The Secrets to Real Estate Success: Part 4

“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” —Mark Twain

In real estate, there are two distinct parties with distinct goals:

  • Landlord: builds wealth through increased rents and stable tenants

  • Doctor: builds wealth through reduced costs and patient growth

Brokers who represent both sides of a transaction—or have the potential to represent the opposing party on a future transaction—complete more than 90% of today’s real estate transactions. This is called dual representation, and the majority of real estate firms come under this type of agreement. In other words, most firms both list properties and represent tenants and buyers. Under dual representation, your broker becomes a mediator, as opposed to a negotiator.

Consider this (even) more sinister scenario, where a landlord offers to have his broker “help you” with your real estate transaction. A landlord’s broker is under contract to the landlord to represent his interests and is paid based on how lucrative the deal is for the landlord. His job is to ensure that the landlord gets as much money out of your leasehold as possible. This is the power of an agency agreement working against you.

The Cornell University Law department defines Fiduciary Duty as follows: “a legal duty to act solely in another party’s interests.”

When you hire a broker, it is naïve to think he has your best interest at heart. And thus, an agency agreement that defines the relationship with your broker is indispensable. Just as you wouldn’t hire an attorney that decides to represent your opponent at some point during your case, you should never enter into a real estate negotiation with a broker unless you are certain his fiduciary duty is to you.

The U.S. financial markets have experienced similar conflicts over the past several years. When a broker sells investments to an individual from a fund he manages, his responsibility to the investor is under a “suitability” standard. So as long as the deal is “suitable” for the investor, the broker has done his job. In truth, his duty is to his employer (the managed fund or bank). Conversely, the fiduciary standard is a requirement that the broker is performing solely on behalf of the investor. You can imagine that once investors recognized that their financial interests were not being represented, the popularity of fiduciary firms skyrocketed.

A similar real estate trend is that many states now require by law a fiduciary standard when a real estate broker represents a client. The notion that a firm representing both the landlord and tenant can effectively fairly represent both parties is being challenged by multiple lawsuits across the country.

In an article in Financial Reporting titled “Broker-client relationship is key to level of service,” authors Matt Carter & Andrea Brambila note: “Consumers shouldn’t assume that their broker or agent is obligated to represent their interests, and their interests alone, until they have seen a written disclosure describing the agency relationship under which services are being provided to them.”

Alongside, in January 2015, California passed a law requiring deeper and more thorough disclosures of dual agency requirements. These evenly pertain to brokers representing tenants and buyers who work in the same office, where another broker lists properties. In other words, if two distinct brokers working in the same office represent both the tenant and the building owner, this is considered “dual agency,” because the completion of that deal is still in the best interest of the employing broker.

The difficulty in providing a fiduciary service for both sides of a real estate transaction within a dual agency is becoming a legal quagmire. The new dual agency legal requirements make recommending a lower offer than list price a near impossibility, since it does not represent the fiduciary interests of the seller. Now, any advice given to the opposing parties in the transaction must first be approved by the other side—effectively eliminating any chance of favorable negotiation for either party.

To summarize, when finding representation, it is essential to require an agency agreement that clearly defines your broker’s fiduciary duty. If the firm cannot guarantee you full fiduciary representation, then at the least, search out firms that have solid separation between tenant and landlord representation. Optimally, find a firm that only provides separate tenant and buyer representation. The broker representing you should never be allowed to also to list properties.

Christian is the Founder and CEO of GILE Healthcare Real Estate (Formerly Arizona Healthcare Realty) a tenant and buyer representation firm specializing in medical real estate and investment services. A graduate of the United States Air Force Academy, Christian served on active duty in the U.S. Air Force for 10 years in Texas, California and Colorado and an additional 3 years in the reserves. He began his career in Commercial Real Estate in 2004. In that time he has personally negotiated over 1500 medical, dental, and veterinary lease & sale transactions for his clients. His representation and advice continue to result in extraordinary increases in profitability and savings for his clients. He now resides with his family in Scottsdale, Arizona.

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