Washington, D.C. – A new report from the Consumer Federation of America (CFA) – Double-Dipping by Real Estate Agents: Risks and Costs to Home Buyers and Sellers – estimates that some one million sellers and buyers in home sales with a single agent are charged excessive commissions totaling several billion dollars annually. The report also examines the risks and costs to which home sellers or buyers are exposed because of the conflicts of interest of these double-dipping agents. (Double-dipping agents retain the entire commission, usually 5-6 percent of the sale price.)
“Double-dipping can only be justified when agents greatly reduce their commission and function as a facilitator with the full knowledge and approval of both buyer and seller,” said Stephen Brobeck, a CFA senior fellow and the report’s author. “The report highlights the consumer risks and costs of dual agency, which should be prohibited,” he added. (It is effectively banned in eight states.)
In addition, the report documents criticism of double-dipping by real estate agents themselves, recommends policy changes to reduce consumer risks and costs, and provides advice to home buyers and sellers about how to deal with double-dipping agents. The study is based not only on a survey of existing scholarship, journalism, and industry comment, but also on research on recent, consecutive sales of more than 6,000 homes in twelve major cities and several small cities. The examination of these sales helped reveal double-dipping rates (as a percentage of all home sales) and their variation based on factors such as sale price, agent dispersion, seller expectation, and the priorities of real estate firms and individual agents.
Double-Dipping Rates Vary Widely and Often Unexpectedly
One surprising finding of this research was the great variation in double-dipping rates from city to city. In the twelve diverse major cities studied – Boston (MA), Providence (RI), Charlotte (NC), Orlando (FL), Birmingham (AL), Cleveland (OH), Chicago (IL), Minneapolis area (MN), Oklahoma City (OK), Tucson (AZ), Oakland (CA), and Portland (OR) — these rates ranged from 2.6 percent in Charlotte to 14.8 in Birmingham. Double-dipping rates in smaller cities were often much higher – for example, 36 percent in McAlester (OK) (compared to 9.0 percent in Oklahoma City) and 30 percent in Laurinburg (NC). The report estimates a national double-dipping rate of about 10 percent.
In examining factors that may help explain variation in rates among the large cities, the research identified two influential variables:
- Low sale prices: The 932 homes that sold for under $150,000 were twice as likely to be double-dipped than were more expensive homes – 16.5 percent vs. 8.1 percent, a statistically significant difference. The lack of seller leverage over their agents, and the greater difficulty of sellers to qualify for financing, may help explain the difference. But sale price only explains a portion of the overall variation since the double-dipping (DD) rates for all other home price levels were very similar.
- Days on the market: There was a statistically significant correlation between median days on the market in the twelve cities and DD rates. In an area of quicker sales, listing agents would seem to be more likely to search quickly for a buyer and less likely to delay the sales process in a search for unrepresented buyers. The four “hottest” markets studied – Oakland, Tucson, Portland, and Charlotte – were four of the five markets with the lowest DD rates.
Other factors appear to be less influential in DD rate variation or not influential at all:
- High sale prices: It was hypothesized that very expensive homes may provide more incentive (fixed commission rate) and opportunity (greater likelihood of pocket listings than lower-priced properties). However, the DD rate for homes sold for at least $600,000 (and those for at least $1 million) were a little below the overall DD rate. One important caveat: Pocket listed homes may be more likely to be double-dipped but may also be more likely not ever to be listed on a local MLS, so could not be included in samples studied.
- Real estate agency priorities: Another somewhat surprising finding of the research was that the DD rates for most of the largest national agencies – Keller Williams, RE/MAX, Coldwell Banker, eXp, Century 21, and Howard Hanna – were very similar to the overall DD rate. And for most other large national agencies – Compass, Sotheby’s, Berkshire Hathaway, and Redfin – the rate was about half of the overall rate. None of the large agencies appear to encourage double-dipping (though they may encourage other in-house sales, the subject of a future CFA report). There was, however, a much greater range of DD rates among large regional firms.
Double-Dippers Overcharge Consumers and Expose them to Risks and Costs Because of Conflicts of Interest
The report estimates that double-dipping agents, who sometimes have less work to do on a sale than when there is a second agent involved, are overcompensated by several billion dollars annually – that is, are paid “economic rents” in excess of the value of services provided. (These rents are above and beyond any rents built into the high and near-uniform 5-6 percent commissions shared by a listing and buying agent.) The excessive DD charges are largely added to home prices, so are paid mainly by some 500,000 home buyers in DD sales.
