Agent or Transaction-Broker?

Pickle in the Middle or Gladiator on One Side?

Brokers may sell their own listings while remaining a seller’s agent. This is a specific example of the general phenomenon that brokers may work on a transaction as an agent of one party and assist the other unrepresented party with the ministerial tasks identified in Real Estate Commission Rule E-33, without establishing a transaction-broker or other brokerage relationship with the unrepresented party. Yet while this option is available to licensees and sellers, is the option desirable?

Last month’s article considered a transaction (discussed below) which did not close. While the broker didn’t do anything legally wrong, the end result was undesirable: The broker didn’t get a commission. The seller might have a harder time than the seller expects getting the buyer’s earnest money. Both the buyer and the seller are likely to have a poor impression of the broker. While the law is fairly clear that the broker had no liability to the buyer, the seller might have a different recollection of the seller’s choice not to ask the buyer about the buyer’s need to sell her existing home. The listing broker might only be exonerated after a law suit. Law suits begin in the mind of an unhappy person. The judicial system is imprecise. It would not surprise this author if at least one judge in Colorado disagreed with the conclusion of last month’s column.

This month’s article considers the same example (repeated below) and compares the advantages versus the advantages of becoming a transaction-broker when you sell your own listing.

EXAMPLE

I listed a property as a Seller’s agent. During an open house, a buyer, who is not working with any broker, fell in love with the property. Prior to any serious discussion with the buyer, I disclosed to the buyer that I was working as a seller’s agent. I gave the buyer a Brokerage Relationships Disclosure (Buyer) form which she signed.

The buyer asked me many questions about the home. The buyer mentioned to me that she owned her current home. Eventually, the buyer asked me to write an offer and I did so. The buyer did not tell me that she needed to sell her current home to buy my listing and she did not ask me for such a contingency.

When I presented the offer to the seller, I informed him that the buyer had an existing home and that I did not know whether she needed to sell that home to qualify for the financing identified in the offer. The seller responded: “If I get enough earnest money, that’s not my problem.” The seller asked me to counter the offer increasing the earnest money from $5,000 to $10,000. This counter offer was accepted by the buyer.

All of the preprinted contingencies in the Real Estate Commission approved contract were satisfied or waived. The buyer did timely obtain a loan commitment. The commitment was conditioned upon the buyer selling her existing home.

Now, a few days before closing, the buyer has been unable to sell her existing home. She can’t obtain the loan she needs to buy my listing. Since all of the contingencies which would excuse the buyer’s performance have been satisfied or waived, the buyer will breach the contract if the buyer doesn’t timely close.

The buyer claims that I should have asked her about a home sale contingency. Did I have a responsibility to ask the buyer about a home sale contingency?

ANSWER

Last month’s brief answer to the question was that the broker was not liable. Since the listing broker worked this transaction as an agent of the seller, without establishing a brokerage relationship with the buyer, then the seller’s agent had no duty to consult with the buyer about her potential need for a home sale contingency. Whether a buyer needs to sell an existing home is often important to the seller. However, this seller, perhaps against the listing broker’s better judgment, made an informed decision to not raise the home sale contingency issue with this buyer.

WHICH IS BETTER?

This month’s column addresses the question of whether it is better for a broker to either (a) remain an agent of the seller when the agent sells his own listing, or (b) establish a brokerage relationship with the buyer so that the broker works the deal as a transaction-broker. (Though offices may choose to work in-company transactions as dual agents, the Commission discouraged dual agency in its July 1998 news letter. For a variety of reasons, dual agency seems to be on the wane. In an attempt to simplify an already complex topic, this article ignores dual agency.)

A. Broker’s Liability Reduction Perspective

No one knows whether a broker has greater risks having (a) fiduciary duties (i.e. high duties) to a seller and virtually no duties to a buyer; or (b) lower, but equal duties to both the buyer and seller. Colorado’s current agency legislation became effective in 1994. As of the writing of this article, there has not been any published appellate court decisions creating binding precedent which shed light on this issue.

A substantial portion of this author’s law practice is spent defending brokers and acting as an expert witness in broker malpractice claims. Only a portion of broker errors and omissions defense cases involve in-company transactions. Of the in-company E & O cases, only a portion shed light on the question raised by this article. Of the in-company cases, only a small portion go to trial. There is simply not enough empirical data to help answer this question.

While the listing broker in the example last month had no liability to the buyer, the seller didn’t close on the sale to the first buyer, the buyer lost her earnest money and the broker put in a fair amount of time working a transaction which didn’t close. One of the reasons the broker didn’t have any liability was that the broker was careful to disclose to the buyer that the broker was working as a seller’s agent. Had the broker not done so, the result may have been different.

Because little empiric evidence exists addressing the liability consideration, this author suggests that brokers should answer the question raised by this article based less on liability considerations and more upon their style, the style of their office and marketing considerations.

B. Style

Some brokers feel uncomfortable becoming a transaction-broker when they sell their own listing. Yet many of these same brokers would, in the above example, like to have the flexibility to ask the buyer whether she needs to sell her house to close on the purchase of the listed property. If you are one of those brokers, you may want to be a transaction-broker.

If the listing broker was a transaction-broker, then regardless of the direction of the seller, the listing broker would owe the buyer the duty of “reasonable skill and care.” Not only would the broker have the flexibility to ask the buyer whether she needed to sell her house, the broker may have the obligation to do so.

An advantage of being an agent is that it allows some brokers to continue their natural inclination to act as more of an “advocate” for the client. One of the disadvantages of being an agent is that the duty of undivided loyalty may require the licensee to do something which is not in the interest of the unrepresented party and which may, in the broker’s better judgment, be against the best interest of the principal. Many brokers naturally think “win/win.” Transaction-brokers have more flexibility to achieve “win/win” results than agents.

What if a licensee from the listing company showed the property in response to a floor call? During the showing, the showing licensee and the buyer establish rapport. Will that showing licensee have the discipline to work with the buyer as an agent of a seller who the showing licensee has never met?

C. Marketing

Brokers might lose listing opportunities by telling sellers: “As a transaction-broker, I have flexibility to protect you from your own bad judgement.” But consider the following script from a broker to a seller prospect: “A buyer should feel more comfortable disclosing confidential information to me, or someone else in our company if we act as a transaction-broker. As a transaction-broker, we can’t pass on that confidential information to you. Yet an awareness of the buyer’s true needs may make it easier to put together a smoother deal. If we were to tell the buyer that we were your agent, Mr. Seller (which is what the law requires us to disclose), then the buyer won’t tell us these secrets.”

Would the seller in this article’s example have been happier had the listing broker been a transaction broker? Probably. For those of you who want to act as transaction-brokers as often as you can do so, consider walking your sellers through the example above.

CONCLUSION

Though offices may choose to sell their own listings and remain an agent of the seller, offices may also have a policy of becoming a transaction-broker every time the office sells its own listing. Offices should consider their style and marketing factors in making this choice.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN