Brokerage Relationships Act Tapes

What's It All About...

Effective November 1, 2000 Oklahoma has a new law, that makes it illegal for real estate licensees to be agents for buyers, sellers, landlords, or tenants. Essentially real estate agents will no longer be agents for clients. (They will still the agents of the brokers they work for in that relationship, however).

The Law of Agency evolved over centuries to provide legal guidelines for the governance of relationships between principals, agents and third parties. It is a well-founded body of law and there is no major problem with it. The problem is with the real estate industry. In many cases, "agency" does not "fit"  well with brokerage relationships in the buying and selling of property. Agency, does however, work very well in the property management area of brokerage.

The law of agency is designed for an agent to represent the best interests of one party, his client. A lawyer represents a client in court. An accountant prepares taxes for a client. A director manages a trust for the beneficiaries. There is no doubt who is being represented in these cases. Loyalty is easy to determine. Confidentiality is easy to understand.

The problem comes about when a lawyer, for example, wants to represent both sides of a lawsuit, or an account wants to represent both the IRS and the taxpayer in a dispute. In cases with inherent conflict of interest, it is very hard to be a dual agent. It is hard to be loyal to both sides, to get the best deal for both sides, to keep both sides positions confidential. In some cases, such dual agency is illegal even if all parties agree to it.

Brokers of all kinds, historically, have put buyers and sellers together for a fee. Usually a broker does not own inventory. He is helping buyers and sellers find each other and often helping in the actual transaction. In a sense, a broker is like a third principal in the deal. The broker wants his fee, so he wants the deal to "make". He does not particularly care if the buyer pays a little more or the seller receives a little less. What is important is that the deal closes and the broker gets paid.

A broker  wants both buyers and sellers to be happy so they will use the broker's services again. Today's buyers become tomorrow's sellers and vice versa. Therefore, it is in the broker’s best interests for both sides to "win" (or at least think they won). Brokers want WIN/WIN transactions. They want both sides to believe they are better off because the broker facilitated the transaction. Any broker wants good "word of mouth" and referrals in the future.

In the past,  it was not uncommon for a buyer to think the broker was working for his benefit in a transaction when, in fact, the broker was really working in the seller’s best interest. Even some agents thought they were working for the buyer when they were not.

This "Win-Win" concept came under pressure in the late 1970’s when real estate brokers began to be held to stricter compliance to the law of agency. Helping a buyer-customer get a better deal was considered disloyal to the seller. Helping a buyer too much could make the broker an agent by accident. This could make the broker an undisclosed or accidental dual agent – which was and still is illegal.

By the 1980’s many states required brokers to inform buyers that they were working for the best interests of sellers. Brokers had to tell buyers they were not the agents of the buyers. This eventually caused some buyers to hire their own brokers to represent their best interests. Thus buyer brokerage came into being. Buyer brokers, in turn, caused a problem for real estate companies that had many listings.

If buyers wanted to be represented by their own agents, then a company selling its own listings could become dual agents. No one likes dual agency. It is risky. A large full service company traditionally was said to need to sell half its listing within house to stay profitable. With buyer brokerage, a company could not sell its own listings to buyer-clients without being dual agents. A little company, with few or no listings, had no problem with buyer brokerage or agency.

As buyer brokerage became more widespread, the pressure became very great on large listing companies to allow dual agency. They needed to be buyer agents and still sell their own listings.

In July of 1993, it became acceptable policy to the largest trade association, to permit dual agency. However, this dual agency had to be called a limited agency ( there could not be undivided loyalty to each side). Informed consent was also required from both parties. While such a limited disclosed dual agency would be hard to accomplish, for many firms,  it was still better than the alternative: going out of business. 

Dual agency was never going to be a good idea. You really can’t get the best deal for both sides in most cases. Serving two masters well is all but impossible. In the military you just don’t violate the chain of command.

Therefore the idea came about to allow brokers to be what they traditionally have always been: transaction facilitators, people who  put deals together for buyers and sellers. Why be an agent at all? Many states have already passed laws that allow brokers to do business this way. These states, however, have retained the law of agency and brokers can still be agents. Oklahoma, on the other hand, has abolished agency for licensees and replaced it with something entirely new.

A Transaction Broker works to put a deal together without being an advocate for the party for whom he is providing services. If the Transaction broker is working as such for both sides of the deal, he is not trying to get the best deal for one side at the expense of the other side. He is essentially neutral.

A Single-Party broker works for the benefit of one side of the transaction. He is very much like the agent of old. The Single Party broker  has almost, if not all, the same "duties and responsibilities", he  had when he was an agent. 

If you are working with a Single-Party broker, he is  working for your benefit. If the broker you are working with is a Transaction Broker, he  is trying to help you with the transaction but he is not obligated to work for your benefit and is not trying to get you the best possible deal. 

IMPORTANT: A transaction broker can work for your benefit if his actions are not adverse to the other party in a transaction. For example, a transaction broker could work very hard to get a buyer the best loan. While this benefits the buyer, it also benefits any seller in that the buyer would be able to pay more money for the house. You can expect the transaction broker to assist you, and even work for your benefit, however, he is not obligated to do so when benefiting you is not in the other party's interest. If you want a broker who is obligated to always be working for your benefit, then employ a Single Party broker.

This new law is not much different from the way things used to be. However, under the new law a broker cannot be a Single Party Broker  for both sides of a transaction as he could in the past when both parties agreed to a disclosed dual agency.