DAVID S. DRINKWATER
Consumer expectations

Leaders of a state real estate industry group last week voted overwhelmingly in support of a controversial proposal that seeks to redefine and clarify the way real estate agents represent buyers and sellers in the Bay State.

Members of the Massachusetts Association of Realtors Board of Directors voted 81-6 in favor of an agency proposal that includes three key components. The component that has sparked the most debate would enable a real estate company’s broker of record to designate one or more agents to represent the buyer while simultaneously appointing others in the firm to represent the seller in the same transaction. The practice of “designated agency” would allow agents in a firm to represent both buyer and seller in a full fiduciary capacity. In a similar situation today, the agents would either have fiduciary obligations to the seller only or would work as so-called disclosed dual agents, meaning they would have to get permission from both buyer and seller to shift into more neutral roles and not offer full representation to either party.

The MAR proposal also calls for listing agents to get written consent from sellers to allow other agents to work as subagents of the seller. Today, sellers are not required to sign off on the practice of subagency. Yet another component of the proposal would enable real estate agents to function as facilitators who work with consumers and assist with the transaction but have no fiduciary responsibility to either buyer or seller.

Supporters say the proposal is consumer-driven and based on years of research and input from many real estate professionals and legal experts. The plan also is responsive to changing trends in the real estate industry.

Massachusetts, unlike 37 other states, lacks specific and comprehensive laws that guide real estate agency relationships and practices, which causes confusion in the real estate industry as many Realtors interpret agency in their own ways, according to proponents of the MAR proposal. The proposal offers greater disclosure and protections for buyers and sellers to fully understand how agency works, supporters maintain.

They also emphasize that the proposal does not seek to eliminate any forms of practice currently in place, but instead expands the choices available to consumers and real estate agents and brokers. Some believe, however, that subagency will eventually be phased out if the MAR plan succeeds because sellers, made fully aware that they can be held liable for any misrepresentation about a property made by a subagent they don’t know and aren’t directly working with, won’t sign off on it.

“What we are doing is not groundbreaking in any way, shape or form. But we are responding to the growing trend in the marketplace that we have analyzed very carefully over the last three years,” said David S. Drinkwater, who served as the chairman of MAR’s Agency Committee and is a past president of the association. “It is our hope that, with these expanded choices out there, we will be able to work more in concert with what is expected of the brokerage community from the consumers’ point of view and the free market will determine which services are the most attractive in the marketplace and they will gravitate in that particular direction.”

Consumer Issues

But critics see flaws in the proposal that they say could ultimately hurt consumers and smaller real estate companies. They argue that designated agency will benefit larger companies that are interested in keeping both sides of a real estate transaction in-house and that smaller companies won’t have the capacity to offer that type of agency relationship, especially when the principal broker is directly involved in a transaction.

They also contend that agents within one company can’t truly represent both a buyer who is seeking the lowest purchase price and seller who is seeking the highest price in the same transaction. And while proponents say that having more choices is beneficial to consumers, the plan’s detractors argue the added options will confuse both consumers and agents, and as result Realtors may not provide full disclosure about the implications of choosing one form of agency over another and get true informed consent from buyers and sellers.

“The problem is that the disclosure that’s necessary for consumers to understand what their options are – even in who in the market will offer those options – is completely lacking,” said Barry Nystedt, an exclusive buyer’s agent in Newton. “While the consumer will have more choices to make, they won’t find all those choices at any one firm, and the major firms, the largest companies, will merely offer one choice – basically designated agency.”

He added, “The consumer will not readily understand when they’re choosing a big-name company that in fact they’re only getting the commitment and advocacy from one individual within that firm under so-called designated agency.”

Under the proposal, real estate agents are required to get a consumer’s signature on a form agreeing to the agency relationship, but that doesn’t guarantee full disclosure, according to Nystedt.

“Once the practitioner has gotten the signature on the form, it’s assumed that all the options have been explained,” he said.

The vote came after a three-year effort by MAR leaders to clarify agency roles in the state. Today, Bay State real estate agents engage in practices that are common within the real estate industry. They either function as buyer’s or seller’s agents. Some work as exclusive buyer’s agents, meaning that they never represent sellers. They can also function as disclosed dual agents.

Agents may also act as subagents, a common practice in Massachusetts that occurs when an agent cooperates with a seller’s agent to represent the seller even though he or she brings a buyer to the transaction. The practice is sometimes criticized because, despite disclosure requirements, it is thought homebuyers sometimes wrongly assume an agent showing properties to them automatically represents them. Problems also arise, according to some Realtors, because in many cases, sellers don’t realize that they’re liable for the actions and representations of subagents, even though they haven’t signed any agreements to have those agents represent them.

“We feel that they [sellers] need to understand what that means to them and that the vicarious liability issue does exist out there,” explained Drinkwater.

Many Realtors agree with Drinkwater that the legislation is long overdue and will provide much-needed guidance.

“As a practitioner, [I believe] we need very definitive laws governing agency and this is a step in that direction,” said Mary Dawson, who is a member of the MAR board of directors and sales manager for Century 21 Annex Realty in Quincy.

