This summer buyers and sellers in Ontario and B.C. may find that their favourite real estate agent will turn them away as a client. Why? Because new rules are coming into effect that will impact all real estate transactions in these two provinces (and may eventually lead to changes in other provinces and territories). These changes are updates to how dual agencies work in Canada and new restrictions for real estate agents. Learn about how dual agency evolved and how it pertains to homebuyers across Canada.
How dual agency evolved
Historically, real estate agents would get to know their community and work a specific geographic area. In some situations — such as remote or rural regions — this business model was based on necessity. With only a limited number of transactions each year, only a limited number of agents can earn a living in the business of real estate.
In other situations, a real estate agent would choose to focus on a specific region or area in order to become a defacto area specialist. Known in real estate speak as “farming an area,” this practice typically results in one or two agents dominating the business in a neighbourhood or community. Because these agents would develop long and strong relationships with community members quite often they would end up representing both the buyer and the seller in neighbourhood real estate transactions.
This business model appeared to work for a long, long time until resourceful journalists found unearthed how some unethical agents were putting their earnings before the needs of their clients. As a consequence, various provincial governments began to scrutinize and question the validity of the dual agency relationship in real estate transactions. At present, only the B.C. and Ontario provincial governments have taken steps to ban or severely restrict the use of dual agency in provincial real estate transactions. More provincial governments may follow suit.
What is a dual agency?
Dual agency — also known as multiple representation or dual representation — is when one agent or two agents from the same brokerage represent both the buyer and seller in a real estate transaction.
Problems that can arise with dual agency?
When one agent (or one brokerage) represents both parties, this agent will end up earning a commission from both the buyer and the seller side of the real estate transaction. In most jurisdictions in Canada, the buyer’s agent would receive a commission of 2.5% of the sale price (minus any fees that agent pays to his or her brokerage). In the same transaction, the seller’s agent would receive a commission of 2.5% of the sale price (minus any fees that agent pays to his or her brokerage). That means, on the sale of a $200,000 home, a buyer’s agent would receive $5,000 (minus brokerage fees) and the seller’s agent would receive $5,000 (minus brokerage fees). But if one agent represents both the buyer and the seller, they’d receive the entire commission of $10,000 (minus brokerage fees).
An agent that represents both the buyer and seller is still expected to provide full and ethical representation to both sides of the transaction but, as you can imagine, the advice this agent may normally provide their client may be hampered due to representing both the buyer and the seller. For instance, if a buyer’s agent learned that the home seller is listing the home for sale because the family needs to move to another city for work, then that agent would probably advise their client to come in with a competitive bid. But if that same agent was also representing the seller, they could not pass on this information to their buyer client and could not advise their buyer client that the seller’s motivations could be time-sensitive. If the agent were to let their buyer client know of the seller’s motivations, the agent would be in breach of fiduciary duty to their client selling the home — and, yet, the buyer is missing out on smart, strategic advice from their real estate representative.
Potential for abuse
The financial incentive for a dual agent can potentially create a conflict of interest in that the agent may be willing to:
- Advise against recommending the highest price for the seller and;
- Advise against recommending the lowest price for the buyer;
- Put their own commission earnings before the needs of the buyer or seller and, as a result, omit information that may impact the real estate transaction in a negative way.
The agent might be concerned that he would miss out on the full commission so he or she may elect to omit information, downplay concerns or not provide much-needed expert insight in order to increase the chances of a complete real estate transaction.
What can buyers and sellers do?
Despite the potential for a conflict of interest, not all real estate agents who operate in dual agency relationships lack ethics or honesty. Across the country, thousands of dual agency transactions are completed each year, where the agent provided excellent advice and maintained professional integrity. That said, the best step for any buyer and seller is to find representation that is free from all potential conflict of interest situations. In most cases, this will mean finding a real estate agent that is not working for or affiliated with anyone working for the other party in the real estate transaction. In large urban areas, this is quite an easy task. In smaller, more rural communities, this can be difficult to achieve.
In situations where a dual agency relationship is hard to avoid, it’s best to seek out independent legal advice or representation, either from a real estate lawyer or from a notary that specializes in the particular type of real estate transaction you are involved in.
Remember, investing in a home is a huge financial undertaking and should not be done without understanding the process, including the responsibilities of all parties involved.