You need to know a little something about the laws of Agency

If you want to purchase a property in Santa Rosa, Windsor or the surrounding areas, chances are very high that you will be dealing with the seller’s agent (the listing agent). The NAR research shows that 93% of all open-market real estate transactions are done through the use of a real estate agent. This includes the one you are excited about too.

Because you are going to be dealing with a real estate agent, you should know a little bit about the laws of agency, the different types of agency and the agent’s loyalties. So, here we go…

Agency and Loyalty in a California Real Estate Transaction

One of the fundamental concepts in real estate relationships is the concept of “Agency”. California licensed real estate agents are governed by the California Department of Real Estate and the laws of agency. The California laws of agency require that an agent must maintain a fiduciary responsibility to their client.

A fiduciary responsibility is a much higher level of loyalty than simply acting “honestly and fairly”. A fiduciary responsibility requires that every action the agent performs must be in the best interest of their client. This is above and beyond “Honest and Fair”. This responsibility goes so far as to require that even if a particular course of action is NOT the most advantageous action for the agent, but IS in the best interests of the client, the agent must act for the benefit of the client. With everyone other than the client, the agent is only required to act honestly and fairly, but NOT NECESSAIRLY in the “other person's” best interest.

The key point is that when there is a conflict between the best interests of the client and the best interests of “other people” in the transaction, the agent is required by law to act in the client’s best interests. So all this begs the question: “Who is the client”? Well, it ‘aint Batman or the Lone Ranger, so read on…

Three types of agency; Single, Separate and Dual for a Santa Rosa real estate agent

Before we answer the “who is the Client” question, let’s look at an example. Suppose you want to buy a house in Santa Rosa or Windsor without the help of an agent. You look through the newspaper, attend some open houses, find a home that you like and want to make an offer. Because the vast majority of homes for sale in Santa Rosa or Windsor are offered through a listing agent, in these cases your offer would have to be presented to the real estate listing agent. By law, the listing agent must inform you that they will be acting in one of two ways; as a Dual Agent (representing BOTH you and the seller), or as the Seller’s Agent only (you do not have an agent; you are on your own).

There is also a third agency scenario called “Separate Agency” where you get your own agent before the offer, and this type of agency is discussed in the last section of this article.

Single Client Agency in a Santa Rosa or Windsor Real Estate Transaction

So, you are making an offer to buy a home in Santa Rosa on your own, and the only agent involved is the seller’s listing agent. This smarter-then-average agent knows dual agency stinks and so tells you that you are on your own, that they are NOT going to represent you. You are NOT the Client, the Seller is the Client. Let’s assume a “best case” scenario where this agent is completely honest and ethical, they could even be a friend of yours.

Due to the laws of agency, no matter how fair the agent wants to be, if there is a conflict between what the agent knows is in YOUR best interests and what is in the seller’s best interest, the agent is required by law to act in the seller's best interests, not yours. Even your friend would legally have to act for the benefit of the seller. With the complexities of real estate transactions in Sonoma County, you really want a professional acting in YOUR best interests, not the other person’s. In my opinion, single agency is the worst of all scenarios because the other person has the benefit of professional advice, and you have nothing (well, ok… at least you read my article, that’s a good start).

Dual Agency in a Santa Rosa or Windsor Real Estate Transaction

OK, let’s go back to making that offer to buy a home in Santa Rosa, and the only agent involved is the seller’s agent. This time the Seller’s agent doesn’t care that there is a much higher risk of a lawsuit and so suggests that he can represent you in a “Dual Agency”. Dual-Agency in real estate is when the real estate agent represents both the seller and buyer of a given property. BOTH buyer and seller are the “Client”. How handy is that! Remember, the real estate agent is required by law to act in the best interests of the client. The problem of course is that in dual agency, the “client” is both the seller AND the buyer, each of whom often have very different “best interests” when it comes to the property transaction.

For example, the seller wants the highest sales price, the buyer wants the lowest. The seller would prefer that certain "blemishes" of the property do not become a "problem"; the buyer wants to know absolutely every detail about the property before buying. The buyer may not want the seller to know details of their financing arrangements, while the seller wants this information to determine the probability of closing escrow. The list goes on and on, and in each case the real estate agent is supposed to act in the best interests of BOTH? How the heck do you do that?