In a presentation to the Banker & Tradesman editorial board last week, MAR President Peter P. Casey pointed out that currently, practices like facilitation are already allowed in Massachusetts because there aren’t any laws specifically prohibiting them.

“The fact of the matter is, that all of this is permitted under the current law – all of it – without definition, without guidance. Which way is better? Providing the definition and guidance, or leaving it the way it is?” said Casey.

Casey, who is president of Prudential Wilmot Whitney Real Estate, said if the proposal is implemented it will clarify agency by creating uniform standards and will help him in his own business. Casey said that, while it is true that principals of small firms who are directly involved in a transaction won’t be able to offer designated agency, they nevertheless will retain all the existing agency options they currently use.

“I don’t do a lot of listing and selling because I choose to designate other people to do it. But there are clients who insist on working with me, and I am no worse off now with this new proposal,” said Casey. “In fact, I’m a little bit better off because as part of this we are asking for a much, much clearer definition of what dual agency is, much better disclosure for consumers so they understand what can occur under dual agency.”

He added, “That helps me to do a better job than I’m able to do today because right now that’s buried in the common law and no one really understands what the rules are or everybody understands the rules a little bit differently, which is even worse.”

Yet Realtors like Leo Berard predict that the agency changes will be particularly tough for smaller real estate companies that don’t have the staff and legal experts to help them navigate the potential pitfalls with practices like designated agency.

“It’s going to create complete chaos in most of the medium-sized and small offices,” said Berard. “The bottom line to me is that the marketplace is working terrifically in Massachusetts. Our national association [of Realtors] has been pushing this for a decade, but we don’t need this. There’s been no consumer demand for this. The consumers basically have the options they need today.”

MAR leaders challenged the notion that designated agency will hurt small business. They said the association would provide educational programs to help real estate companies implement new business models that they choose.

Members of the MAR Agency Committee met with Realtors from Maine and Connecticut, states that allow designated agency, to see whether problems have arisen with practice. Twenty-five states have enacted designated agency.

“We have not seen small businesses crumble – just the opposite. They’re doing very well,” said MAR General Counsel Stephen Ryan. “What we’ve seen is from [Maine’s] own real estate commission – their assessment – that it’s working. It’s working quite well. When Connecticut … was looking at a designated agency statute, their own Office of Consumer Affairs wrote a letter to the Legislature in support of the measure with a couple of minor tweaks to it.”

According to MAR leaders, no formal complaints have been registered in those states regarding the practice.

In response to the proposal, Berard, Nystedt and a group of other Realtors formed Real Estate Agents for Real Agency. The group has already met with several legislators and is sending out letters urging them to reject the legislative proposal if it comes their way. REAFRA’s biggest concern centers around designated agency.

According to Nystedt, there aren’t enough consumer protections written into the proposal to guarantee that confidential client information isn’t shared under designated agency. And the broker-owner of a company that chooses to designate agents to represent opposite sides of a transaction faces conflict-of-interest issues, he said.

The broker-owner is supposed to supervise both agents and becomes a dual agent, under the proposal. But Nystedt said the broker becomes an “undisclosed” dual agent, because no disclosure to the consumer is required under MAR’s plan.

“This supervising broker also has the corporate pressure to produce more business and special incentives to write as many in-house transactions as possible. The designated agents may also have those pressures and special incentives for in-house transactions,” he said.

Disclosure Debate

The American Homeowners Grassroots Alliance, a group based in Arlington, Va., also considers the designated agency practice to be “anti-consumer” and “not in the best interest of homeowners in the Bay State.”

“Designated agency is simply a disguise for undisclosed dual agency. It is a deceptive practice very similar to the conflicts of interest and self-dealing recently exposed in the investment-banking sector,” writes Beth Hahn, president of the American Homeowners Grassroots Alliance, in a letter dated Sept. 3, 2003, and posted on REAFRA’s Web site.

But Ryan, MAR’s attorney, and others see it as a consumer-friendly proposal.

“If there’s one word I’ve used to describe the proposal it’s disclosure,” said Ryan. “If there’s going to be a relationship with a consumer, the disclosures would be better and clearer. I think the consumer gets a better sense as to what they can expect in a real estate transaction.”

Drinkwater said a “minimum required disclosure level” has been included in the proposal. “But we’re not precluding the opportunity for additional disclosures to be done if the board of registration decides to weigh in and want to augment that,” said Drinkwater.

“But you’re also going to have individual companies that may want to create the [disclosure] form with this contained information but include some other things about whichever business model they are actually choosing to practice to make it easier for the consumer to understand,” he said.

While MAR has formulated a legislative package, Drinkwater and other MAR leaders indicated last week that they may pursue the initiative through regulatory changes. The MAR Government Affairs Committee will begin taking steps to implement the changes and will meet with regulators and legislators.

“The market is going to tell us what they want to embrace … we have to be forward-thinking,” said Drinkwater. “The needs of the consumer 10 years ago are not the way they are today nor will they be that way in the next 10 years.”