Let's say you walk into an open house and you're approached by the friendly and knowledgeable real estate agent sitting at the dining room table. You're very interested in the house and she says that she can represent you in the transaction. If you agree, you could be giving up your right to an advocate who solely represents your interests by signing up with a double agent --- in real estate parlance, a dual agent.
This exact situation also occurs when you see a property on the internet and call the listing agent directly. She then offers to represent you in the purchase or refers you to someone else in the office. You may have given up your right to someone who only represents you.
Dual agency is when one agent represents both sides in a transaction, or when two agents working for the same broker each represent one side. This type of relationship is very easily abused but is a major source of revenue for agents and their brokerages.
What Just Happened
When you go to an open house, the listing agent or one of her representatives is there to answer any questions about the property. While the goal as understood by the seller to get exposure for the house, another goal for the agent at the property is to generate new leads for themselves.
Where this relationship becomes dicey is when you express interest in buying the house and the agent offers to represent you on the deal. When the listing (selling) agent offers to represent a buyer, you know to be alert.
But when the person who offers to represent you works at the same firm as the listing agent, the risks are much more subtle. After all, they have the same boss, who is privy to both sides and your information.
Why Dual Agency Is Controversial
Without going into the legal specifics, dual agents are supposed to protect the interests of both parties. Since the buyer and seller have diverging goals and are both represented by the same agent or brokerage firm (who has a great incentive to see the deal completed), conflicts of interest in this type of relationship are common.
Obviously, the buyer wants as low a price as possible and the seller wants the opposite. Who does the agent choose? The agent doesn't have to, right?
Not exactly, because the agent knows both sides of the deal. Let's say the buyer casually mentions their recent stock options exercise or how much they're willing to pay, what would a double agent's move be then? The best interest of the seller is to have this information; the best interest of the buyer is for it to be a secret.
The perils to consumers are well-documented:
Would You Go to Court Using Your Opponent's Lawyer?
Real estate agency has its roots in the legal system. There was a point in time, not one that you and I probably remember, when all real estate transactions had to be done by attorneys. Contracts weren't always standardized so every deal became a custom job that had to be drafted and vetted: this was expensive and time-consuming.
The success of a free market often depends on how efficiently goods and services are transferred. Standardized legal forms and state-mandated programs were created so that real estate specialists could legally manage these real property transactions without having to pass the bar.
In general, buyers had one representative in the transaction and sellers had another. The sides negotiate back-and-forth towards a deal that would be acceptable to both principals but whose outcome depended on the quality of their representation and negotiation.
So, would you go to court with your opponent's lawyer representing you? Of course not. And in this case, buying real estate isn't mediation or arbitration. In those cases, the third party is neutral and gets paid no matter what the outcome is. The double agent, on the other hand, only gets paid if the deal goes through.
Considering Dual Agency
I would not recommend dual agency to my clients. If you are a buyer and decide to use a dual agent, it's your responsibility to choose an agent who has earned your trust over time.
If you need to test the double agent, start to tell her a story about how much you'd be willing to pay for the house (but don't give your real number). See if she interrupts you or reacts as if you shouldn't have mentioned that information. Then ensure that you are adequately compensated for the rights you are giving up.