Dual agency is such a bad idea that it has been outlawed in other states, yet it is still legal in California. However, while it is still legal, even the California Department of Real Estate has issued a warning to real estate agents about Dual Agency. In an article they published called "The Perils of Dual Agency" (CA Real Estate Bulletin, Fall 2007, page 2), they stated that “…dual agency arrangements present an increased risk of liability and/or discipline to the licensee”. Honestly, when the Governmental agency responsible for licensing real estate agents publishes an article like that, why are we still allowing Dual Agency?. When it comes right down to it, dual agency is a dinosaur that should be dead, but is still lurking in Sonoma County, and if you are not careful it might step on your real estate transaction. Ouch.

Is Dual Agency in a Real Estate Transaction Fair to the Buyer and Seller?

The question in dual agency is not whether it is "possible" for an agent to be fair to both sides of a transaction, because in some situations this is certainly possible. The real question is whether dual-agency truly serves the best interests of both clients better than if each client had their OWN agent (separate agency). I have not read or heard a convincing argument that leads me to believe that this is true.

In Santa Rosa and the surrounding areas, some agents actually prefer dual agency, mostly because it means they make more money. However, considering that “some percentage” of real estate agents in the Santa Rosa area are ignorant, untrained, or just plain unethical; in my opinion, dual-agency is a ripe opportunity for these individuals to prosper at the expense of one or both of the clients. Not only does the client suffer, but so does the real estate profession.

In Santa Rosa, Windsor or ANYWHERE, Your Real Estate Agent Should be working for YOU

In my opinion, you don’t want a buyer’s agent that finds a “happy middle ground” for both buyer and seller. You want an agent that is BETTER than the seller’s agent. You want to come out ahead. What you REALLY want your agent to do is work hard and ethically to find out as much information to your advantage about the other side of the transaction as possible. Some of the information you may want to know would be illegal or unethical for a dual agent to disclose because of their fiduciary responsibility to the Seller. In my opinion, at different points in the transaction both sides get ripped-off with dual agency.

In every real estate transaction I have been involved in, I have found at least a dozen things the other agent wanted to do, but were not the best path for my client. Dual Agency in Sonoma County is just as crazy as having the same lawyer represent both sides in the same lawsuit. You'll never see that on “CSI”!!! In Santa Rosa, some agents (myself included) will not enter into a dual agency relationship if at all possible. Yes, this means I am giving-up a portion of the commission, but I feel that dual agency prohibits my ability to aggressively represent my client. I don’t care that my commission would be more with dual agency; I just don’t think it is right.

A Separate Buyers Agent is YOUR Professional in the Deal

The concept of a "buyer’s agent" is relatively new to the real estate industry, and in Sonoma County this may still be the exception rather than the norm. Remember that in the beginning, the real estate industry in California only had one type of agent. This agent represented the seller of a property and the phrase “Buyer Beware” was the motto of the day. As time passed, people buying real estate realized that the listing agent was frequently assisting the buyer in some fashion and so dual agency was created.

Dual agency was never designed to be the “best” solution for both parties, so much as an attempt to keep the buyer from getting totally screwed. Oh yeah, and it also let the real estate listing agent keep the entire commission. That was sweet. Savvy buyers in the Santa Rosa area eventually realized that if they hired their OWN agent, an agent who had no fiduciary relationship to the seller, they had a BETTER chance of getting the best deal. These savvy buyers began bringing their OWN agent to the party and insisted that their real estate agent represent them exclusively. And so, the concept of the buyer’s-agent was born. Best of all, it the cost of this buyers agent is normally paid for by the seller, not the buyer.

Legally speaking, buyer agency removes the fiduciary duties of the agent to the seller and replaces this with a fiduciary responsibility to the BUYER only. The real estate agent must, by law act in the buyer’s best interests, even if this is NOT in the best interest of the seller. The agent must certainly treat the Seller fairly and honestly, but removing the handcuffs from your agent lets them fight for YOUR best deal. Buyer Agency also gives a buyer the opportunity to pick their own agent based on what is important to them, not the seller. Just because the seller “has” to use their Cousin George as their agent, doesn’t mean YOU have to. Also, in most cases the buyer’s-agent fee is still paid by the seller, it really doesn’t get much better than that. I have some suggestions in helping you select a buyers agent if that is the route you decide to take. The point to this article is NOT that you "have to have an agent", but rather how imperative it is that you understand the loyalties and legal requirements of agency, and whose interests are truly represented.