Dual agency disclosures fail homebuyers

A look at some of the worst-offending states

Flickr photo courtesy of Son of Groucho.

Although some states ban the practice, called dual agency, in which the same real estate broker represents the buyer and seller in a real estate transaction, most states have settled for a kind of disclosure Band-Aid that doesn’t work well for consumers.

It’s a little like the warnings on cigarette packets about the dangers of tobacco that really don’t make much difference to those who really want to smoke.

I’m told that more states used to ban dual agency, but real estate associations lobbied hard for the passage of regulations that permit this “double-ending” as it is also referred to, in some form. So what we have ended up with is a kind of cigarette packet of regulations: “Yes, you can have dual agency (or some variation of it), but here’s your warning” — which is most often ignored.

The way it now works in some states: An agent or broker has to reveal to the homebuyer the possible ways that the buyer will be represented, including dual agency. The buyer signs a disclosure statement and everyone pushes on.

The problem is — and all real estate agents understand this — when consumers find a house they want to buy, they become so emotionally involved in the purchase that they barely listen to the legalities because they are focused only on two things: price and purchase.

Besides, they may end up signing many disclosure documents, so no matter what the documents say, it all gets lost in the shuffle of papers.

“A consumer will do much more due diligence and much more research buying a car, which is 1/20 the value and guaranteed to depreciate compared to a property,” said Tim Walters, a principal with The Home Buyers in Minneapolis. “They do much more research on car buying than on who will represent them in buying a home and what is the best way to purchase a house.”

Secondly, even if a consumer does, perchance, look at the disclosure, the wording is often so obtuse it’s really hard to discern the point being made.

Walters sent me the Minnesota disclosure, which begins: “Minnesota law requires that early in any relationship real estate brokers or salespersons discuss with consumers what type of agency representation or relationship they desire.” I’m not sure how to interpret the meaning of “early,” here, and the wording seems vague.

Walters said that in Minnesota disclosure is to be discussed at initial contact, though in practice that may not be the norm.

“The agency agreement is a legal-sized document of a page and a half and it is really remarkable how it is skimmed over,” he said. “You don’t go over it in detail, because it even says on the document that this is not a contract, just a disclosure.”

In Arizona, N. Mark Kramoltz, an attorney and real estate broker, abhors dual agency, calling it a “fiction” invented by the real estate industry to double-dip, or win commission for both sides of a sale.

“This is the biggest purchase of people’s (lives) and they deserve to have the best representation, the utmost loyalty and confidentiality, and dual agency automatically undercuts that,” he said.

Kramoltz is not a fan of Arizona’s disclosure form, which was created by the state Realtor association. “It says if there is going to be dual agency, then both the buyer and seller have to consent, but it doesn’t mean informed consent — only that they have to sign a document. The form gives weak notice that dual agency is not in the best interest of buyer and seller.”

Kramoltz said many agents now represent themselves as buyer’s agents, but will also take listings.

New Jersey requires disclosure at first significant contact, said Paul Howard of www.njhomebuyer.com and a member of the National Association of Exclusive Buyer Agents.

The big loophole in New Jersey is that brokers can advertise as being buyer’s agents, but they work for large companies that have listings.

The New Jersey disclosure statement, titled, “Real Estate Relationships,” does state that “to work as a dual agent, a firm must first obtain the informed written consent of the buyer and the seller,” but people who want to be dual agents minimize the effect of it, said Howard.

“I was in an online discussion and an agent commented that she explains the advantages of dual agency to her clients,” Howard said. “My reply was, ‘The state law requires that you tell what the disadvantages are.’ ”

The problem is a lack of proper disclosure, said John Sullivan, vice president of Buyer’s Edge Co. Inc. in Silver Spring, Md. “If consumers were more aware of their choices, there wouldn’t be a problem with dual agency, because no one in their right mind would do it.”

Sullivan works in Virginia, Maryland and Washington, D.C.

“The D.C.-area disclosure is probably the worst in the nation,” he said. “It says nothing more than the dual agent represents the buyer and seller. Virginia says much the same thing, with the addition that you might be entitled to other rights under the law, so here’s a citation — go look it up. Maryland’s law is so confounded it actually permits an agent working for a brokerage to perform functions that a broker cannot perform.”

As with other states, in Maryland and Washington, D.C., disclosures are to be made at the first scheduled meeting, which is always a problem. As the National Association of Realtors’ studies in the first decade of this century show, only about 30-35 percent of homebuyers received disclosure information in the first meeting, and as many as 22 percent didn’t received any disclosure at all.

Even before the recession, buyer representation lawsuits started to multiply significantly, according to a legal scan by NAR.

“State real estate associations lobbied for the passage of laws permitting dual agency,” said Bruce Hahn, president of the American Homeowners Grassroots Alliance. “But, it was short-sighted on their part because of all the problems that have (arisen), bad publicity, and damage done to the profession’s reputation.”

Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, “After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade,” has been ranked as a top-selling real estate investment book for the Amazon Kindle e-reader.