Dual agency usually happens when an agent represents both the seller and buyer of real estate in a transaction. However, it also occurs when separate agents licensed to the same brokerage firm represent both sides in a contract. Such arrangements create a potential conflict of interest because agents within an agency bear respective fiduciary duties when representing both parties in a deal.
Homeowners seeking to sell their property hired a real estate agent to put their home on the market for $5 million. Coincidentally, another agent licensed to work in the same agency found buyers for the property, thus creating a dual agency situation.
The buyers put in an initial full-price offer of $5 million, which the sellers were willing to accept. Unfortunately, the proposal was rescinded before the deal was finalized. The buyers submitted a revised lower bid of $4,805,000, which was $195,000 less than their original offer. The sellers were advised that since this was their only offer, they should accept it immediately.
The sellers accepted the offer, which included paying a commission of $144,000 each to the buyer’s and seller’s agents for a total of $288,000 in agent’s fees. Only after the deal closed did the sellers learn that the lower price offer was because the buyer’s agent knew there were no other offers on the property and shared the insider info with the buyers.
The sellers found their ability to negotiate was compromised and that they were in a weakened bargaining position because two agents in the deal worked for the same broker and shared confidential information with the buyers. As a result, they brought a lawsuit demanding payment of the $195,000 loss on the sale deducted from the original price and an additional $288,000 representing the total commission paid to both agents in the deal.
What Went Wrong
An obvious danger of dual agency is the agent’s potential conflict of interest. In this case, the buyers gained confidential information while the sellers were advised to close quickly. Such unscrupulous actions and illicit knowledge sharing encouraged the buyers to rescind and renegotiate their offer to the seller’s considerable financial detriment.
Besides creating a conflict of interest, dual agency poses a potential substantial legal, professional, and ethical risk for agents when they fail to fulfill their fiduciary responsibilities. Buyers and sellers are particularly vulnerable to dual agency because they often do not understand what constitutes a conflict of interest. Such misunderstandings often lead to lawsuits over-representation, compensation, and even ownership.
In this case, the agents and real estate brokerage face nearly $500,000 in losses for settlement fees and additional costly legal defense expenses with the prospect of financial ruin. This real-life dual agency example is a cautionary tale because such incidents frequently occur in the real estate market. Moreover, it underscores why real estate agents need the broad professional liability protection that only quality E&O insurance coverage provides to safeguard them against paying for disastrous losses from legal fees and settlement costs.
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