Real estate transactions can be complex, which is why buyers and sellers are usually represented by knowledgeable agents.
However, there are several different roles that agents can play in the transaction. For instance, a home listed for sale by the owner gives buyers the option to purchase the property directly from an owner without an agent, while dual agency occurs when one real estate agent represents both parties in the transactions.
Understanding the nuances of these different representation options is crucial, as each may have different implications for the success of the transaction. With clarity, you can make confident decisions that shape your real estate transaction.
In this article, we’ll discuss several options for representation in your next real estate deal.
For Sale by Owner (FSBO)
If you’ve spent time browsing Zillow or other listing sites, you may have seen homes listed FSBO, or ‘for sale by owner.’ FSBO indicates that the owner is selling the property directly, without engaging a real estate agent or broker to facilitate the deal. Around 7% of homes were FSBOs in 2023.
Why might a seller choose to forgo hiring an agent, and all the advice and experience they can offer? The main reason is cost. Selling a home without an owner can save the seller money because they avoid paying agent commissions, which are usually around half of around 6% of the sales price (the other half goes to the buyer’s agent).
FSBO homes on average sell for tens of thousands of dollars less than agent-assisted transactions. FSBO may be cheaper; however, keep in mind that the seller/homeowner still must pay attorney fees to draw up the contracts, in addition to the buyer’s agent’s commissions, which usually turn out to be 2-3% of the sales price.
When the homeowner/seller chooses to represent themselves, they are responsible for all the tasks typically handled by an agent—including advertising and listing the house, organizing showings, negotiating the price and sales terms, handling maintenance issues or contingencies, preparing legal paperwork (with an attorney), and recording the sale with local government offices. Homeowners interested in listing their properties for sale by owner should keep these duties in mind, as they’ll need the know-how to be able to perform them successfully.
Individual Agency
Another option for representation in a real estate transaction, and perhaps the most common option, is when each party has an exclusive agent who solely represents their interests.
This option allows for optimal confidentiality, as each agent can represent their own party without any potential conflicts of interest. This allows agents to operate under the principle of fiduciary duty, which requires that real estate agents act in the best interests of their clients.
Additionally, when buyers and sellers are represented by separate, individual agents, the agents typically split the commission.
Individual agencies are recommended for most real estate transactions so that each party can receive the guidance and experience-based advice they need. Each party will receive the top guidance possible for their best interests from a trusted source.
Designated Agency
Another alternative is designated agency, in which different agents within the same brokerage represent the buyer and seller separately. Also known as appointed agency, this arrangement can provide dedicated representation to each party while still allowing both to benefit from the resources of a full-service brokerage.
Designated agency is considered more ethical than dual agency, since there’s less potential for conflicts of interest. Parties still get a separate agent to fulfill their fiduciary duties, but since both work for the same broker, the broker remains neutral.
The two agents may know each other (as often happens when a buyer contacts one agent who knows another), but they may not know each other, as when two agents work for a broker who manages thousands of agents. However, there is still potential for issues if the agents work together rather than remaining loyal to their respective representees.
Dual Agency
Dual agency occurs when a real estate agent represents both the buyer and the seller in the same transaction.
Dual agency can offer benefits like streamlined communication and potentially smoother transactions. The closing process might be faster since a single agent prepares everyone’s paperwork.
However, the risk of dual agency is that it causes potential conflicts of interest as the agent must balance the best interests of both parties. Buyers and sellers should be aware that in dual agency situations, the agent can’t provide undivided loyalty to either party. Their fiduciary duty could be compromised. Confidentiality may also be compromised, as the agent must navigate sharing information between the buyer and seller.
Moreover, there’s a risk of unequal representation, where one party may receive more favorable treatment. For example, a dual agent is always incentivized to support the seller because the higher the home sells for, the higher the agent’s commission will be and the more money they will make from the sale. Knowing this, a buyer being represented by a dual agent might not receive ideal treatment, brewing mistrust and potentially resulting in a discordant relationship.
For this reason, some states strictly regulate dual agency transactions, requiring agents to disclose their role and obtain consent from all parties involved. Most states (e.g., Michigan) have an agency disclosure requirement law so that both parties understand exactly what kind of agency they’ll have during the transaction. Some states have even outright banned dual agency, under the argument that a single agent cannot represent two parties’ best interests at once. These states include:
- Alaska
- Colorado
- Florida
- Kansas
- Maryland
- Texas
- Vermont
- Wyoming
It’s essential to carefully consider the implications of dual agency and seek guidance to navigate this complex aspect of real estate transactions. It is generally recommended that both parties sign a dual agency agreement to specify the terms and conditions of the agency arrangement and ensure that everyone is informed of the nature of the arrangement.
Conclusion
As you navigate the world of real estate, understanding the complexities of various representation structures for real estate transactions is crucial.
Being aware of how these factors affect buyers and sellers can help you confidently navigate your next real estate deal with clarity and insight.
