The Illusion of Fiduciary Duty in Real Estate
Early in my real estate career, I had a client who was looking to buy a Beacon Hill home. We looked seriously at a relatively expensive property that was being offered by the firm that I was then affiliated with. After some due diligence, I uncovered a litany of fairly serious compliance problems with the property. I brought the issues to the attention of the office manager and I was shocked when he scolded me, stating that “your job is to open the door and turn on the lights, you’re not getting paid to think.”
When I pressed the manager, explaining that we had a obligation to disclose these known defects, he staunchly disagreed insisting that any controversy down the road would be between the seller and the buyer. Walking away, I thought to myself, “these guys make the old Wall Street bucket shops look like saints.”
The reality of the market place is that buyers and sellers are forced to navigate minefields of conflicts of interest when they interact with brokers and their sales agents. But don’t real estate professionals have a fiduciary duty to protect their clients? The short answer is no, not in the true sense of fiduciary obligations.
Fiduciary Duty 101
In simple terms, a fiduciary duty is an obligation to act in the best interest of another party. It’s considered the highest standard of care and a fiduciary is expected to be extremely loyal to the person to whom he or she owes the duty. A fiduciary is legally bound to put their client’s best interest ahead of their own.
Walking away, I thought to myself, “these guys make the old Wall Street bucket shops look like saints.”
Judge Benjamin Cardozo famously summed up fiduciary duty in a 1928 court decision. He said, “A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior… the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd.”
It’s important to recognize that a fiduciary duty is a moral obligation, it’s not easily defined and it’s subject to interpretation. However, in Massachusetts real estate brokers and their agents are held to what we consider a watered down rules-based fiduciary system where the essence of that duty can be, and often is, contracted away.
Anyone in Massachusetts who has ever entered into commonly used listing agreements has effectively released their broker from their fiduciary obligation by consenting to dual agency provisions. Dual agency, where the broker “represents” both the buyer and the seller in the same transaction, is actually illegal in many states, but it’s allowed in Massachusetts.
Adding insult to injury, in a dual agency situation the broker not only abandons their fiduciary duty, they generally collect double the compensation. The broker walks away from their fiduciary duty for personal financial gain, which is the epitome of a breach of their duty.
These typical listing agreements also provide that the broker is entitled to collect their full commission by producing a “ready and able buyer” whether or not the transaction is completed or title passes. Yes, you could be stuck with your property while the broker collects their full commission from you.
When working with buyers, many brokers insist that their prospective clients sign exclusive buyer representation contracts. These contracts guarantee that the broker gets paid, even in the event that the buyer buys a property without any involvement of that broker. This practice is becoming more common place and is another example of brokers putting their own financial interest ahead of their client’s which is a cardinal sin when it comes to fiduciary duty.
What is particularly eye opening about these agreements is that the buyers commit to working exclusively with a broker, even agreeing not to attend any open houses without advance notice and approval of the broker, but the broker is free to work with other buyers that may be negotiating to buy the same property. We’re at a complete loss as to why anyone would ever sign one of these contracts.
Who is looking out for you?
The answer is – probably no one. A true fiduciary would never enter into one sided agreements with clients, and the idea that a broker can, and will, contract away their fiduciary duty for personal financial gain is unconscionable in our view.
Making matters worse is that parties to these agreements almost always agree to submit any disputes to the local realtor association (a private industry trade group) for binding arbitration. Not surprisingly, these arbitration panels are comprised of real estate brokers.
Most attorneys will tell you that “the first thing people sign is the worst thing they sign.” Massachusetts is an attorney state, meaning that only attorneys can record real estate transactions with the Registry of Deeds, so you will need an attorney to complete your transaction. We urge our clients to engage an attorney at the start of the process and have everything they sign reviewed by their attorney in advance.
At Batterymarch, fiduciary duty is at the core of what we do. We pledge to adhere to our strict fiduciary commitment which can be found here.