Buyer beware – of your Realtor

by Michael Walsh08 May 2020

During a typical home sale, the listing agent commits to negotiate for the highest possible price. The buyer's agent commits to negotiate for the lowest possible price. That can work nicely for both sides of a deal – unless those agents happen to be the same person.

How does a single agent negotiate for parties with opposing financial objectives? This is the dreaded ‘double ending’ that CBC Marketplace exposed in a documentary about shady behaviour on the part of real estate agents. It's a pretty obvious conflict of interest, one guaranteed to benefit the agent at the expense of buyers and sellers.

But what about a situation where the buyer's agent happens to work at the same brokerage as the listing agent? It happens every day. To be clear, these are two different agents, ostensibly running distinct businesses, but they work for the same company.

This is exactly the same conflict of interest as double ending, but in this situation, it's called ‘dual agency.’ The brokerage – not the agent – has signed two separate contracts for representation.  With one of them, the seller expects the brokerage to negotiate for the highest possible price. With the other one, the buyer expects the brokerage to negotiate for the lowest possible price. How the heck is that supposed to work?

Here's how real estate brokerages make it work: The lawyers who drafted the standard contracts for representation anticipated this conflict of interest and disclose it right in the contract itself, cleverly hiding it in plain sight. When the agents involved in a transaction are employed by the same brokerage, the standard contract stipulates that the agents will remain impartial with respect to the negotiation. Neither agent will provide their client with information or opinion that is intended to benefit their client at the expense of the other party to the negotiation. In other words, they won't negotiate on behalf of their client.

So why would a savvy investor like yourself sign a contract for representation if you thought your agent would withdraw negotiating services in the middle of the transaction? You wouldn’t. Not willingly, anyway.

Sure, the contract discloses the possibility of dual agency, but does the consumer understand the probability of dual agency actually occurring or what it might mean in terms of the price paid or received? Not a chance. Let’s have a look at these issues.

The potential fallout
First, what is the probability that dual agency occurs? When a brokerage has a large share of a community’s listings, the probability is pretty high. Some brokerages employ hundreds of agents and cover massive territories. A lot of investors don’t typically take note of the name of the brokerage where their agent is employed, but they should. The more prominent the brokerage, the higher the probability that the buyer’s agent and the seller’s agent will be working for the same company.

What about the impact on the price paid or received? Real estate agents are trained to negotiate, but if they have to withdraw that service, what is the financial impact on their clients? Happily, there is independent research on this. The efficacy of an agent during a negotiation has been measured as anywhere between 5% and 10% of the price of the home – so on a transaction worth $1 million, dual agency can make a difference of $50,000 to $100,000 on the final price that is paid.

For investors conditioned to eye the bottom line, there is another important financial consideration to make: If your agent won’t be negotiating on your behalf, should they be paid the same amount as if they were truly and fully representing their client’s financial interests? Shouldn’t the standard contracts for representation include a fee reduction in the event of dual agency, accounting for the reduction in essential services provided? An educated consumer will always ask their agent for this simple amendment to the standard contract.

Paying for a service that isn’t delivered is bad enough, but things can get much worse. What if your agent ignores the law – essentially doing you a favour – and gives you advice on the price and/or terms of the offer in spite of being caught in a dual agency? That would not only be a breach of contract law, it would also be a breach of agency law. Penalties could include fines and/or the rescission of an otherwise firm, and potentially lucrative, deal.

The fine print
So how can you be sure that an agent will actually have your back? Before signing anything, read your contract for representation. Every word of it. Then have your lawyer review the agreement. (You're going to use a lawyer to transfer title anyway; it shouldn't cost you anything for this extra service. Most lawyers will gladly throw it in with no charge.)

Ask for your lawyer to explain the implications of dual agency. Then get a referral to a brokerage that will guarantee single agency. The costs of dual agency are simply too high to take a chance that it might happen to you.

 

Michael Walsh is president and broker of record of Exclusively Buyers, an Oakville, Ontario-based real estate brokerage catering exclusively to the needs of homebuyers. For more, contact him at 289-834-4440 or [email protected].

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