Real Estate Matters—Conflicts of Interest

Although the practice is completely legal and widely accepted in California, it seems impossible for one real estate agent to zealously represent both the buyer and the seller in the same transaction, even when the situation is properly disclosed. Simply too much conflict of interest exists.

Nevertheless, many agents are tempted by the thought of getting twice the commission from the same transaction, and many clients accept this practice, not realizing how much more other agents’ clients might have been willing to pay. In practice, some agents even offer a commission discount if the sellers pick their offers. This is a violation of the rules that apply to Realtors® if not properly disclosed to other interested buyers in advance in the MLS, which is rarely done. A good attorney would cringe at the notion of representing both the plaintiff and the defendant on the same case, yet many real estate agents represent both sides without even blinking an eye.

Fundamentally, there are three problems with “double-ending” a deal. First, a good agent knows a lot about the client’s situation and has access to a lot of confidential information. Second, an agent cannot possibly fight for the highest price for the seller while also advocating for the lowest price for the buyer. Third, there is a risk that a listing agent will not do everything possible to bring in competing offers when that agent already has a buyer.

The underlying conflict stems from the commission model that is widely used in the real estate industry. Most agents successfully close only a limited number of transactions per year, but they are paid extremely well when they do make a sale. Thus, the difference between two transactions and three transactions has a material impact on an agent’s annual income. You must also consider that much of the first sales commission goes towards an agent’s business expenses, such as monthly fees to the affiliated office, dues to MLS and Realtor® associations, and advertising to get new clients. Do the math and you will see why so many agents are willing to represent both the buyer and seller. A less obvious problem occurs when a listing agent finds a buyer and then gets a friend to write up the offer, often taking a large, and generally undisclosed, referral fee. In many ways, this is an even worse set-up because the sellers do not know they should be on guard.

One problem that makes it hard to fix the flawed dual agency situation in California is the definition of dual agency itself. Any transaction in which the listing agent and the buyer’s agent are licensed under the same managing broker is classified as dual agency. This may be overly broad because, in most offices, the agents are independent contractors who operate with very little interaction. Put another way, independent agents in a particular office compete against each other in the same way they compete against agents who pay to be affiliated with another office. Generally, there is no financial incentive for an agent to accept an offer from another agent in the same office unless the listing agent referred the client. However, there is a large incentive for unethical conduct when an agent receives commission (or a referral fee) if a personal client gets the home.

Most agents are good people, but the commission-based model creates the temptation to put their finger on the scale. By way of example, assume a home has been on the market for a few weeks. Three somewhat interested parties circle the opportunity, then one party decides to submit an offer. A good agent would inform every interested party to stir up some competition and generate a higher price, but those calls may never be made by a listing agent who is submitting an offer for a personal client. At its core, the problem is that the agent has two clients with directly opposing interests. On the one hand, the agent should be doing everything they can to get their buyer the home for the lowest possible price. Naturally, that would include avoiding competition that would drive up the price so they would be influenced not to make the calls. On the other hand, the agent should be doing everything possible to get the seller the highest possible price, which would include updating all other agents. Clearly, there is a conflict that prevents the agent from doing what is best for both clients.

Short of lobbying to get the law changed, here are a few ways wise clients may protect themselves:

• Make sure you get a copy of every offer that is submitted, including the buyer’s agent’s name and contact info, along with any correspondence.

• Ask that any offers submitted in person are also emailed so there is an electronic record.

• Ask for the name and phone number of every agent who downloaded the disclosures.

• Request a log of the listing agent’s follow-up with all interested agents.

• Require written disclosure of any commission, referral fees, or other financial incentives to the listing agent based on the acceptance of any particular offer.

Generally, sellers get the short end of the stick when it comes to dual representation, which may cause buyers to conclude they will have a competitive advantage if working with the listing agents. Initially, this sentiment is logical, but you must ask yourself, “Do I really want to trust this agent to help me when I am attracted to the agent only because I think this agent might mess over the other client?”

Another latent problem that comes up is that most agents represent both buyers and sellers at the same time. Unfortunately, most offer dates are set for either Wednesday or Thursday in this area. Therefore, some agents find themselves scrambling to get an offer on another property ready on the same day that they are accepting offers on one of their listings. While this isn’t exactly a conflict of interest, it certainly can create a conflict of time.

At DeLeon Realty, we keep complete separation between the listing side of the company, headed by the author, and the buyer side of the company, headed by Ken DeLeon. In fact, the two teams are located on different floors and have separate support staffs. At DeLeon Realty, we believe all clients deserve complete loyalty from the person with whom they decide to place their trust.