Restructuring Agency Relationships in the Real Estate Brokerage Industry: A Legal & Economic Analysis

Posted: 21 Feb 1997

See all articles by Katherine A. Pancak

Katherine A. Pancak

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies

Date Written: February 4, 1997

Abstract

Our objectives in this paper are the following. First, we will review the traditional role that brokers have played in facilitating sales of residential real estate. Second, we will review the law of agency as it has arisen around this traditional role. In doing so, we will identify the problems that traditional agency law as applied to brokers seem to have created. Third, we will argue that these problems are inherent to the residential brokerage industry as it is currently structured. In particular, we will argue that these problems seem to stem from the bundling of brokerage information-providing services and representation (advocacy) roles. Some stylized facts about the commercial real estate brokerage market are instructive in this regard because in this market, these services appear to be unbundled to a large extent in commercial transactions. The animosity of traditional (full service) brokers to discount (limited service) brokers in the residential market, and the recent trend toward buyer brokers are also consistent with our analysis. Lastly, in view of the conclusions of the analysis, we evaluate current legislative efforts to reform or redefine the agency role of brokers. In the past three years, over forty states have either proposed or passed legislation aimed at restructuring real estate brokerage relationships. These efforts to redefine the agency laws governing the relationship between real estate brokers and their clients suggests that existing laws have not met the needs of the parties involved. Common criticism of traditional agncy law as applied to brokers are that: (1) buyers are unrepresented, (2) sellers are vicariously liable for the actions of unknown subagents, and (3) courts have imposed unintended dual agency status on brokers after the fact. More generally, there seems to be misunderstanding and uncertainty among buyers, sellers, and brokers, as to what their legal duties are to one another and how these correspond to the traditional functions that brokers have played in the residential housing market. We argue that much of this uncertainty stems from an inherent conflict between the traditional roles of the residential broker as both an information provider and an advocate. The broker best serves the former role when buyers and sellers freely share information prior to a match. However, once a match is made, the broker's fiduciary obligations reside with only one of the parties (typically the seller). As a consequence, the unrepresented party may be reluctant to share information with the broker up front in anticipation of the broker's agency obligations, thereby impeding the flow of information. Inevitably, this reduction in the exchange of information leads to higher transaction costs of completing real estate transactions, and therefore to a less efficient market for housing.

JEL Classification: D40, L85

Suggested Citation

Pancak, Katherine A., Restructuring Agency Relationships in the Real Estate Brokerage Industry: A Legal & Economic Analysis (February 4, 1997). Available at SSRN: https://ssrn.com/abstract=9225

Katherine A. Pancak (Contact Author)

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies ( email )

368 Fairfield Road
Storrs, CT 06269
United States
860-486-1275 (Phone)
860-486-0349 (Fax)

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