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Buyers Agents Offer Protection from Dual Agency Minefield in Arizona
In real estate, a single agent or broker for both the buyer and the seller of a Scottsdale luxury home is comparable in many ways to an attorney representing both the plaintiff and defendant in a courtroom. It’s a no-win scenario. The following exposes the legal minefield born from dual agency practice and underscores the vital role of exclusive buyer representation by a Scottsdale luxury buyer agent.
Two Opposing Sides Require the Scottsdale Buyers Agent
As exciting as it can be to buy and sell Scottsdale luxury real estate, at its core is a business transaction with two distinct sides. The home seller and home buyer have polar opposite objectives. A real estate agent may be the fairest and most experienced in the industry, but it’s still impossible for the same agent to get the seller the most money and save the buyer the most money in the same transaction.
Bottom line: Dual agency is a glaring conflict of interest with flashing red lights. That’s because by definition, dual agency is a practice providing services to both buyers and sellers in the same Scottsdale luxury home transaction. Whether it’s single broker representation (two agents under same broker represent buyer and seller) or single agent dual agency representation (when one agent represents both the buyer and seller), it all boils down to one entity receiving both commissions while providing limited service.
In dual agency practice (which, when disclosed, is legal in Arizona), relationships are void of traditional fiduciary duties of loyalty and full disclosure of details. Real estate/broker loyalties are split, which makes it a significant challenge to establish a transparent, loyal relationship fully benefiting the Scottsdale luxury real estate buyer.
Dual Agency Commission ‘Double Dip’ in Scottsdale Luxury Real Estate
When a home is listed for sale, a commission is negotiated between the listing (seller’s) agent and the home seller. Typically, this commission is around six percent of the sales price which often is an even split of three percent between the buyer’s agent and the seller’s agent. In a dual agency practice, the seller’s agent also is the buyer’s agent, wherein they receive all the commission dollars.
Arizona Legal Experts Agree on Dual Agency Risk
“A dual agent must not advocate or negotiate on behalf of either the buyer or the seller,” states Michelle Lind, Esq., CEO and general Counsel to the Arizona Association of Realtors® in an online AAR post on Dec. 31, 2012. When asked the question “May a dual agent aggressively work to secure the best possible price for one party?” she answers “No. A dual agent can do nothing to advance the interests of one party over the other.”
Real estate agents practicing dual agency can’t advocate for clients, can’t negotiate, and can’t advance the interests of their clients, specifically Scottsdale luxury home buyers. And more often than not, without understanding the need for a Scottsdale buyers agent on their side, Scottsdale luxury home buyers are placed at risk for their interests and legal rights being compromised.
The agent also suffers the consequences, as outlined in an article written some years ago for real estate agents in the Arizona Journal of Real Estate & Business by the late Judge William Holohan, retired Justice of the Arizona Supreme Court. Although disclosed dual agency is allowed in Arizona, “the prior consent [by the clients] for multiple representation places agents in an impossible position,” stated Judge Holohan.
It is legally impossible to have fiduciary obligations to two parties who have opposite interests. Therefore, there is virtually no defense for agents practicing dual agency capacity because being a dual agent is essentially a breach of fiduciary duty. Both the agent and the broker are at great risk. While agents can practice disclosed dual agency, Judge Holohan cautioned that "what is permitted is not always the wisest course.”
According to the AAR in a November 21, 2014 post: “While dual agency is permitted by Arizona law, judicial skepticism of this arrangement exists. See Marmis v. Solot Co., 117 Ariz. 499, 503, 573 P.2d 899, 903 (App. 1977). For these reasons, the agent should avoid representing the seller as a dual agent.
Because the client gains nothing by dual agency practice and actually is at risk for harm, it would seem clear that no client would agree to this. In fact, dual agency transactions occur every day in the Phoenix metropolitan area, including Scottsdale luxury real estate transactions. Increasing risk even more is the Arizona Department of Real Estate’s (ADRE) only requirement that clients agree to dual agency in writing. The Arizona Association of Realtors (AAR) has created a form entitled "Consent to Limited Dual Representation," to be used by agents to get that written consent. But look closely at the form’s explanation, or lack thereof, regarding the disadvantages of dual agency:
"There will be conflicts in the duties of loyalty, obedience, disclosure and confidentiality [by your agent]."
