice to homebuyers and sellers
The report also provided consumers with advice about dealing with real estate agents. According to the report, consumers should:
- Ask the agent whether the agent will be solely representing their interests (i.e., acting as a fiduciary) throughout the entire home purchase process. They should also ask the agent for a completed form that discloses this relationship.
- Homesellers should request that the agent represent their interests throughout the sale of the property. If they choose to work with an agent who is unwilling to do so, they should ask for a reduction of the commission by 1 percentage point if another agent is involved, or by 2 percentage points if no other agent is involved (i.e., the agent ends up working for both buyer and seller).
- Homebuyers should be aware that many agents will not be willing to act as their fiduciaries. If they still wish to work with these agents, they should request a clarification as to the role of the agent — as a subagent (and fiduciary) to the seller or as a facilitator acting as a fiduciary neither to them nor to the seller.
- If working with an agent who is not their fiduciary, sellers should be cautious about disclosing to the agent the minimum sale price they would accept for their home and buyers should be cautious about disclosing the highest price they are prepared to pay for a property.
- Buyers and sellers working with an agent who is not their fiduciary should consider employing an attorney who will represent their interests during the sale.
- To ensure the greatest exposure to potential buyers, sellers should insist that their home be immediately listed on the local multiple listing service (MLS).
CFA’s Brobeck was a panelist at the real estate competition workshop held in June 2018 by the Federal Trade Commission (FTC) and Department of Justice (DOJ). He criticized the lack of good information in the industry on the quality of agents, the industry’s silence on agent compensation and states’ anti-rebate and minimum-services laws.
Inman has reached out to the FTC and DOJ for comment on the CFA’s report and will update this story if and when we hear back.