Dual agency: The illusion of individual savings & the real cost to society

Opposing Teams

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Exposing the hypocrisy of dual agency, and it’s evil counterfeit buyer agency twin, “designated agency” has been a crusade for real estate consumer advocates, like The Real Estate Cafe, for more than 15 years.  For the most part, proponents of buyer agency have stressed the financial benefit to individuals — something an article today in the leading real estate new service fails to even address.  Instead, the article may give the mistaken impression that buyers can maximize their savings by working with a dual agent because of “…a commission reduction to cover repairs or a lower purchase price, if they represent both sides.”

Those savings are trivial by comparison to the deep discounts skilled buyer agents can negotiate for their clients.  For example, The Real Estate Cafe saved clients over $1 million dollars during one recent year (see map of selected savings, all but one over $100,000).

Still, what’s more important from a policy perspective is to switch from debating savings at the micro-level to costs at the macro level, ie. the cost to society.  With one in four mortgages underwater, it’s essential for legislators and regulators, both a national and state levels, to investigate whether dual agency, and related “blind” bidding wars, helped inflate the housing bubble and to enact reforms to prevent a repeat in the future.

Research findings from one snap shot, a Cornell study on dual agency, suggest dual agency helped create overvalued housing prices, which taxpayers are now being forced to bail out. More specifically, Cornell researchers found that listing agents increased asking prices by 10 percent “when an internal buyer with a high willingness-to-pay is available,” and generated sales prices 5 percent higher on transactions involving in-house sales. Ironically, researchers concluded that the net impact on the market was insignificant because “agents cut sale prices to capture both sides of the commission or trade favors with colleagues.”  That’s one of the strongest arguments to outlaw inside trading, and require no conflict of interest agreements from any real estate agents involved in foreclosures.  (As CNBC recently reported, short sales are already plagued by fraud and kick backs.)

Even if individual buyers don’t understand the financial benefit of using a buyer agent, shouldn’t taxpayers have an advocate to prevent buyers from overpaying any time government subsidies are used to purchase or finance a property?  Yale Economist Robert Shiller may have had something like that in mind last year when he told ConnectNY that ever family in America should have a personal financial advocate.  Fortunately, the cost of paying for that advice is already built into the typical real estate transaction.   If you’re NOT using a buyer agent, you’re giving the listing agent / agency a double pay day whether or not they are acting as disclosed dual agent (something the article above also fails to mention).

Speaking as a real estate consumer advocate, my hope for the new decade is that (1) dual agency laws will be repealed, (2) any company involved in short sales or foreclosure disposition will be required to sign a no conflict of interest policy which includes dual agency, and (3) in the future, “blind” bidding wars replaced by controlled bidding environments, like N-Play, to maximize transparency and minimize deceptive buyer manipulation.

Until then, we invite readers to discuss what regulatory reforms are needed to protect real estate consumers; and if you are buying a home, we would be glad to discuss how The Real Estate Cafe can help you save money.  Let us know when that’s convenient.

Posted in Defensive Homebuying, Dual Agency Detective, Foreclosures, RECALL: Real Estate Consumer Alliance

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