Mountain Law: A controversial salvation to the real estate industry
May 13, 2014
A few weeks back, I wrote about the difference between an agent and a transaction-broker in a real estate deal. In brief, an agent is an advocate for either the buyer or the seller, while a transaction-broker is merely a facilitator who can work for both sides. This article picks up on that discussion and addresses some issues with transaction-brokerage.
To take a few steps back, there was a time in the not-too-distant past when all real estate brokers were agents for the seller.
In those transactions, even if a broker was ostensibly working with a buyer, the broker was deemed to be a sub-agent of the seller's broker. The problem with this arrangement was that buyers typically did not understand that "their" broker really worked for the seller.
This was seen as borderline fraudulent to buyers and it sometimes gave brokers a bad name simply for operating within the existing legal framework.
One solution to the issue was to allow brokers to work directly for the buyer as a buyer's agent. But this solution had two prominent drawbacks.
First, the old guard was hostile to the concept of buyer agency because it created an adversarial relationship between brokers working with sellers and brokers working with buyers that did not exist previously. This created fear that buyer agency would result in lower real estate prices, which was not good for the real estate sales industry.
Second, an agent can only serve one master, so requiring brokers to choose sides between the buyer and seller meant that brokers could not "double dip" and earn both sides of a commission. That was again bad for the real estate sales industry where brokers often sold their own listings and earned both sides of a commission.
Well, the industry leaders put their heads together to address these issues and came up with the idea of transaction brokerage. The concept had significant appeal to the industry, particularly in Colorado, for many reasons. For one, the lesser duties that transaction brokers owed to their clients, as discussed in my previous article, would theoretically reduce broker liability. For another, transaction brokerage allowed a single broker to represent both the buyer and the seller without being an improper "dual agent." The single broker could then "double dip" on the commission.
Clearly, transaction brokerage has its advantages. But it is not without its problems also, namely because transaction brokers often advocate even though are not supposed to. For example, imagine that a broker agrees to take a listing from a seller as the seller's agent. The broker works with the seller for many months, building a close relationship, and finally finds a potential buyer who is not working with a broker. The broker then switches hats (as is allowed under Colorado law) and agrees to be a transaction broker working with both the seller and the buyer.
Is it really fair in this situation to expect the broker to be an unbiased intermediary between one party that it has worked with for months (the seller) and another party that just walked in the door (the buyer)?
Consider another example where the seller and the buyer are each represented by their own transaction broker. In this case, the brokers are supposed to simply work together to close the deal.
But, in reality, it is likely that the transaction brokers will advocate for their sides. And that's actually what their clients want and expect even though it is not the way transaction brokerage is supposed to work!
In sum, transaction brokerage has been called the "controversial salvation" of the real estate industry because it is better than the old system, but nowhere near perfect.
Buyers and sellers should at least understand the difference between an agent and a transaction broker so they know what they have a right to expect.
Noah Klug is owner of The Klug Law Firm LLC in Summit County. He may be reached at (970) 468-4953 or Noah@TheKlugLawFirm.com.
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