Understanding Different Types of Real Estate Agency Arrangements
If you have looked into buying or selling a home, you will have quickly discovered just how many people are out there offering to help. It can quickly become confusing as you try to understand who represents who, who is helping who, and where do you fit into it all.
Whether you are buying or selling, you want to know that your best interests are being represented by the person you choose to assist you.
Unfortunately, many consumers do not know who represents who in a real estate transaction. For this reason, I am going to educate you, so you’re better equipped to make smart decisions when buying or selling a home.
Real estate agents tend to operate in three ways:
When you start communicating with a Realtor, you need to verify where his or her loyalties lie before you start giving sensitive information – like how much you are willing to pay for a home.
Arrangements between real estate agents and clients are explained in depth below:
What is a Seller’s Agent
Also called a listing agent, the seller’s agent works for the person selling the home. The agent will list the home, hence the name, and will work to find buyers and eventually sell the home. The owner of the home typically pays the seller’s agent a portion of the sales price.
If the seller’s agent finds buyers without an agent, he or she may send another agent from the same real estate firm to represent the buyers. Or, the buyers may move forward with no representation. In this circumstance, the buyer would be “working” with the seller’s real estate agent. The agent, however, would have complete allegiance to the seller in all aspects of the transaction.
A seller’s agent owes the seller undivided loyalty, reasonable care, obedience to lawful instruction, disclosure, confidentiality, and accountability. A seller’s agent must put the seller’s interest first. They must attempt to negotiate the best price and terms acceptable to the seller. Many people wonder what does a listing agent do?
Take a look at the summary of what you should expect from an exceptional seller’s agent.
What is a Buyer’s Agent
The buyer’s agent works exclusively for the buyer, not for the seller. Buyer’s agents can be quite helpful for buyers who want to find the best home at the best price because the buyer’s agent has a lot of resources at his or her disposal that the average buyer does not.
Usually, the seller pays the buyer’s agent for his or her services called a co-broke fee, but it is also possible that a buyer could pay a buyers agent in some circumstances. The perfect example of when that could happen is if the buyer’s agent locates a for sale by owner property that is a perfect match for the buyer. Buying a for sale by owner without a real estate agent can be risky for some reasons.
In a buyer’s agency relationship, the agent owes the buyer undivided loyalty, reasonable care, obedience to lawful instruction, disclosure, confidentiality, and accountability. Just like seller’s agency, the real estate agent must fight hard to negotiate the best price and other terms for the buyer. Here is an explanation of what a buyer’s agent does for their clients.
What is Dual Agency
Dual agency is a controversial arrangement that has been made illegal in many states. With dual agency, a real estate agent will represent both the buyer and the seller. Most states require that a written agreement be signed by all parties to ensure that the agent serves the best interests of both parties.
The problem with dual agency is that it is quite impossible for a single agent to serve the best interests of both a buyer and a seller. The buyer wants to buy the home for as low a price as possible. The seller intends to sell the home for as high a price as possible.
These two goals are in conflict with one another, and the agent cannot seek both of them at the same time.
In fact, some states have rules that say that the agent cannot do anything that works against either client – which of course means that he or she cannot do anything at all, for either party. The agent essentially becomes a neutral party or “just an order taker.”
Dual agency is a horrible arrangement for both sellers and buyers. If you are selling a home one of the biggest factors in choosing a real estate agent is to get sound advice. When you accept dual agency, you are giving that up. The agent you hired is no longer able to give you advice because it’s, in fact, ILLEGAL for them to do so.
One of the biggest issues with dual agency is the fact that many real estate agents don’t know how it works. They are completely in the dark about what they can and cannot do when they take on this role.
Another segment of agents know exactly how dual agency works, but they want their clients to agree to it even though there is no benefit for THEM to do so. Why? The only person that benefits from dual agency is the real estate agent!
If buyers and sellers actually understood the dynamics of dual agency, they would never agree to allow it. Unfortunately, they do not understand, and the person who’s explaining it to them is the agent who will benefit from them agreeing to it.
A real estate agent who tells you there is nothing wrong with dual agency is thinking about one thing – their respective wallet or purse! There is a reason there are more lawsuits against agents who practice dual agency.
