Goodbye dual world; real estate brokerage changes again, but not enough.

• Author: Brown, Ronald Benton
• Position: Florida

Faced with commission-cutting competition in the early 20th century, real estate brokers banded together to form the National Association of Realtors (NAR). The NAR popularized the Multiple Listing Service (M.L.S.). Through the listing agreement, this system provided contractually for the listing broker to be the seller's agent under an exclusive right to sell arrangement. It also provided that a broker who subscribed to the M.L.S. to locate property for a prospective buyer, i.e., a selling broker, would be the listing broker's subagent in representing the seller.

Under this system the brokers would share the sales commission paid by the seller. This structure worked for decades with little change because it satisfied many of the goals of all parties involved. The seller's primary goal was to sell the property as soon as possible at the highest price. Th accomplish this, the seller sought: access to the M.L.S., which provided wider exposure to the market than could be accomplished by placing "for sale" signs on the property and advertising in a newspaper; to enlist other brokers in selling the property to enhance the likelihood of a fast and reasonable sale; and to engage the services of an expert (i.e., a broker) who would direct the sale to a completed closing.

A buyer's primary goal was to purchase a property as soon as possible at the lowest price. To accomplish this the buyer sought to obtain information about available properties; to narrow quickly the field to appropriate properties; to obtain a look at those properties; to present an offer that would be accepted; and to obtain the guidance and sources needed to complete the purchase. The buyer expected that engaging an expert (i.e., the broker) to act for the buyer was the way to accomplish these things.

The broker's primary goal was to earn a commission by getting a property sold as soon as possible. Brokers accomplished this by helping the seller reach the widest available market; helping buyers identify appropriate properties; helping sellers (or buyers) accurately estimate the value of the property; helping sellers translate that into a listing price that will be high enough to produce a reasonable return but low enough to attract the prospective purchasers; helping the buyers and sellers reach agreement; helping buyers complete the purchase and helping the sellers complete the sale; and, generally, providing all the services reasonably expected by buyers and sellers.

However, the system ran into trouble. It presumed that brokers were only the sellers' agents, even though the brokers had actively and regularly dealt with buyers who had relied on their expertise and advice.[1] Prospective buyers could not understand that the brokers who had helped to find a property, search for neighborhoods, prequalify them for a mortgage, reduce their offers to writing, and perform the other seemingly endless tasks involved in helping them buy real estate were anything but their agents.[2] They could not fathom that "their" brokers were actually working for the other side, i.e., the sellers, because it was counterintuitive. In fact, agency law already existed to support their impressions that "their" brokers were their agents.[3]

When buyers discovered that "their" brokers had not protected their best interests, they got angry and some sued. As a result, brokers found themselves in court being held liable for breaching duties they never knew they owed to buyers.[4] They sought relief from their state legislatures. That relief came in the form of statutes that brokers hoped would eliminate the potential for unexpected obligations and liabilities.[5]

The statutes typically expanded the number of possible relationships that brokers could have with their customers. They could still be the agent or subagent of the seller, but they could also become buyers' brokers, i.e., brokers who represented only the buyer's interests, regardless of whether the seller pays the broker's commission. They could be the agent of both buyer and seller because these statutes officially recognized and condoned dual agency. A major innovation was that brokers now had the freedom to practice without becoming agents of either party under the label of "transaction brokers," also known as "deal brokers," "facilitators," or "independent contractors." In this arrangement, the broker merely facilitated the deal rather than representing either party. However, this approach merely exacerbated existing problems for buyers and sellers and created new ones. The concept of transaction brokers is inconsistent with buyers' and sellers' expectations and desires as illustrated by one survey that found that 76 percent of the sellers felt that it was very important that the agent represented them exclusively, while 60 percent of the buyers in the same survey said it was important that the agent owed them fiduciary duties.[6] The statutory schemes required that brokers disclose the nature of the relationship to the customer.

These statutes presented some unfortunate possibilities. Brokers were not required to choose one role to play with all their customers. They could be a buyer's broker with one customer and simultaneously a seller's agent handling a listing for another customer. In fact, they could act as both for the same customer, i.e., a buyer's agent helping the customer buy property while simultaneously the seller's agent helping the same person sell his or her current property.

Likewise regarding multiple parties, they could be agents of the seller, agents of the buyer, agents of both the buyer and seller, or agents of neither the buyer or seller, but it was critical for a broker not to enter conflicting relationships with the buyer...