The Value of Real Estate Brokers
- Jul 05, 2017
It’s almost an axiom of real estate: In order to do a transaction, you need a seller or landlord and a buyer or tenant that are willing to negotiate at arm’s length, in good faith for a specific location. The starting point is finding the other party and the location, and owners and developers have to rely on third parties to facilitate the transaction. This is where using a real estate brokerage firm has value, and one should not underestimate the skill brokers need to mine data, stay current on the data, and maintain the relationships needed to convince an owner that a buyer or tenant is the appropriate and reputable party for the transaction.
All parties expect their brokers will have the highest duty of loyalty to them and disclose all relevant facts about the transaction. That duty is codified in most state laws, and many states classify brokers as being a fiduciary for its principal.
Dual Agency Dilemma
The question being asked with some greater urgency in the past year—in large part due to consolidation in the brokerage community—is what happens when the brokerage company represents both the buyer/tenant and the seller/landlord through separate teams? What is the duty of loyalty and how far does it go? As most sophisticated owners of office or retail properties know, it is not uncommon for your outside broker to find a potential buyer or tenant from within the same brokerage company’s clients (indeed that is part of the value large brokerage companies bring to the table).
There has been a rise in litigation on this topic, and most of it focuses on a simple question: If the selling agent finds out something negative or inaccurate about the property that has not been disclosed by his or her principal, does the selling agent have a duty to disclose this to the buyer’s agent, or does the buyer’s agent have the independent duty to find this out? The most courts are ruling that the broker in a transaction where both the seller side and the buyer side are represented by separate teams at the same brokerage company (referred to as “dual agency”) has a duty of disclosure and investigation to both parties. The cases generally involve the facts regarding the physical condition of the property—not pricing or concessions. What is generally considered confidential information is negotiation strategy, “bottom line” rent or sale price information, even in a dual agency context.
Some brokerage companies believe that in a dual agency situation, neither side has an incentive to aggressively negotiate a deal because the brokerage firm is motivated by the large commission it will earn, and being aggressive risks losing “both sides” of the transaction. While this argument may have some weight in certain circumstances, it is a narrow situation.
After years of dealing with brokers and seeing numerous dual agency transactions, it seems most sophisticated owners of office and retail properties, and most active users and buyers of property, appreciate the value of an integrated brokerage company that can provide added services and visibility into a market, and real estate executives can make their own decision as to whether their broker agent is loyal to them or not. The take away is that owners, buyers and users of commercial properties need to be attuned to this political issue if and when it arises in their markets.