The bottom line is you should always have an agent that is working for you and only you. Any real estate agent who doesn’t take the time to explain agency law properly deserves to be fired!
What is Designated Agency
Many real estate firms work with both buyers and sellers. To ensure that both parties are served as well as possible, these firms will designate an agent to work for the buyer and an agent to work for the seller.
These designated agents serve in the same capacity as buyer’s agents and seller’s agents, working exclusively for the interests of their specific client. Only your designated agent works for your best interests.
What can be confusing is the fact that some states call dual agency and designated agency the same thing. For example, in California when two agents from the same office each represent a buyer and seller they call this dual agency.
What you need to understand is that single agent dual agency and designated agency are like night and day. In single agent dual agency, the real estate agent is beholden to nobody. In designated agency both the buyer and seller have representation.
Just like in seller’s agency and buyer’s agency each agent provides their respective client with undivided loyalty, reasonable care, obedience to lawful instruction, disclosure, confidentiality, and accountability.
Aside from the fact that some states call dual agency and designated agency synonymous terms, they are very different. This is why it is vital to understand agency law in your state.
In a designated agency arrangement, the commission the seller pays to his or her agent is shared by both agents.
What is Sub-agency
Some states allow an arrangement where agents can work for seller’s agents as sub-agents. These sub-agents are paid out of the commission paid to the seller’s agent.
If you find a home you are interested in and call an agent, a real estate agency or some other party, you will most likely be interacting with a seller’s agent. Sometimes you may be interacting with a subagent, who is working for a seller’s agent.
Just because a person offers to show you a home for sale does not mean you are meeting with a buyer’s agent. It is critical that you clarify who the agent represents before you start communicating seriously.
You do not want to give away any information that would compromise your ability to get the price you want for the home. Operating under the assumption that an agent works for you also makes you more vulnerable to persuasion that may not be to your benefit.
What is a Facilitator, Non-agency or Transaction Brokerage
There are some situations where you may encounter agents that are not working for the buyer or the seller but are still facilitating the transaction in some way. If the agent is facilitating your transaction, but not representing you as an agent, then he or she is free from the standard obligations that a buyer’s agent or a seller’s agent would have.
The facilitator is usually still expected to treat you respectably, but would not have any obligation to keep confidence with only you. When working with a facilitator, they will assist in reaching an agreement.
The facilitator and the broker with whom they are affiliated with, owe the seller and buyer to represent the property honestly and accurately by disclosing all property defects. They must also account for any escrow funds.
In many states, unless otherwise agreed, a facilitator has no obligation to keep information obtained by a buyer or seller confidential. Florida is the most well known transaction brokerage state.
Protecting Your Best Interests
Before you ever start working with a real estate agent, be sure you ask about what you are getting into. You have a right to inquire whether the agent is a buyer’s agent, seller’s agent or some other type of agent, and you want to know where his or her allegiances lie.
You should also understand when hiring an agent that there are skill differences between seller’s agents and buyer’s agents. Some agents are excellent working with sellers. Some are just as good working with buyers. Don’t assume every agent has the same skill sets.
If you are selling a home, it might make sense to hire an agent who does the majority of their business working with sellers. Without a doubt, many people make the mistake of hiring the wrong real estate agent.
In many states including Massachusetts, a real estate agent is required to explain how agency works. There is a form that buyers and sellers must sign called an agency disclosure form. The agency disclosure forms spell out each type of agency. The buyer or seller is supposed to sign this form acknowledging two things – who the agent is working for and how agency law works.
The whole point of the form is to prevent either a buyer or seller from not understanding who represents who.
Your transaction is a major life decision, and a major financial transaction, so you want to be certain you are working with someone that will protect your specific interests.
Generally speaking, if you are a buyer, you want a buyer’s agent. If you are a seller, you want a seller’s agent. Designated agency can work to your benefit in most situations, and you may be forced to deal with a sub-agent at some point. However, try to avoid dual agency arrangements, and remember that a facilitator has no obligation to you.
Above all else, when buying or selling a home make sure you understand how agency works in your respective state.
Hopefully, you now have a better understanding of how agency laws work.
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