The report also identified agent conflicts of interest that impose risks and costs on home buyers and sellers. Most conflicts of interest originate with listing agents, who are able to find unrepresented buyers among their own buyer clients, at open houses, or through increased use by buyers of home listings on portals such as Zillow and Realtor.com and buyer-initiated contacts with the listing agents of homes the buyers find attractive.
Sellers can be harmed in several ways in a double-dipped sale. If agents are determined to find an unrepresented buyer, they often delay placing the home listing on the local multiple listing service (MLS) then make it difficult for buyer agents to show the property. When listing agents do find an unrepresented buyer, in all states but the eight that effectively prohibit dual agency, they usually try to persuade the seller to accept a change in the agent’s status from fiduciary (complete loyalty) to dual agent (an oxymoron). If successful, the listing agent then can no longer advance the best interests of their seller client, including negotiating a high sale price or even giving out advice that may materially affect the interests of the buyer.
Buyers suffer the greatest harm by not having an agent who can negotiate down the sale price, which usually includes the buy-side commission. Their risks are greatest if if they agree to be only a customer, not a client, of the listing agent. Listing agents who work with a buyer customer are obligated to advance the interests of the seller, including increasing the sale price, taking the seller’s side on any disputes, and refraining from giving the buyer any advice that affects the material interests of the seller.
If a buyer contacts a listing agent about a specific property, the buyer can and should expect that agent to promote that property. But if the buyer seeks the assistance of an agent to help search among all listed properties, that agent is likely to promote their own listings, especially if any of those properties bears a resemblance to the type sought by the buyer or if the agent is just determined to double-dip (and as the report shows, some agents are). This steering effectively limits the pool of properties available to the buyer and increases the chances the buyer will end up with a less desirable home.
Moreover, the prospect of double-dipping encourages some agents to be deceptive and manipulative, as a CBC marketplace report documented. “Structural conflicts of interest tend to increase the probability of dishonest, manipulative agent conduct including lack of agency disclosure, disclosure of confidential information to the other party, steering, and leaning on clients,” noted Brobeck. “This encouragement of unethical practices is the most important reason that so many real estate agents reject and criticize double-dipping,” he added.
CFA Recommends Policy Reforms to Curb the Risks and Costs of Double-Dipping
CFA does not recommend a ban on double-dipping. Though this prohibition would greatly reduce all associated risks and costs, it is difficult to justify because it would impose other costs, such as the inability of an agent facilitator (usually called a transaction broker) to work (transparently) with both parties at a greatly reduced commission. But CFA does recommend the following restrictions on double-dipping practices:
- Prohibiting dual agency. Dual agency is an oxymoron. One agent cannot represent the material interests of both seller and buyer, especially related to sale price. As well as misleading consumers about agent representation, dual agency aggravates the conflicts of interest inherent in double-dipping.
- Prohibiting a fiduciary agent changing their status to dual agent or transaction broker in the middle of the sale process. While often allowing a quicker sale (after listing), this shift greatly disadvantages the seller.
- Supporting major lawsuits that are challenging the coupling of listing agent and buyer agent commissions. If both sellers and buyers were required to compensate their own agents, they would likely be much less willing to pay commissions of 5-6 percent to double-dippers. Today, buyers have no ability to negotiate buyer agent commissions, and sellers can negotiate down only the listing agent’s share of the commission.
CFA Offers Suggestions to Home Buyers and Sellers Related to Double-Dipping
CFA’s most important advice is to avoid double-ended sales except when one agent functions as an impartial facilitator (often called a transaction broker) and charges a significantly lower commission, keeping in mind that most agents are unlikely to accept these conditions.
In searching for an agent, sellers and buyers should research whether an agent is a frequent double-dipper. They can usually learn this by reviewing recent sales on agent profiles found on websites such as Zillow and Realtor.com. Aggressive double-dipping by agents is associated with the highest risks and costs from agent conflicts of interest.
In searching for an agent, sellers especially should make it clear that they want the agent to represent them throughout the sales process, then refuse to accept an agent request to change their role from fiduciary agent to dual agent or transaction broker.
In searching for an agent, buyers should recognize the great risks of working as a customer, not a client, of the listing agent. For a buyer, it is better to work with a dual agent to both seller and buyer than as a customer to a fiduciary agent of the seller. Regardless, these buyers should employ an attorney to represent their interests.
Contact: Stephen Brobeck, sbrobeck@consumerfed.org