The Cost Of Dual Agency In Real Estate Transactions

The Cost Of Dual Agency In Real Estate Transactions
Be careful of dual agency real estate transactions

In numerous past blog posts I've alluded to the problems of dual agency. The fundamental problem is that when there is only one real estate agent "representing" both sides of the transaction whose interest takes priority?

In Illinois the way it's supposed to work is that the real estate agent who is about to work as a dual agent gets both parties to the transaction to sign a dual agency disclosure so that they both understand what they are getting into and so that there is documentation that they both accept this arrangement. The key restrictions that these parties are agreeing to are that the realtor cannot give preference to either client and that the realtor cannot provide them with any advice on offers or counteroffers. Since the seller originally hired the realtor to represent them and provide this advice dual agency amounts to a bit of a concession on their part.

One would expect there to be some kind of a financial impact of dual agency but nobody really knows for sure what it is. Interestingly, some academic types did attempt to quantify it in 2007 by looking at dual agency transactions in Hawaii from 1977 - 1980 and from 1987 - 1989. They picked these time periods because the state of Hawaii enacted legislation in 1984 requiring real estate agents to provide written disclosure to both parties of dual agency situations and these researchers wanted to look at the impact of the legislation.

Cost of dual agency

There is a measurable cost for the seller from dual agency

What they found is that prior to the legislation dual agency resulted in an 8% lower sales price but after the legislation the impact dropped to 1.4%. Time on the market was reduced by 8.5% prior to the legislation and by 8.1% after the legislation. I would think that once the legislation was enacted realtors had to be a lot more careful with how they conducted themselves but, nevertheless, it's clear that dual agency hurt the seller even when it was disclosed. To better understand how dual agency has these impacts we need to examine how dual agency arises.

3 Ways Dual Agency Arises

  1. The listing agent already has a potential buyer (a client) for a home when they take the listing
  2. The agent has a buyer client and finds an off market or FSBO property for them and the seller asks the agent to represent them also.
  3. An unrepresented buyer decides to buy a listed home and asks the listing agent to represent them

What is NOT dual agency: an unrepresented buyer decides to buy a listed home and chooses to not be represented. In that case the listing agent is only representing the seller and can only offer limited assistance to the buyer by providing what are known as ministerial acts.

Personally, I think scenarios 1 and 2 above are most likely to result in a lower sales price because the home is not given the opportunity to be fully marketed on the MLS. These scenarios are sort of like pocket listings, which I've extensively bashed in previous posts. Suffice it to say that every single sophisticated flipper/ investor I've ever spoken to buys properties almost exclusively outside the MLS because "by the time it hits the MLS the price is too high". And if that's good for the buyer then it's bad for the seller.

You can also see how those scenarios would result in essentially 0 market time, which would bring down the average market time for the dual agency sample set. That explains the 8.5/8.1% average reduction in market time.

Although it's possible that scenario 3 could result in a lower price I don't see any reason why it should. The home has been on the MLS for a while and the real estate agent has no reason to favor the buyer over the seller.

There are actually a couple of other ways in which dual agency can have a financial impact on the transaction but I'll cover that in a follow up post next week.

#DualAgency #RealEstateAgents

Gary Lucido is the President of Lucid Realty, the Chicago area's full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market, get an insider's view of the seamy underbelly of the real estate industry, or you just think he's the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.

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