6 Reasons Our Understanding of Agency Is Clouded

The subtleties of client representation are sometimes difficult to uncover, especially in the real estate industry. Here are a few reasons I feel the waters are so muddied.

May 7, 2018

The topic of agency is fertile ground for discussion in the real estate world, if for no other reason than because it can be seen from a variety of perspectives. It’s relatively easy to look at isolated cases or hypothetical situations and determine who owes whom exclusive representation. But in the real world, it gets complicated.

Fiduciary duty and representation is best understood in the context of an agent’s information management responsibilities, such as when they market properties, handle confidential information, deal with disclosures, and execute administrative duties. An agent’s representation while carrying out these tasks can be measured by the actions they take or by their inaction or omissions. For a more in-depth framework on this topic, see “Helping Agents Understand Agency.”

However, if we truly want to make strides in defining and understanding this important legal construct specifically in the context of a real estate transaction, we first have to understand what’s holding us back. Here’s a look at how the legacy of agency stands in the way of progress.

1. It’s based on old-school thought processes.

When people talk about agency problems, all too often blame is laid at an agent’s lack of learning or misconduct. But in fact, the root problems exist in trying to apply the legal concept of the law of agency as the sole method and philosophy for defining agent-consumer relationships.

The concept of agency has been around since medieval times. It evolved from the servant-master relationship in the old world, predicated on the idea that damages caused to another person by a servant were best recovered from the master. Although damages are still a fundamental concept of agency, discussions about it with regards to the real estate profession center more around advocacy and representation questions than monetary ones. Agency simply was not designed with the challenges faced by modern real estate agents in mind.

Modern real estate agency-representation laws and regulations developed primarily as a response to a 1984 Federal Trade Commission study revealing that consumers often did not understand the representation relationship that agents had with the buyer or seller in a transaction. The premise of the FTC study follows traditional thinking that real estate agents always represent one party or the other in a transaction. In reality, agents have requirements benefitting both parties to a transaction, notwithstanding an agency agreement with one of them.

So, in response to the FTC study, states began to replace the common law of agency with statutory agency law on an individual basis. What states did by enacting statutory law was to define some of the more critical duties required or excluded by the agent in their relationship with consumers. And that brings us to problem number two.

2. The focus has traditionally been on agency as a whole, not duties.

Often those trying to define and understand agency focus on the vehicles or types of agency, but it makes more sense to examine the duties contained within the environment of agency. Agency without a duty is like a horse without a saddle!

A duty is a promise or legal obligation to someone. Some duties in real estate are of a very specific nature, such as how earnest money is handled. Other duties may be circumstantial, such as balancing caveat emptor (buyer beware) laws with seller disclosure statements.

The agent-consumer interaction is best defined and understood by looking at a moment-to-moment balance between duties and any agency already in existence, which may or may not require further actions or omissions by the agent with respect to those duties. A duty can exist by itself. Agency on the other hand, must have at least one duty to be functional. Agency sets the perspective of the agent for how he or she should act on the duty, not the other way around.

3. Real estate is different from many other agency-representation type professions because of its catalytic nature.

Another issue that comes up quite a bit is the fact that some try to define real estate agency using examples from outside industries. Real estate agents create situations and bring conflicts together. By contrast, most other professionals dealing with agency issues (with a few exceptions) respond to situations. Attorneys, plumbers, real estate appraisers, morticians, and pharmacists are examples of professions that do not create situations but rather respond to them.

For the real estate professional, creating situations and potential conflict is a necessary part of business. Agents often have contact with both opposing consumers to a transaction, even when the agent represents only one of them.

Moreover, it’s imperative that the relationship between agents under cobrokerage transactions be generally friendly in nature and not adversarial. There’s a certain amount of empathy required from the agent for both consumers, even with single agency.

In fact, if you ask agents whether they feel some loyalty and concern for the welfare of the nonclient in a transaction, most will agree that they do. So, there’s a real question of just how much real estate professionals can actually separate out the concept of loyalty in their dealings with opposing consumers. And that question doesn’t factor in as much for other industries that deal with this agency issue.

Furthermore, confidential information in real estate is generally more categorical than it is in legal and other professions, where it’s more specific and esoteric. Which brings us to point number four.

4. Confidentiality in real estate is not the sacred cow we often treat it as.

How many times have you heard this advice? “You should enter into an agency relationship before the consumer divulges confidential information.” In real life, this precept is a difficult one for agents to practice because they cannot predict when a consumer will divulge confidential information.

And, given the categorical and repetitive nature of confidential information in real estate, it can’t be seen simply as a trigger for an agency relationship. Often, the very nature of confidential information makes it difficult to isolate to just one consumer. Plus, confidential information often ripens later in the agent-consumer journey.

Not that you should ignore the advice stated at the top of this section, especially when it comes from legal counsel, real estate associations, or other qualified sources. Legal professionals understand how courts will treat agency, notwithstanding positions taken here.

5. Timing is problematic in the real estate profession.

In real life, it’s often hard to determine when agency begins. The agent-consumer relationship may develop as a casual conversation held impromptu at a neighborhood restaurant, for example.

Because real estate discussions are ubiquitous in everyday life, agents may struggle with dilemma of when to enter into formal agency. The answer to this question is best addressed by examining passive duties within the environment of agency. Active duties generally require an action on the part of the agent and consumer. What’s nice about passive duties, on the other hand, is that they require no agent-consumer action or formal agency. Think about how laws in your state help you move from casual real estate discussions that don’t include written agreements to more formal agency relationships, especially in regard to tasks such as disclosures, managing confidential information, and marketing.

6. Agents have much more than just one transaction or task to worry about.

It’s not uncommon for an agent to later list a property that they had previously shown to a prospective buyer client and vice versa. And sellers often benefit from working with an agent who has a successful sales history in their neighborhood. This means the agent may rely on the loyalty of past clients as potential buyers of the seller client’s property.

So, while this churning of consumers from client to nonclient and back has economic advantage for society, it also creates stress for the agent attempting to appropriately apply old-world agency concepts to the modern world of real estate. And overall, the most important task isn’t necessarily price-related; it’s to successfully consummate a deal for the client. Ironically, this objective is often more easily accomplished when the buyer’s agent acquiesces to a higher selling price or when the listing agent is able to convince their seller client to reduce the price in order to consummate the sale.

But by perceiving agency simply as transactional, we make the task of understanding it more difficult than it needs to be. It will help if we consider the agent-consumer interaction as one of a journey with passive duties that help define the relationship.

Fred Otterbein

Fred F. Otterbein began his real estate career in 1981. Today, he’s an associate broker at Liberty Realty Corp. MI in Grand Rapids, Mich. His general focus today is in commercial, industrial, and development areas. Otterbein is not an attorney or regularly practicing real estate educator or trainer. He has a long history of involvement in the analysis of and writing about real estate agency and advocacy matters.