Dual agency situation needn’t mean twice as many problems

ANOTHER merger between real estate companies has been announced. What does this rash of mergers mean to buyers and sellers?

One of the results is that with more mergers occurring, and fewer different real estate offices in operation, buyers and sellers will increasingly face situations where the listing office is also the selling office. Dual agency will likely become the norm.

Dual agency occurs when the same real estate office represents the buyer and the seller. It does not mean that the same agent is representing both sides in the transaction.

Instead, dual agency is tested at the office level. This means if Broker A from the company lists the property, and Broker B from the same company represents the buyer in the sale, the office is a dual agent representing both buyer and seller. This is true regardless of the location of the office.

If Broker A is from Coldwell Banker’s office in Los Gatos, and Broker B is from Coldwell Banker’s office in San Jose, a dual agency occurs. The commonality of the company — regardless of its office locations — creates the dual agency.

I previously wrote about the implications of an office representing both buyer and seller. This is a common practice in California and it has been around for a number of years.

California’s dual agency law has detailed provisions regarding how dual agency is to operate. As long as it is followed, one hopes there will be no problems in a dual agency situation.

Problems will arise, however, where agents, buyers or sellers — or all of them — do not understand the consequences of dual agency. The following is an example illustrating what may happen if everyone involved is not fully informed of how dual agency works.

Sellers list their property with XYZ Real Estate Company with Agent No. 1. Sellers tell Agent No. 1 they want to sell quickly. Mrs. Seller has lost her job. Mr. Seller’s job is in jeopardy. They are desperate. Bill collectors are knocking at the door. Sellers are out of money, facing bankruptcy. They plan to flee California to avoid their creditors. Sellers innocently tell all of this to Agent No. 1 to emphasize how urgently they need to unload their property.

Buyers love the house. They are working with Agent No. 2 from the same office of XYZ Real Estate Company. Buyers ask Agent No. 2 if there is anything they should know about this property or the sellers.

Under the law of dual agency, XYZ Real Estate Company has a duty to disclose to the buyers all of sellers’ motivations involved in selling or purchasing the property, with the exception of any information that sellers will take less than the listed price.

Information relay

Agent No. 2 is aware of his disclosure obligation and goes to Agent No. 1 to find out about the sellers. Agent No. 1, fulfilling her obligations, informs Agent No. 2 that the sellers are on the brink of bankruptcy and are desperate for a quick sell.

Agent No, 2 dutifully reports this information to the buyers. Buyers draw the obvious conclusion — if sellers are so desperate to sell, buyers should be able to get this property for a really good price.

They offer to buy the property at $50,000 below fair market value. Sellers are furious with their own agent for telling the other agent about their financial problems. However, because of their urgent need to sell, they accept the offer, close escrow, and get out of town as soon as possible. Then they sue the real estate office and both agents!

Obviously, the buyers in a transaction want to know all of the motivations of the sellers for just the reason set forth in our scenario.

If sellers are motivated, buyers may assume they can offer a lower price and obtain other concessions from the sellers. On the other hand, sellers will not usually want the buyers to have this information knowing that it may very well give them leverage to drive a harder bargain.

The dual agent has a duty to disclose to both sides the full ramifications of the motivations of both parties with the exception of price.

In my example, XYZ Real Estate Company properly disclosed to buyers sellers motivations in entering into the sale. It also then had a duty to disclose to the sellers that it had told buyers of their motivations. It also then had the duty to go back to the buyers and tell buyers it had disclosed this information to the sellers, and so on and so on.

Proper course

In other words XYZ Real Estate Company and its agents acted properly…

How is this problem resolved? Do you do away with dual agency?

No, because the reality is that most properties are sold through dual agent and dual agency usually works very well. Buyers and sellers are initially given a written disclosure form that explains agency and the obligations involved in a dual agency relationship. In other words, they are warned in advance that a dual agent has the duty to make these disclosures back and forth between buyer and seller.

Buyers and sellers in a dual agency situation will want to be careful about what they tell their agent since the agent is duty bound to relay it to the other party. Of course, sellers are still under the obligation to reveal all material facts about the property.

However, they are not under an obligation to tell their agent about their motivations for selling. If they do so, the agent must then pass it on in a dual agency situation.

In this new market where we are going to have fewer and fewer real estate offices, dual agency situations will arise more and more frequently. It is important that buyers and sellers be aware of the implications of dual agency and of what they tell their agent.

While it is true that if buyers and sellers are represented by separate offices, some of these problems might not arise, a whole series of other problems can come into play. It is imply important for buyers and sellers to understand the realities of a dual agency relationship.

Attorney Ron Rossi is a senior partner with Liccardo, Rossi, Sturges & McNeil in San Jose.Write him in care of the Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190