Homeownership

Home Buyers and Sellers Are Confused and Harmed by Complex, Poorly Enforced State Laws on Real Estate Agent Disclosures

CFA Calls on State Officials to Improve and Enforce These Laws, Including a Prohibition of Dual Agency

Washington, D.C. — Today the Consumer Federation of America released an extensively researched report titled, The Agency Mess: Home Buyer and Seller Confusion and Costs Related to Diverse and Poorly Enforced State Laws About the Role and Responsibility of Real Estate Agents.  The report incorporates CFA’s research of the literature on real estate agency, CFA’s mystery shopper survey of agents, and a national consumer survey by ORC International.

According to the national survey, two-thirds of consumers believe that real estate agents are always or almost always required to represent the interests of the home buyer or seller with whom they are working.  Yet, many agents working with consumers represent the interests of the other party or the interests of neither party.

“Today, many home buyers and sellers do not know whether their agent is representing their interests, those of the other party, or those of neither,” said the report’s author, Stephen Brobeck, a CFA senior fellow.  “Given the huge expenditure of a home purchase and the conflict of financial interests between seller and buyer, it is important that consumers know who their real estate agent is actually representing,” he added.

Every state has a law that requires real estate interests to disclose their relationship to their consumer clients.  Yet, these laws are ineffective.

  • The laws define agent roles – e.g., agent, subagent, transactional agent, designated agent, dual agent – that most consumers, according to the national survey, say they don’t understand.
  • These roles often do not serve the interests of home buyers or sellers. For example, a subagent working with a buyer owes fiduciary allegiance to the seller.  And the term dual agent is an oxymoron.  No one agent can represent the fiduciary interests of both buyer and seller.
  • The effectiveness of the laws is diminished by the fact that these disclosures may be only required orally, may not require the use of a standard form, and may not be required at an early stage in the home purchase.
  • The disclosures have not always been made conscientiously by agents according to past research and CFA’s recent mystery shopper survey of listing agents in many states. These calls revealed that, when the caller asked if they could work with the agent, three-quarters of agents called failed to mention dual agency issues.
  • State officials have made little effort to enforce the disclosure laws. Violations usually only come to light when agent practices are so egregious that they lead to litigation.

The ineffectiveness of the disclosure laws has harmed many consumers:

  • Home buyers and sellers who think their subagents or transactional agents are fiduciaries have mistakenly believed that their agent is seeking, respectively, the lowest or highest house price.
  • Home buyers who think subagents are working for them often have disclosed information about their finances and house price ceilings that the subagents are legally required to share with sellers.
  • Home sellers working with fiduciary agents may face pressure to allow dual agency when buyers are interested in working directly with those agents. They may not understand that, under dual agency, their fiduciary interests are no longer being represented.  They also may not understand that a 5-6 percent commission captured by one agent usually represents very generous compensation for services rendered.

The report urges reforms that would greatly improve the content and timing of disclosures to home buyers and sellers.  For example, it recommends that:

  • Dual agency be prohibited, as it is in eight states.
  • There be a clear written and verbal communication from agent to consumer at the first substantive contact about whether the agent will function as a fiduciary agent, a subagent, or transaction agent/facilitator.
  • State real estate commissions work both with consumer and industry representatives to develop an effective disclosure document then enforce its use. If they refuse, state attorneys general should take on this responsibility.

“These reforms would benefit both consumers and real estate agents,” noted CFA’s Brobeck.  “More informed home buyers and sellers will make better decisions.  They will have a higher regard for, and complain less about, real estate agents.  And agents will not face the risks and ethical dilemmas of dual agency and undisclosed subagency,” he added.

The report also includes advice to home buyers and sellers about dealing with a real estate agent.  At the outset, both should ask the agent whether that agent will be representing their fiduciary interests, those of the other party in the transaction, or those of neither party (as a transactional agent/facilitator).  If their agent is not representing their financial interests, buyers and sellers should consider employing the services of an attorney.

Contact: Steve Brobeck