Tuesday, September 12, 2006

RE Broker's License (#2) Agency RE Broker's License (#2) Agency

One of the more interesting changes in Colorado law since I first took and passed the Real Estate Broker's exam, is how the legislature got around the dual-agency problem that has plagued real estate professionals for a long time. The problem is that if someone is legally an agent of one party, they can't be an agent of another party, without violating the duty of loyalty. Worse, in the past, court cases had determined that the party paying employing the agents was the principal. This means that a real estate broker/salesman who represented a buyer turned into an agent of the seller when he submitted a contract for purchase, because the seller is the one who invariably pays the commission. But what about all the confidential information that the buyer had disclosed to this salesman/broker? By agency law, he would have to disclose it to the seller. Not good.

The Colorado solution is rather inventive. First, payment of commissions has been disconnected from agency. Anyone can pay it, as long as that is disclosed to the parties in writing. Secondly, there are now two basic types of agents in a real estate transactions. Singe agents represent one party, and transaction brokers sit in the middle and don't formally represent either. Dual agency is illegal. What that means is that the single agents have a duty of loyalty, etc. to their clients, but when someone becomes a transaction broker, their main duty becomes that of doing a good job at facilitating the deal, but most still disclose material facts. Its a nice balance.

Another problem that we see in big law firms that plagued some real estate brokerages is that when someone is a client, they are considered a client of the entire firm. In the case of large brokerages, it was not uncommon for one salesman/broker to work with a seller and another with a buyer. Under standard agency laws, this would be a major problem. As noted above, the Colorado legislature could have gotten around this problem by forcing them to become transaction brokers. But, instead, they implemented what is termed a "designated" broker who has loyalty to the one client. Thus, one broker in a brokerage may be designated to be a seller's agent and another, a buyer's agent. This provides a higher duty to the clients, without adversely affecting normal real estate practice.

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