(bad) quote of the day / lawyer stumbles in NYT real estate Q&A


was the nuance edited out?

The Sunday Real Estate section of the New York Times regular feature by Jay Romano, Real Estate Q&A last week posed a complex question and provided an overly simple answer from a lawyer who represents the Westchester Board of Realtors®. I wonder if the lawyer provided a more complete answer that got edited down. Indeed, I hope so, because the simple answer quoted (and then amplified) can give real estate agents (and the lawyers who love them) a bad name.

The question is also a little confused: 

the [seller’s] broker for this apartment [I might buy] is also the broker whom I wanted to use to sell my own apartment,… Should I avoid listing with the same firm because of a conflict of interest?

The question is confusing because the Questioner has TWO potential relationships with the agent who represents the apartment s/he might buy, but asks explicitly only about one. The Questioner may bid (buy) the apartment the agent represents, and the Questioner may want that same agent to represent Questioner when s/he sells his/her own apartment. The lawyer’s simple answer (below) is particularly superficial for not dealing with these two potential conflicts of interest.

simply wrong
The simple answer to the not-so-simple-question was:

No. [identifying information omitted] Always list with the person who is most effective and has your best interests in mind.

The correct overly simple answer is "it depends on what you want and why you value this agent, after you understand it". But at least this simple-but-wrong response deals with the Questioner’s precise question.

Bear with me here (or bail out now), as I can’t find a simple way to approach this, other than step-by-step. (Regular readers know this might be a good time to freshen up that cup of coffee.)

answer that does not match the question
Remember that the Questioner asked about a conflict if s/he listed his/her apartment with the same agent that was representing the other seller. The lawyer’s extended answer, paraphrased by Romano, 

the broker [acting as "dual agent"] works for the seller and the buyer with the informed consent of both. “Effective people get the job done,” he [the lawyer] said.

He noted that a dual agent cannot absolutely guarantee undivided loyalty. But such loyalty, he said, might not be as valuable as having a respected, honest and effective agent working on your behalf.

No part of that extended answer addresses using the same listing agent, but this whole answer deals with buying through the agent who ‘represents’ the seller. Best to begin at the end, then, with that Dual Agency thing before dissecting that legal train-wreck of a (paraphrased??) comment "a dual agent cannot absolutely guarantee undivided loyalty".

"dual" agency is an odd duck, best served well-advertised
The NYS official disclosure form for real estate buyers and sellers is accessible here (pdf). (The form is not required to be signed for coops and condos in buildings with four or more units, but the substance of the disclosure is still required to be given to buyers and sellers by agents.) The key provision of that disclosure about an agent "representing" both buyer and seller in the same transaction indicates that this idea is … fraught (I put some of the heavy words in bold):

An agent acting as a dual agent must explain carefully to both the buyer and seller that the agent is acting for the other party as well. The agent should also explain the possible effects of dual representation, including that by consenting to the dual agency relationship the buyer and seller are giving up their right to undivided loyalty. A buyer or seller should carefully consider the possible consequences of a dual agency relationship before agreeing to such representation.

With that disclosure mandated by New York law in mind, refer again to the simple question asked (essentially, should I avoid the conflict?) and simple answer given ("No.Always list with the person who is most effective and has your best interests in mind."). Nothing particularly "careful" about that answer, with no indication that there may be possible effects other than the one I will get to ("a dual agent cannot absolutely guarantee undivided loyalty"). To be pedantic, nothing like, "after the agent carefully explains the risks and benefits, you should carefully consider whether that is best for you, or whether you prefer to work with an agent who can give you full-fiduciary-level services". 

consider the alternative
If an agent represents only one party in a transaction, that agent can be a full fiduciary with the following duties (per the form) to the buyer or to the seller: "reasonable care, undivided loyalty, confidentiality, full disclosure, obedience and duty to account". Of these five fiduciary duties, the most problematic in a Dual Agency situation are Undivided Loyalty (as the form itself notes) and Full Disclosure. Keeping the train-wreck (Undivided Loyalty) aside still, the duty of Full Disclosure would be lost to a "client" of a Dual Agent.

