A dual agency arrangement is where the same licensee is representing the buyer and the seller. It also extends to the representation of the landlord and the tenant in a property management transaction. In states where dual agency agreements are lawful, it’s up to each broker as to whether you’ll allow these arrangements to happen. Legally, it can open the broker to increased risk and exposure to potential lawsuits.
Dual Agency versus Designated Agency
Designated agency is a form of dual agency. Instead of the same licensee representing both the buyer and seller or landlord and tenant, the seller and the buyer work with a different licensee, but both licensees work for the same real estate brokerage. Each licensee acts for and has a fiduciary duty to their client.
Designated agency agreements are common, especially in brokerages with large teams. It’s largely accepted that having two licensees working for the same broker is a better alternative than one licensee representing both parties. However, there are still some potential pitfalls, including conflicts of interest and/or ethical concerns.
Be Aware of Conflicts of Interest and Fiduciary Duties
Dual agency arrangements (particularly designated agency arrangements) might be appealing as they can streamline the transaction process and boost commissions for the brokerage. However, brokers need to be aware of potential conflicts of interest. Whether a conflict of interest is actual or perceived, it can have a big impact on your reputation and business.
Be aware that your brokerage may face a lawsuit arising from a dual agency agreement if:
- Your licensees working on the transaction have shared confidential information with each other.
- One licensee gives an advantage to another licensee at your brokerage, even if it’s not the best deal for their client.
- There is a failure to disclose the dual agency arrangement.
Also, check the fiduciary responsibilities of your licensees in your state. For example, in California, licensees acting under the same real estate broker in a dual agency agreement owe the same fiduciary duty to the buyer and the seller as their broker. That is, they have a fiduciary duty to both the buyer and the seller.
Dual Agency Arrangements Are Illegal in Some States
Dual Agency is currently illegal in 8 states: Alaska, Wyoming, Colorado, Kansas, Texas, Florida, Vermont and Oklahoma.
Even if you do live in a state where dual agency arrangements are legal, regulations do vary from state to state. There are some key differences across the states as to the required timing for dual agency disclosures, what explanations about the dual agency arrangement are required in agreements, and how agreements can be formed (for example, written or verbal).
Communicate Your Expectations with your Team
Brokers who allow dual agency arrangements need to clearly communicate to their teams what their expectations are for such arrangements. Having measures in place to ensure ethical conduct is important and ensuring the whole team is on the same page is critical. Make it clear to your team what fiduciary duties and disclosure responsibilities they have and communicate your expectations about serving client interests as a first priority.
Many brokers choose not to consider dual agency at all because of the risk. Concerns about whether a single licensee or two licensees working for the same broker can truly remain neutral in a transaction are common. Dual agency arrangements offer many benefits to brokers and licensees, but they are not typically advantageous to the buyer or the seller (or landlord and tenant in a property management scenario).
Protect Your Brokerage Against Lawsuits
CRES offers tailored real estate E&O Insurance to your specific real estate risks. As part of one of the largest insurance brokers in the world, we have access to more E&O options than just about anyone else. We can find you the best policy for the best price.
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Contact CRES at 800-880-2747 for a confidential discussion today.
