The below comes from Douglas R. Miller, Esq. Founder and Executive Director of CAARE, Consumer Advocates in American Real Estate. CAARE (www.caare.org) is a non-profit, 501(c)3 charity dedicated to exposing conflicts of interests in residential real estate and providing information, solutions and resources to consumers and others to help combat these problems.
Agents from the same brokerage firm cannot negotiate on behalf of buyers and sellers in the same transaction. Despite heavily lobbied for laws that have “legalized” this impossible relationship, designated agency is a legal fiction that harms consumers. Just because it is legal, does not mean that it is good or appropriate for consumers. Designated agency serves only the interests of the real estate brokerage firm that desires to collect a double commission at the expense of appropriate client representation. If you agree to designated agency, you will be giving up the right to honest representation and you will be putting the brokerage firm in a position to manipulate your transaction in order to collect a double fee.
Designated agency – A fictional relationship that occurs when all the participants of the transaction are represented by the same brokerage firm. In designated agency, the buyers and sellers are told that their agents can negotiate against each other even though the brokerage firm that is supervising those agents cannot.
Designated agency is worse than dual agency. States that allow designated agency as a form of “representation,” have legalized the intentional misrepresentation of dual agency. Designated agency is serving two masters but disclosing that you represent each of them exclusively. We believe it is legalized fraud. Designated agency is not legal for any other profession. Even lawyers, who have received postgraduate training on how to manage conflicts of interest, cannot legally engage in designated agency.
In order to understand designated agency, you must first understand that when you hire a real estate agent you are really hiring the agent’s brokerage firm, not the individual agent. Real estate licensing is a two-tiered system designed to protect consumers by requiring that an experienced real estate broker (broker’s licensee) maintain a supervisory role over their less experienced real estate sales people or licensees. Brokers are held to higher entry standards than sales people (or agents). Brokers are responsible to supervise their agents. Only brokers may hold contracts with clients. Agents are merely agents of the broker, not consumers. When you hire a broker (just like when you hire a lawyer in a law firm), all the agents in the firm represent whomever the broker represents (they all should represent you). That is why lawyers must conduct a conflict check at their entire law firm before agreeing to represent you.
Dual agency and designated agency are extremely profitable for brokerage firms and extremely bad for consumers. Real estate firms get paid double (both halves of the commission) if both the buyer and seller are procured from the same firm. Consumers are stripped of their representation with little warning or put in a position where the brokerage firm is financially rewarded for manipulating their advice.
In designated agency, the brokerage firm is a dual agent and is prohibited from negotiating on behalf of either party. However, the supervising broker designates one agent to represent the buyer and another the seller in the same transaction. It presents several impossible relationships with enormous conflicts of interests. For example, even though the broker is a dual agent and is prohibited from negotiating, the broker somehow imparts those powers of negotiation to the agents who work for the firm. How is the broker going to supervise these agents when negotiation issues present themselves? How is the broker going to supervise the agents when the broker stands to collect a double commission if supervision is given in a way that prefers one buyer over another? How are agents going to be prevented from manipulating the transaction in order to prefer the double commission transaction over the transaction from an agent from another firm?
Any honest attorney who understands agency law would call this fictional relationship preposterous. Designated agency is a dichotomy of two mutually exclusive promises. The brokerage firm promises that as a dual agent that they will not engage in negotiation, but that they will help their agents negotiate against each other. It just makes no sense. Yet Realtor Associations all over the country have used their enormous lobbying power to persuade legislators to legalize this subterfuge that could easily play an important role in creating more real estate bubbles and mortgage foreclosure crisis’s.
Designated agency does not just create an appearance of impropriety, it encourages dishonest conduct by putting brokerage firms in the position of being able to manipulate real estate transactions to their own benefit.
Imagine the designated agency transaction where the brokerage firm is managing a multiple offer transaction in which the firm represents the seller and one of the buyers. The other buyers are from outside firms. The firm stands to collect a double commission (often an extra $12,000) if a transaction occurs with the buyer agent from within the firm. Even though the individual agents are engaged in active negotiations and are supposed to be prohibited from seeing the offers of the competing agents, the broker who is responsible for managing the agents and the transaction and the broker is privy to this negotiation information. How will the broker “supervise” and “manage” this transaction? What kind of supervision can be expected in this situation?
What if the broker is aware that if their buyer were to offer an additional $500 in earnest money that the inside transaction would have the advantage? What if the broker is aware that the buyer from the outside firm is better qualified and more likely to complete the transaction than the buyer with the inside agent? There are hundreds of examples like this.
With little effort and no paper trail, designated agency puts brokers in a position in which they are financially rewarded for advising buyers and sellers to enter into real estate transactions that they otherwise would not have done. Designated agency makes brokers privy to private negotiating information for which they otherwise would not have had. Designated agency encourages misguided supervision of agents and management duties required by licensing law. Designated agency purports to create a legal fiction that impossibly grants the broker’s agents more negotiating power than is possessed by the broker.
The concept of designated agency serves one purpose. It serves to put brokers in a position to manipulate buyers and sellers to increase the occurrence of double commissions. See Doug’s further comments below under comments.