With an agent who owes me (a seller) Full Disclosure, if my agent learns something about a buyer that might give me a negotiating edge, that agent is obligated to tell me, to use it to my advantage, and has no obligation to protect any of his secrets. This topic lends itself to Big Picture (vague) pronouncements, so I will try to be concrete.

more concrete scenarios
Let’s hypothesize that my agent (as I am a seller) overhears or figures out that the buyer has some time constraints (a lease is ending, or some parent gift-money must be given by the end of the year), or that there are only two viable purchase candidates for this buyer and that the other one just went into contract. My agent’s job is to exploit that information for my benefit. If, instead, "my" agent morphed into a Dual Agent, that agent would owe the buyer Confidentiality and I would never learn of these factors.

Or if I am the buyer, my agent might learn that the seller is under contract to buy something else so is under pressure to make a deal to sell. My agent’s job is to help me leverage that intelligence to get the best deal possible for me. But if, instead, the agent who was "my" agent became "our" agent (a Dual Agent), the agent would have to hold that information in confidence.

Worse for the seller whose agent goes from Seller’s Agent to Dual Agent: if there is a very comparable competing listing on the market that goes into contract during negotiations between buyer and seller, the parties will want to know what the contract price is (if they can find out). If the agent somehow learns that the contract price would advantage the seller (because it is very high), the Dual Agent would be prohibited from telling the seller this information while a Seller’s Agent would be duty-bound to use it to put the screws to the buyer. Once you get the idea of how significant Undivided Loyalty is in a negotiation, more fertile minds than mine will come up with more powerful factual scenarios. I will offer just one more.

the Negotiating Eunuch
Even without any special factual nuggets that a seller’s agent might exploit, the entire negotiating dynamic is different with a Dual Agent. One of the reasons that some people use agents is to get that important emotional distance in a negotiation; another is to take advantage of the experience of someone who negotiates coop or condo purchases for a living. Whether that takes the form of hand-holding ("relax; that last gambit only seems personally insulting; are you really willing to walk away because the Idiot Buyer wants your drapes??") or is more strategic ("I think they are bluffing and that they will make another counter"), the seller often asks the agent "what do you think?" or "what does that mean?"

But if "your" agent becomes a Dual Agent there is a reverse-phone-booth effect: the formerly powerful tool you had becomes a mere transcription service.

Seller: how much more do you think I can push this Buyer?

Dual Agent: I can’t say. What should I tell the Buyer?

Seller: well, I can counter by dropping $50k but that is close to my Absolute Bottom Line.

Dual Agent: don’t tell me that unless you want me to tell the Buyer.

Seller: I thought you worked for me!!

Dual Agent: I used to, but then we agreed that I would act as Dual Agent.

Seller: why did "we" do that?

Which leads us back to the lawyer’s comments and the question: if Dual Agency can only be created by agreement of all parties, why would a Seller agree?

back to that train-wreck of a comment
Romano edits the lawyer’s answer to put these words into the lawyer’s mouth about the Loyalty of a Dual Agent (though he does not quote the lawyer): "a dual agent cannot absolutely guarantee undivided loyalty". Doesn’t that weasel set of modifiers ("cannot ABSOLUTELY guarantee…") suggest that you might get some loyalty, and that — in some circumstances but we can’t promise in advance — you just might get that Undivided kind of loyalty?

Instead, the NYS disclosure form is clear that when "your" agent becomes a Dual Agent, you "give up your right" to Undivided Loyalty. You had it. You lost it. No, "we might be able to provide it, depending …" stuff.

Any "careful" explanation (as required by the disclosure form) should — it seems to me — include the Negotiating Eunuch. Some people don’t need help negotiating; they may do it every day at work, in transactions involving many, many more dollars than an apartment or loft sale. So some sellers will maturely conclude that they can handle the entire negotiation on their own. But what do they get for "giving up their right to undivided loyalty"? In most cases, I expect that the sole benefit to a seller of "their" agent going in to the reverse phone-booth is that the agent believes the buyer and agent share a rapport and that the transaction can be expected to be "easier". No risk of misinterpretation between two sides if the same agent is in the middle.

I am trying to think of another "significant" "benefit" to a seller.

Still trying ….