It’s clear that this brief statement does not adequately explain to the Scottsdale luxury home buyer or seller that he or she is about to do something not in their best interest.
As referenced in the Real Estate Property section of the State Bar of Arizona, the following Arizona court cases underscore the risks of dual agency practice and uncover the glaring realization of the important role individual representation is, especially that of the Arizona exclusive buyers agent:
Lerner v. DMB Realty, LLC
Elevating the standard of explanation and clarity. “The court held that when obtaining consent to dual agency, “the broker must deal fairly and in good faith with each of them, and ‘disclose all material facts that the [broker] knows, has reason to know, or should know would reasonably affect the principal’s judgment’," unless the principal knows the facts or doesn’t want to know them. 2012 WL 5910800.” This appears to require a discussion much more comprehensive than that contained in the AAR form.”
The court found several breaches of fiduciary duties by the salesperson, the most serious being the salesperson's failure to disclose that she was a dual agent serving as an agent for both sides of the transaction. Because of her failure to disclose this information to the Buyer, he did not know that there was certain information she could not reveal to him and also that the seller was responsible for compensating her. The court ruled that the salesperson had breached her fiduciary duty to the buyer.
Jennings v. Lee
Dual Agency creates licensee liability. If a client is damaged by an agent who is the only representative of the parties, the agent will have difficulty creating a defense, and the only question may be being how much he or she will lose. The Court quoted a California case with approval: “the fact that a[n] . . . agent in a real estate transaction is the agent for both parties is no defense to an action by one of the parties to hold the other party responsible for misrepresentations with regard to such other party’s property made to him by the…agent."Agency related issues are the number one problem of real estate brokerages according to the 2011 Legal Scan. The Scan showed that agency representation issues outrank all other liability generating areas, including the failure to provide adequate disclosures, ethics, and fair housing laws. This illustrates that single agent, dual agent licensees are vulnerable to claims and litigation under Arizona law. And in dual agency situations, damages may be provable without an allegation of failure to comply with the standard of care. 105 Ariz. 167, 461 P.2d 161 (1969).”
Liegh v. Lloyd
The duty of disclosure. An agent must disclose any facts affecting the value or desirability of the property, as well as any other relevant information pertaining to the transaction, such as the other party’s bargaining position or information concerning the ability or willingness of the buyer to offer a higher price. See Liegh v. Lloyd, 74 Ariz. 84, 244 P.2d 356 (1952). But an agent’s duty of disclosure to a client must not be confused with an agent’s duty to disclose any known material facts about the property to customers.
Cook vs. Orkin Exterminating Co., Inc.
The duty of confidentiality. An agent is obligated to safeguard the client’s lawful confidences and secrets. Therefore, an agent must keep confidential any information that may weaken a client’s bargaining position. For example, the seller’s agent cannot reveal to the buyer or the buyer’s agent any information that could be used to the disadvantage of the seller. On the other hand, the duty of confidentiality also precludes the buyer’s agent from disclosing the buyer’s willingness to pay more than the listing price or the buyer’s motivation for buying. See Cook v. Orkin Exterminating Co., Inc., 227 Ariz. 331, 258 P.3d 149 (App. 2011). This duty is “characterized by great intimacy, disclosure of secrets, [or] intrusting of power” (quoting Standard Chartered PLC v. Price Waterhouse, 190 Ariz. at 24, 945 P.2d at 335 (App. 1996) ). The duty of confidentiality does not include an obligation by a broker who represents a seller to withhold known material facts about the condition of the seller’s property from the buyer or to misrepresent the property’s condition. Aranki v. RKP Investments, Inc., 194 Ariz. 206, 979 P.2d 534 (App. 1999).
Dual Agency One of Top Concerns for Scottsdale Buyers Agents and All Arizona Realtors
According to Inman, “The National Association of Realtors surveys real estate brokers, agents, attorneys and educators every other year to identify legal issues of concern. Problems that can arise from agency representation issues — including breaches of fiduciary duty, dual agency, agency disclosure, and buyer representation — remained the top-ranked issue in NAR’s 2011 Legal Scan. Agency representation outranked property disclosures, ethics, fair housing laws and the Real Estate Settlement Procedures Act (RESPA) as legal issues of concern.”