Impulse-buying a home may not happen frequently, but it can happen. You might stroll through an open house and inadvertently stumble upon your dream home. Without a real estate agent to represent you, what comes next? The seller’s agent may offer to help you put a bid together, but is that allowed?
The answer is: sometimes.
In real estate transactions, dual agency occurs when the same agent represents both the buyer and the seller. Even when permitted, it’s smart to proceed cautiously before agreeing to a dual agency transaction. Due to the potential conflict of interest, some states have issued outright bans on this practice. Others have stringent laws governing situations where dual agency in real estate may occur.
Why is dual agency restricted or prohibited?
Dual agency raises the potential for conflicts of interest in real estate transactions. Both buyers and sellers lean on real estate agents for advice. But what if the right advice for the seller is not the best advice for the buyer? An agent representing the seller and buyer may have difficulty remaining impartial when attempting to do what’s best for everyone.
In dual agency transactions, the agent generally earns a double commission on the sale – both the seller’s and the buyer’s portion. With this motivation, they may want to prioritize a deal with their own clients while excluding offers from other willing buyers.
States Restricting Dual Agency
As a result of the potential for conflicts of interest, some states do not allow agents to practice dual agency. Other states place restrictions on dual agency, requiring the parties involved to give their consent in writing before the transaction occurs.
Florida is an example of a state with strict laws prohibiting dual agency. Dual agency is also illegal in some states, including the following:
- Alaska
- Colorado
- Kansas
- Maryland
- Oklahoma
- Texas
- Vermont
- Wyoming
New York requires written consent before a dual agency transaction. This means that a real estate agent in NYC must obtain the acknowledgment of both the buyer and seller showing that they agree to the dual agency relationship.
Even if your state permits dual agency, it’s wise to ask about current regulations before agreeing to an arrangement. You can check with your state’s governing board, such as the Department of Real Estate or Real Estate Commission.
Dual Agency vs. Designated Agency
Designated agency occurs when the selling agent refers an unrepresented buyer to another agent to assist with a real estate transaction. A New York state-licensed real estate broker may have many agents working out of one office. In a designated agency situation, the selling agent refers the buyer to another agent, possibly someone working for the same broker. This may reduce the chance for a conflict of interest. However, when agents work for the same broker, they may have a stronger interest in closing the transaction between their clients rather than potentially entertaining outside offers.
In addition to limiting dual agency, some states may also restrict the practice of designated agency. In Florida, which does not allow designated or dual agency, real estate brokers can become transaction brokers. These brokers do not have a fiduciary responsibility to the buyer and seller—they simply exist to facilitate the home purchase transaction. As such, they will not offer advice or negotiate the terms of a deal.
How Dual Agency can Benefit Buyers and Sellers
Even when restricted, dual agency may sometimes benefit buyers and sellers. Give consideration to the following factors when presented with the opportunity to enter this type of agreement.
Potential for lower commissions
When a real estate agent represents both the buyer’s and seller’s side of a real estate transaction, they may be willing to negotiate their commission. Since that singular agent receives a double commission, a buyer or a seller can use that argument to convince the agent to go from a standard 3% commission down to 2.5% or 2%.
More efficient negotiation process
When the same agent works for both parties, they may have the best information and the ability to offer insight into what the buyer and seller must do to successfully close the sale. While the agent should remain neutral and not favor any particular side, they may know what a seller looks for in an offer and provide that advice to the buyer to streamline the buying process.
Access to an Agent Familiar with the Local Market
A dual agency transaction may be the best option in transactions requiring specialized knowledge or when the buyer or seller prefers an agent highly familiar with the local real estate market. In areas with fewer real estate brokerages and agents, one agent may represent both parties simply because they are significantly more knowledgeable about the area.
Reasons to Avoid Dual Agency
Restrictions on dual agency serve to protect both the buyer and seller. As such, you may want to avoid this business relationship for several reasons and find a listing agent or a selling agent to represent you.
Sub-optimal Pricing
With an agent representing two parties, one or both sides may not receive the best pricing. Agents may steer sellers toward an offer from a buyer they currently represent, even when better options abound. In this way, sellers could miss out on the potential to receive a higher offer. On the buyer’s side, the agent must press them to go for the house they’re representing more than they would on another comparable property in the area.
Potential Conflict of Interest
An agent in a dual agency transaction may struggle to remain impartial. Rather than properly advising both parties, they may withhold pertinent information for the protection of the buyer or seller. Agents may also rush the process in order to facilitate a quick sale before other offers come in. During contract negotiations, the agent may not be as motivated to push one party’s stance over the other.
Working in a dual agency agreement
If you decide to enter a dual agency agreement, take the time to research your state’s regulations. Gain an understanding of the local housing market to ensure you receive fair representation. As a seller, search local listings and recent sales information to determine what your home is worth. Buyers should know how much they can afford and what type of house falls into their budget. Make sure that each party in the transaction has consented to dual agency and follow the law to ensure a successful closing.
Finding a real estate agent outside of a dual agency agreement
Many times, buyers and sellers can avoid a dual agency agreement. In smaller markets, sellers can still talk to their agent and ask them to list the home online. This will guarantee wider exposure and could generate additional interest in the property. Clients should ask for updates on all incoming offers and potential offers to make sure the real estate agent communicates with everyone who expresses interest in the home.
As a buyer, if you find a property through the seller’s agent, but do not want to enter into a dual agency agreement, take steps to find someone else to represent you. Start by asking for referrals from friends or family members who’ve recently bought or sold a house. Find information on local buyer’s agents online. Search for a real estate agent familiar with the neighborhood where you’d like to buy and interview several agents before selecting the person you’re most comfortable working with.
States enact dual agency and designated agency restrictions to guarantee fair real estate transactions for all parties. If an agent informs you of the possibility of a dual agent situation, read the consent form carefully before signing. If you still feel uncomfortable moving forward, find another agent to represent your interests.
Conclusion
A dual agency agreement can benefit clients who wish to quickly and efficiently close on a home. However, several states restrict this type of real estate transaction as a single agent may have a conflict of interest and prove unable to move through the deal without any biases. If you’re interested in a home that requires a dual agency process, you should carefully consider the terms and ensure you feel confident moving forward. In most cases, you will still be able to find another home with a standard real estate agreement where you work with either a seller’s agent or a buyer’s agent.