When "carefully" explaining all this to "my" seller, I want to be very clear that I would owe neither party much loyalty if the seller and buyer agree that I should be a Dual Agent. I would owe both of them honesty, reasonable care, obedience, and confidentiality, but otherwise I am playing it straight down the middle. I would want to be so sure that "my" (soon-to-former) seller "gets it", that I would never be wishy-washy about Loyalty by suggesting "well, I can’t absolutely guarantee you undivided loyalty, but …" and then leave that pregnant ellipsis hanging and hope the seller draws his/her own conclusion.

Nor would I want a buyer to think — after careful explanation of Dual Agency — that I had his/her best interests in mind ("[a]lways list with the person who is most effective and has your best interests in mind"). Because if that is what the buyer thinks, there was something wrong with my explanation, no?

But then I am not a lawyer representing a Board of Realtors®.

more common scenario in Manhattan: dual agent with designated agency
It is much more common here for a slightly different potential conflict to come up. The seller of Beautiful Loft represented by a Brokerage Firm (let’s call it "Corco"; although you could equally well call it "Prude"). The buyer has been working with a different Corco agent, and becomes interested in the Beautiful Loft. As a firm, Corco has a conflict in that setting unless the buyer knows (agrees) that s/he is unrepresented for purposes of the Beautiful Loft (in which case only the seller’s agent participates). If that buyer wants to be "represented", both parties must agree that Corco is a Dual Agent and that the seller’s agent is "designated" to work with the seller, while the buyer’s agent is "designated" to work with the buyer.

a bit of a swamp
As the disclosure form says, this is another opportunity for a "careful" explanation. I have seen precious little practical guidance here over the years, but this is what the form says (in part):

A designated sales agent cannot provide the full range of fiduciary duties to the buyer or seller. The designated sales agent must explain that like the dual agent under whose supervision they function, they cannot provide undivided loyalty.

I take this to mean that the two "designated" agents can go at each other on behalf of their respective principals, but if they choose to get guidance from their supervising broker, everybody knows that the supervising broker will give advice to both "sides" equally. I admit that I am a bit fuzzy about the "designated sales agent … like the dual agent under whose supervision they function, … cannot provide undivided loyalty" part.

Frankly, I would love to hear more specifics about what "designated" agents can and cannot do, but each time I have asked a lawyer or association executive I have gotten boilerplate responses that are not very useful in the real world.

What is clear is that there has to be a "careful" explanation of this. While NYS law does not require that the disclosure form be provided in most cases in Manhattan, I will use it and get my "client" to sign it.

who cares? why??
There is a sense in which none of this matters to agents in the real world except under three circumstances.

(a) The Department of State exercises its ability to audit firms for compliance and (in the absence of a form in the file) may start asking questions of the buyer and seller that could have embarrassing repercussions.

(b) Something bad happens to the deal after the fact, and sharp-eyed lawyers are paid to dig through the deal’s carcass.

(c) A painful situation that came up in the last few years, the details of which are lost in my memory but the outline of which I saw reliably reported when there was litigation. At the closing table of a deal in which there was only one agent involved (the seller having a written agreement to list with that agent’s firm), the seller’s lawyer overheard a remark by the buyer about something the seller would have liked to have known, but did not (maybe it was that the buyer would have spent more??), although the agent knew. The attorney asked the agent if there was a NYS Dual Agent with Designated Agency form signed (of course not) and refused to deliver the commission check (a rather large number, as I recall). Teh firm sued for the commission, and lost because it appeared as though the agent had some loyalty to the buyer but had never explained to the seller about Agency. (Anyone else remember the details? I think it was one of the "S" firms….)

There is a sense in which this matters a great deal to a buyer who thinks that the agent who really (and exclusively) represents the seller somehow has the buyer’s best interests at heart. And a sense in which a seller should never give up a right to undivided loyalty unless the seller truly does not care or if the seller gets something in return of real value (still can’t think of another example).

to sum up
This is a complicated topic, hardly suited for simple answers.

This is a wordy MLG post, and your coffee is probably cold.

I wonder if that lawyer will write in next week to "amplify" his remarks…. Whatever, he is the source for my Bad Quote Of The Day. Congratulations. The certificate is in the mail, c/o the Westchester Board of Realtors®.

© Sandy Mattingly 2009

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