Dual Agency and the 10,000 hour Rule; The Rules Have Changed

Originally Published 6/9/22 amended 8/14/24

I chuckled to myself recently seeing a post on Linked In where a real estate broker proudly boasted he was honored to represent both the Buyer and Seller. He “Double Ended” his recent transaction.

It never ceases to amaze me how some Real Estate agents are able to circumvent their Fiduciary Obligations and worse, how regulators seem to allow it. This is one of the greatest detriments to our profession and might be exacerbated by the traditional compensation structure and a lack of experience.

Earlier this year, the National Association of Realtors reached a landmark legal settlement. “Two main changes are happening now. First, listings in local databases called multiple-listing services will no longer show whether a seller is offering to pay a buyer’s agent, or how much. Second, buyers will be required to sign agreements specifying how much their agents will be paid. Buyers will do this before they start touring homes with agents.” New Real-Estate Commissions Rules Are Here: What Home Buyers and Sellers Need to Know - WSJ. While this is just the beginning, it has initiated the discussions and put a focus on an industry that for years has been allowed to blur the lines of Fiduciary Duties to clients. For the client, this will complicate things initially until reality sets in and it becomes obvious, they have the power to decide.

This conflict of interest was recognized long ago by the ancient Greeks with the Latin phrase,. “Caveat Emptor”,or let the buyer beware. This doctrine proposes to place the burden to reasonably examine property before purchase and take responsibility for its condition, on the buyers. A corollary of caveat emptor is “Caveat Venditor”, or let the seller beware. In some real estate transactions, the interests of both are sometimes compromised.

Background

A Fiduciary is legally obligated to act in their client’s best interests instead of their own. Attorneys, Accountants, Bankers, Accountants and Board Members are all examples of fiduciaries, because they’re legally required to maintain the best interests of their client ahead of their own best interests. Real Estate Agents somehow get a pass on this obligation.

Agency in its most basic definition is defined as “one who is authorized to act in the place of another, specifically as an official business representative.” This definition is where real estate agency has its roots.

How is it possible then, that the State Department of Real Estate allows or much less endorses dual agency? They, likely with the encouragement of lobbyists, have come up with a litany of terms to blur the lines of Fiduciary Obligations adopting contradictory defined agencies such as, Limited Dual Agency, Designated Agency, Cooperating Agency, Subagency, and the list goes on. None, however, are Fiduciaries in the purest sense of the law of agency.

Compensation/Unintended Consequences

Generally speaking, the majority of Real Estate Agents, are focused on residential markets where the Seller lists their home with the listing agent and pays the agent a commission on the sale of their property. Previously, iIf another agent participates, typically representing the buyer, the listing agent splits their commission with the buyer’s agent. This creates a financial incentive for the listing agent to act as a dual agent, or “double end” the deal which violates their Fiduciary responsibilities to their client, who as part of the listing agreement has unknowingly waived their fiduciary rights. In response agents are motivated to act as dual agents and keep 100% of the commissions for themselves. In addition, Multiple Listing Services (MLS) have regulated memberships and require members to list a property immediately after a listing is signed, thereby leveling the playing field to access to properties between seller and buyer agents. Also, in an effort to protect the public from a litany of legal cases involving agency, many States are requiring separate agency disclosure documents to be presented and signed by the client. Nowhere do the documents disclose that Dual Agency is an Oxymoron.

An article from 2022in the Wall Street Journal highlighted some of the issues with the traditional approach coming off the heels of a Federal investigation into the real estate compensation issue. Perhaps the most logical and profound comment by researcher Professor Keys states that “allowing buyers and sellers to negotiate Realtors’ fees separately would reshape the market. Because the price for the buyer’s agent is rolled into the price for the seller’s agent, the commission is not a function of the buyer agent’s experience, effort or the hours they worked.”. In other words, the standard arrangement of the buyer’s and seller’s agents being paid from the same pool of money calculated as a percentage of the transactional value disadvantages both the buyer and seller. By not separating agency, fiduciary obligations to the individual client are compromised creating both a conflict of interest as well as preventing an individual’s ability to negotiate fees based on value-add components, such as experience, education, due diligence, project management, etc.

Professor Keys, goes on later to clarify that, “thinking about compensation as an a la carte menu is really useful because it shows real-estate agents provide value, and the question is how to price that value: Negotiating the terms of an agreement costs Y, drawing paperwork costs Z. By breaking down components, there is a sense of where the value is added from real-estate agents and where buyers and sellers overpay. Once services are converted into those units, it’s possible to think about ways to automate, substitute and compete on each of those different elements.” And I would emphasize negotiate compensation based solely on the value a client receives.

This brings me to the experience quotient.

The 10,000 Hour Rule

The book Outliers by Malcom Gladwell applies to everyone and asserts that the key to achieving true expertise, to becoming a Top Performer, is simply a matter of deliberate practice, in the correct way (as opposed to mindless repetition), for at least 10,000 hours (full time, 2,000 hours per year for 5 years or more accurately, eliminating the mindless repetition results in 1,000 hours for 10 years) The overwhelming majority of experts who become top in their field have spent a minimum of 10 years acquiring and honing their skills.

The truthfulness is, we will either give one or another undivided allegiance or fall short of the mutual commitment expected. Someone trying to serve two masters is either traitorous or ineffectual, especially if material gain is involved.