Dual agency means an agent is representing both the buyer and seller – not always a good idea.
Last week CBC Marketplace aired an eye-opening episode on the wild, world of Toronto real estate. In the episode entitled, “Real estate: How some agents break the rules,” the show’s journalists went undercover with hidden cameras to investigate real estate agents for wrongdoing. And what they found was downright shocking.
Is the Deck Stacked Against Buyers in Bidding Wars?
In red-hot real estate markets like Toronto and Vancouver, bidding wars are just a fact of life. (I discuss ways to come out ahead in bidding wars in my upcoming book, Burn Your Mortgage.) Bidding wars can be tense and stressful for buyers. The stakes are high. Come out ahead and walk away with your dream home. Come up short and walk away empty handed.
Despite their prevalence, there’s a lot of secrecy surrounding bidding wars. They’re done behind closed doors. As a buyer, you have no idea about competing offer – how much is being offered or any conditions. More often than not, you’re asked to “improve” your offer. It can seem like the deck is stacked against you – and in some cases you might be right.
The Pitfalls of Dual Agency
During its undercover investigation, CBC Marketplace came across real estate agents who were willing to bend the rules, with some who were outright willing to break them. This is a disturbing trend to say the least. The selling agents were recorded on hidden camera saying they’d be willing to give buyers the inside scoop if they’d hire them as their buying agent.
When a real estate agent represents both the buyer and seller, this is known as dual agency. (To use a sports analogy, it’s like the Chicago Cubs and Cleveland Indians having the same manager in the World Series. It wouldn’t fly in Major League Baseball, but for some reason dual agency is fine in real estate.) In situations like this, the agent will encourage buyers to sign a buyer agency agreement. By signing a buyer agency agreement, the agent has a fiduciary duty to ensure your best interests are protected. The problem is that doesn’t always happen.
In the episode, an agent allegedly accepted an offer from a buyer, refusing to accept an offer from a buyer who offered more. The agent refused the higher offer because he was representing both the buyer and seller and able to collect double commission (this is known as a “double-ended deal”). The agent made out quite nicely, while the buyer with the best offer lost out on his dream home and the sellers got less than they could have for their home.
Are the New Rules Working?
Last year the Real Estate Council of Ontario (RECO) introduced new rules on dealing with multiple offers. The new rules brought more transparency to the offer process. Under the new rules, selling agents could only tell buying agents they had an offer if it was signed and in writing. While the new rules are a step in the right direction, clearly they aren’t enough based on CBC Marketplace’s investigation.
What’s the Solution?
There’s a conflict of interest between the buyer and their real estate agent. While the buyer wants to buy the home for the least amount possible, the higher the home sells for, the more commission the real estate agent receives. If there’s any suspicion of wrongdoing, the onus is on buyers and sellers to file a complaint, but since the deals happen behind closed doors, buyers don’t usually know if anything wrong has actually happened.
The financial industry gets audited to make sure everything is on the level. The real estate industry should be no different. Regulators like RECO should have their own teams of investigators who pose as buyers, asking routine questions to see if agents are following the rules. This would help weed out the crooked agents.
The fines for breaking the rules should also be increased. Right now the fines are a slap on the wrist. Real estate agents can be fined $3,000 to $5,000, but the chances of being caught are slim to none. On the other hand, a real estate agent can earn $40,000 in double commission. Based on the number of agents double-ending deals, it seems many think it’s worth the risk.
Do Your Homework Before Hiring a Real Estate Agent
If you’re like most people, purchasing a home is the single largest financial transaction of your lifetime. A good real estate agent can mean the difference between buying your dream home and coming up short.
Before hiring a real estate agent, do your homework. Don’t just go with the first agent you meet. Take the time to interview at least three agents. (I devote a whole chapter on hiring a real estate agent in my upcoming book.) You’ll want an agent who is familiar with the neighbourhood and type of the property you’d like to buy. Do your due diligence and check with the regulator in the jurisdiction you’re buying in to make sure no disciplinary action has been taken against the agent.
Getting Rid of the Bad Apples
Most real estate agents are honest. Unfortunately, there are a few bad apples that give agents a bad name. The regulators have taken some steps to protect buyers – for example, earlier this year in B.C., new rules were introduced to limit “shadow flipping” – but more needs to be done. The regulators need to do a better job of disciplining the crooked agents to gain back the public’s trust, otherwise an outright ban on dual agency should be strongly considered.
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.