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Dual Agency Transactions Can Increase Risks

A dual agency relationship exists one broker handles both sides of a transaction, even if two different agents working in the office represent the buyer and the seller respectively.  Although it is generally discouraged, dual agency is legal in California residential real estate transactions if fully disclosed in writing to both parties.  However, because the buyer’s interest in paying the lowest price necessarily conflicts with the seller’s interest in getting the highest price for the property, it is virtually impossible for a dual agent to fairly represent the interests of both parties.

The problems associated with dual agency are usually considered to negatively impact buyers more than sellers.  Since the seller has elected to list the property with the broker, they likely have a pre-existing relationship in which the seller will tend to be favored.  In addition, they both share an interest in getting the highest price for the property (which results in the highest commission for the broker).

However, circumstances can change, and on occasion a buyer or seller may need to cancel a transaction.  If buyers need to back out of a deal, the consequence they usually face is the loss of their “liquidated damages” deposit, typically a small percentage of the sales price.  In contrast, sellers can be forced to sell their homes against their will (in a lawsuit seeking specific performance of the purchase contract) if the sellers need to back out of a transaction.  Thus, sellers should be just as wary as buyers of entering into transactions that involve dual agency relationships.  In my legal practice, I have personally encountered cases in which the buyers used the threat of the forced sale to demand huge monetary settlements from sellers in exchange for agreeing to allow them to remain in their home, while the dual agents also demanded that sellers pay the full commission for the cancelled sale.

In one particularly painful case, the Seller, a widower with two young daughters listed his $3.5 million home for sale with the Listing Agent who worked for Uptown Broker.  Seller began his search for a new residence to purchase in the area.  Selling Agent, who also worked for Uptown Broker, brought an offer that was substantially below the listing price, which Listing Agent convinced the Seller to accept.  Within a very short time, Seller realized he would not be able to afford the type of house he needed in the same area, and his daughters became distraught when he told them they may have to move away from their friends and attend different schools.  He realized he had made a terrible mistake, and advised his Listing Agent, in confidence, that he had changed his mind and told her why. He instructed her to provide written notice to the Buyers to perform all contingencies within 48 hours, a fairly routine document, but also a pre-condition necessary to allow Seller to cancel the sale.

In retrospect, it was obvious that Listing Agent had immediately advised Selling Agent that Seller was going to cancel the sale the moment the 48-hour deadline elapsed.  A flurry of activity ensued.  Selling Agent obtained a report on the physical condition of the property identifying numerous alleged deficiencies in the property, and faxed it directly to Seller noting “you will now have to disclose all this to anyone else you try to sell the property to.”  As soon as the 48 hours elapsed and all contingencies had not been removed, Seller instructed his Listing Agent via email (as she was suddenly unavailable via cellphone) to take all necessary actions to cancel the sale immediately. 

However, Listing Agent claimed that the email was not read until several hours later, during which time Selling Agent’s clients succeeded in removing the remaining contingencies.  Thus, although he had been in escrow less than a month, Seller ultimately agreed to pay hundreds of thousands of dollars to the Buyers and pay the full commission to Uptown Broker (approximately $180,000 on the $3 million cancelled sale).  The risk of being forced from his home was more than he could bear to face, and the Listing and Selling Agent (and the Broker) knew it.

This situation is not the norm.  Most real estate agents are honest, diligent and do their best to protect their client’s interests.  However, in my opinion, entering into a dual agency transaction increases the likelihood of collusion by the agents in order to push deals through, or to the exchange of confidential information (even accidentally or subconsciously) that has the same effect.  In my experience, I find that Brokers often downplay the very serious risks of the dual agency relationship to Buyers and Sellers when presenting the written disclosure form for their signature.

If you are comfortable with your broker promising to do the best for both you and your opponent, then go ahead and enter into a dual agency transaction.  If, however, you want your broker to have only your best interests in mind and do their best to fight for what you want against all comers, then make sure the listing agreement or buyer’s agent agreement you sign specifies that you will not accept any dual agency relationships in your transaction.  Never forget dual agency is not a mere formality, it is a choice for you to make which can have very serious consequences.

Written by Mary Gram

Mary E. Gram, Esq. is a Senior Counsel with Messina & Hankin LLP in the Temecula Valley office. She has more than 20 years of experience in litigating a broad range of business related cases and appeals.

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