Introduction and background [chapter]

R H Gong, R M Wright
2002 Fancy Yarns  
A 1988 study conducted by the National Association of Realtors found that a large majority of home buyers and sellers employed the services of an agent in the transaction (NAR, 1988). Wolf and Jennings (1991) report that 50% of all lawsuits instituted against real estate agents involve some aspect of agency disclosure. These statistics imply that there may be problems associated with the agency relationship in real estate transactions. The purpose of this paper is to examine the impact of
more » ... ative forms of agency in residential real estate transactions. Simple bargaining theory provides a framework in which to look at participant payoffs under different agency structures and with differing levels of information among the parties to the bargain. This study focuses on whether the form of agency affects the equilibrium bargaining outcomes and, if so, who bears the benefits or costs. It is well known in the real estate industry that home buyers often mistakenly believe that the cooperating broker is their representative in the process of price negotiation. 1 Nevertheless, the law in most states holds that the cooperating broker in a fee-splitting commission arrangement is the subagent of the listing broker. 2 This implies that the cooperating broker has a fiduciary obligation to the seller in the real estate transaction and does not owe a duty to the buyer. JOURNAL OF REAL ESTATE RESEARCH 1 65 Abstract. Although substantial research effort has been directed to the examination of optimal search and pricing behavior under traditional brokerage arrangements, market outcomes under conditions of undisclosed subagency and buyer representation have not been fully explored. This study applies the legal and economic theory of agency to real estate markets with cooperating brokers. The existence of cooperating brokers acting as subagents of the seller with the buyer's full knowledge does not change the buyer's and seller's net payoffs relative to the single-agent case. However, when the buyer mistakenly believes that the cooperating broker/subagent is acting as his agent in negotiations, there may be informational gains that result in a higher selling price and a higher payoff to the seller at the expense of the buyer. The analysis indicates that buyer brokers may be a potential solution to this agency problem. When both parties to a real estate transaction have separate representation, their net payoffs are shown to be higher and the sales price lower than under traditional brokerage arrangements. The result is dependent on several factors, including: market conditions, relative bargaining power of the parties, method of broker compensation, and disclosure of the status of the buyer broker.
doi:10.1533/9781855737525.1 fatcat:junrhte435gttll5t75v6ba7xu