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History of Real Estate Agency Relationships
In the beginning, real estate brokers were known as middlemen and optioneers. In the past, it was common practice for a middleman to know about a property being sold, but keep it from other middlemen. It is difficult for these middlemen to collect payment for their services so they resort to tactics that are not always in the best interest of their seller. Optioneers, on the other hand, are often more successful in collecting their fees because they tie the seller’s property to a purchase option, sell the property to a buyer at a price above the option value, pay the seller the option price, and then pocket the rest.
The early real estate brokerage business was not very organized and used brokerage methods that were often dishonest, subject to fraud, and that exploited both sellers and buyers. Eventually, a newer concept of the real estate broker who is an agent of and owed a fiduciary duty to the seller and receiving payment for his services was developed. This new concept forces the seller-broker relationship to a higher level of service and duty. It also allows brokers to list properties for sale using contracts. These contracts are what we are now referring to in the listings. The previous forms of the list we called open lists. An open listing is a type of non-exclusive listing contract that allows a real estate broker to offer a property for sale, find a buyer and get paid for services to close that transaction.
Other brokers may also have open listings for the same property, but only the broker who finds the buyer receives a commission. In addition, no broker is paid a fee when the seller sells the property. The open list discourages cooperation between brokers, because each broker gets their own open list. To solve the open list problem, the exclusive agency the list became popular.
An exclusive listing agency is a type of listing contract in which the seller only offers the listing fee to the brokerage if the buyer is obtained through the brokerage’s efforts or the efforts of other real estate brokerages. This means that in some situations, such as For Sale by Owner, the listing brokerage may not receive payment when the property is sold. In an exclusive agency listing, the listing brokerage or another brokerage working with the listing brokerage must hire the buyer to have a claim for payment.
The exclusive listing agency encourages competing brokers to find buyers for the listing, because the listing brokerage pays the sales brokerage fee. However, the seller still does not pay when a seller finds a buyer. The agency’s exclusive listing eventually spawned the exclusive right to sell list.
Exclusive right-to-sell agreement, the listing brokerage is offered a fee in the event of a sale regardless of who the buyer is. The exclusive right to sell the listing guarantees that the listing broker will be paid a fee, even if a competing broker or the seller sells the property. This provides the most protection for the listing broker and is considered to be in the best interest of the seller because the listing brokerage will put effort and resources into marketing the property, as a commission is guaranteed at the time of the agreement.
Although the exclusive right to sell the listing has become popular, there is little cooperation between brokerages, because a buyer who wants to buy a specific property must deal with the broker who has the exclusive listing interest. It is also clear to all parties that the broker represents the seller and that the buyer has no representation.
In the 1950s there was pressure for more cooperation between brokerages. As a result, a broker working with a buyer will contact competing brokerages to determine their inventory and possible matches for their clients. Deals usually result where the selling agent does not know the seller or their agent and the only dealings with the selling agent are with the buyer. Suddenly, the concept that the selling brokerage owes its fiduciary duty only the seller is no longer a neat and logical concept. However, it will take years before the agency’s dysfunctional concepts are sorted out and bring buyer representation.
As the 1950s and 1960s developed, a more formal system of cooperative brokerage, known as Multiple Listing Services (MLS), developed. Through MLS, the concept of subagent improved. Simply put, this means that the listing broker is the agent of and only represents the seller. The listing brokerage hires sales associates for consideration subagents to the seller. An MLS brokerage listing is required for the listing to apply to all cooperating brokerage within their MLS. These cooperating brokerages are also considered subagents of the listing brokerage, which are the seller’s agents. If the cooperating brokerage has marketing partners, they are subagents of the cooperating brokerage, which are subagents of the listing brokerage, who is the seller’s agent. At this time, the agency relationship with a buyer is not possible, because the agency relationship is always with the seller. A licensed mortgage buyer’s only duty is not to lie when asked about a property. The concept of “buyer beware” is the true reality of how the brokerage business operates and buyers are often underrepresented.
The rise of consumerism, as shown by many court decisions, has put pressure on the brokerage business to be more concerned with the interests of the buyer. Because of that, licensees working with buyers have a positive duty to disclose known factors affecting a property. For example, if the broker knows that a roof is leaking, he must disclose this fact. This concept of disclosure was later expanded by the courts to include conditions regarding property that brokers should or know.
In the 1980s, a government study found that nearly three-quarters of all buyers thought the brokerage they worked for represented them as a client. The same study concluded that nearly three-quarters of all sellers also think that the cooperating brokerage represents the buyer’s interests. It soon became clear that the concepts of agency law that industry and government regulators tried to impose to simplify and clarify agency relationships did not work. Continued pressure from consumer groups and the courts eventually led to the buyer representation movement in the 1990s.
In 1991, the National Association of REALTORS® formed an advisory group to study agency representation issues. Testimony was received from real estate practitioners, industry experts, the public, and state regulatory authorities. The advisory group’s report made the following recommendations:
NAR’s multiple listing policy should be changed to make subagency offers optional. If the subagency is not accepted by a cooperating brokerage, then the listing brokerage will offer a fee to the brokerage representing the buyer.
NAR will encourage state associations to promote changes in real estate laws and regulations to promote disclosure of agency options. These options include seller agency, buyer agency, and disclosed dual agency. The purpose of this recommendation is to help consumers make informed decisions about representation.
NAR should encourage real estate brokerages to adopt written company policies that address the management of the agency’s relationships with its clients and customers.
NAR will encourage the education of all members on the subject of agency representation. State regulatory agencies will also be encouraged to include the agency as a mandatory subject in continuing education requirements for all licensees.
Since 1992, the National Association of REALTORS® has adopted the following policy:
“The National Association of REALTORS® recognizes seller’s agency, buyer’s agency and discloses both agencies with informed consent as appropriate forms of consumer representation in real estate transactions. The association respects the need for all REALTORS® to be able to make individual business decisions about their agency Practices in companies. In addition, NAR endorses freedom of choice and informed consent for consumers or services in real estate when establishing agency relationships with real estate licensees.”
These NAR changes in representation policy changed the way the industry practices. Exclusive Right of Representation Today’s buyer’s agreements allow a buyer to contract with a brokerage to find, and negotiate, the purchase of real property. Usually, these agreements are for a specific period and require the buyer to pay a commission to close the real property transaction. As a buyer’s agent, the buyer’s brokerage owes all fiduciary duties (care, loyalty, disclosure, compliance, and accounting) to its principal, the buyer.
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