Peterson: Why I Hate Transaction Brokerage!
by Scott Peterson, CAR General Counsel
In the July issue of the Colorado REALTOR® magazine, I wrote “Be Afraid! Your Misuse of the Transaction Brokerage Relationship” describing some of the changes that were being proposed to the Colorado Real Estate Commission rules regarding brokerage relationships. At its August 5, 2019 meeting, the Real Estate Commission did, in fact, adopt the proposed rule changes and those modifications will be effective January 1, 2020. Overall, I believe the modifications are a very good thing for REALTORS® and reflect a much more practical interpretation of the statutes. If you want more detailed information on the changes, please read my article linked above.
At the end of my July article, I promised to follow up with a more complete discussion on “Why I Hate Transaction Brokerage.” Steadfast in my promise and with the full understanding that many of you have been in breathless anticipation of this article, I have finally arrived with my Halloween “treat!”
For nearly 20 years, Colorado has offered only two types of brokerage relationships between a REALTOR® and a consumer. As each of you know, the two available brokerage relationships between a Colorado licensee and their client are “transaction broker” and “agent.” There are two ways to create a “transaction brokerage” relationship, but only one way to create an “agency” relationship. A “transaction brokerage” relationship may either be created through no written agreement (“defaulting” to TB), or by checking the “transaction broker” box and signing a written Exclusive Right agreement. Alternatively, an “agency” relationship can only be created by signing an Exclusive Right agreement and checking the “agent” box at the top of the agreement.
The implications of the two types of relationships, while clear to many of you reading this article, is often lost on many real estate licensees throughout the state. An “agency” relationship requires the REALTOR® to provide BOTH Uniform Duties AND Additional Duties (fiduciary) to a client. Alternatively, a “transaction broker” is required to provide, but may ONLY provide, Uniform Duties to a client. A “transaction broker” is not
allowed to provide fiduciary duties to a client…and this is why I hate transaction brokerage.
With very rare exceptions, your clients EXPECT to receive fiduciary duties from you! They hire a REALTOR® because the want advice, advocacy, consultation, and input from you. Consumers EXPECT that you are going to advocate for their best interests and fight for the best deal. Consumers EXPECT you to advise them on purchase price, value, upsides, downsides, etc. CONSUMERS WANT AN AGENT! As a “transaction broker,” you aren’t allowed to do any of the things that your client EXPECTS you to do! You are relegated to the role of a paper pusher who can prepare Commission-approved contracts, present offers, and keep the parties informed as to dates and deadlines.
One of the biggest frustrations I have is when “transaction brokers” act as “agents.” While everyone can acknowledge that an “agent” who doesn’t offer fiduciary duties is violating license law, few people realize that a “transaction broker” who offers fiduciary duties is similarly violating license law. And yet it happens all the time! Frequently, a REALTOR® working with a buyer without a written agency agreement is out driving around consulting with the buyer about home values and prices that are “too high” or “good deals.” Once they go under contract, the REALTOR® commonly advocates for their “transaction broker” client and strategizes with them on inspection items and other contract terms.
Let me be clear, I believe there are two instances where “transaction brokerage” is an appropriate and necessary relationship. First, if you are working with BOTH a Buyer and a Seller in the same transaction. This is a classic scenario for transaction brokerage as you will be clearly obligated to NOT provide fiduciary duties to either party. Instead, you will be working strictly as a neutral “referee” on the transaction and specifically precluded from providing advocacy or advantage to one party or the other. The second scenario where transaction brokerage is appropriate is when the client refuses to engage in an Exclusive Right agreement. In that case, the client should have a clear understanding of the strict limitations on what the transaction broker can (and cannot) do on the client’s behalf. If the consumer still declines to execute an agency agreement, I would argue that they only deserve the limited, Uniform Duties.
Other than the two scenarios described above, I am hard pressed to understand any other appropriate use of the transaction brokerage relationship. In some cases, it is the result of REALTORS® being unable or unwilling to obtain a written, Exclusive Right agreement with their client. This is unfortunate and often serves to the brutal detriment of the REALTOR® since the Exclusive Right agreement also protects the REALTOR® from a buyer or seller unilaterally deciding to work with someone else on the purchase or sale of the home. One of the most common Legal Hotline questions I receive is from a devastated buyer’s broker who just found out their buyer wrote a contract without them.
Sometimes “transaction brokerage” is the preferred (or only!) relationship offered by the brokerage firm pursuant to its office or other policy. This scenario surprises me since I believe it would be difficult for that broker or brokerage firm to compete with other “agents” in the marketplace if consumers fully understood the distinction between agent and TB. If I were competing against a “transaction brokerage” only broker or brokerage firm, I would make certain that the prospective client understood clearly that a transaction broker was not able to advocate, advise, or “fight” for them due to the explicit limitations of transaction brokerage in license law. I am convinced most consumers would not opt for that relationship if they fully understood its limitations.
While many states still maintain “dual agency,” Colorado abolished that as a brokerage relationship in 2003 and I believe that to be a good thing. It would seem nearly impossible to legitimately offer “agency” duties to two different parties in the same transaction. That said, I find that many Colorado licensees essentially still act as a dual agent in scenarios where they are working with both a buyer and a seller. They do this by casually offering advice and consultation to both the buyer and seller in the same transaction because, guess what? Buyers and sellers DEMAND it!
On some level, pretty much every consumer is looking to you, as a professional REALTOR®, for fiduciary duties. While the consumer might not describe them as “fiduciary duties,” they know what they want. They want a REALTOR® who is willing and able to tell them that something is priced “too high” or “too low” or is “a good value.” They want a REALTOR® who can identify and exploit weaknesses and leverage the other party to get a better deal. They want somebody to provide them with the benefit of their market experience, knowledge and expertise. Unfortunately, the only way a consumer can properly get the benefit of all the things that they want and expect is for them to engage the REALTOR® as their “agent” through an Exclusive Right agreement.
I am convinced that if REALTORS® got better at selling the benefits of “agency” relationships (and the limitations on “transaction brokerage” relationships), they are going to be more successful at getting Exclusive Right agreements signed (the only way an “agency” relationship can be created). Moreover, they will “win” more clients away from brokers and brokerage firms only offering “transaction brokerage” services. Most of all, “agency” is what your clients expect and demand!
And that is why I hate “transaction brokerage” relationships! Is the Broncos’ season over yet?
Happy Halloween!