Agency Disclosure in the Real Estate Transaction and the Impact of Related State Policies

Journal of Real Estate Research, The, Jul-Sep 2009 by Wiley, Jonathan A, Zumpano, Leonard V

Abstract

Although agency disclosure is required by every state, recent national surveys of home buyers and sellers indicate that disclosure varies significantly across the United States. This study seeks to determine the causes of these disparities by examining states' educational standards, disclosure forms, regulatory environments, and buyer characteristics. The results identify several variables that have a deterministic impact on the probability of disclosure and suggest corrective actions and policies that states can implement to improve the effectiveness of agency disclosure in the real estate transaction.

In the past, it has generally been assumed that the passage of mandatory agency disclosure statutes by states solved many of the problems buyers encountered when they were unaware of the nature of the agency arrangement that existed between sellers and �ieir brokers. The underlying rationale for the passage of disclosure statutes was that a better informed public would be better able to protect itself and make more informed choices regarding broker representation. However, a recent study by Wiley and Zumpano (2006) points out that compliance with agency disclosure rules is far from universal. In particular, the level of reported agency disclosure is found to vary significantly across homebuyer demographics, as well as from one state to the next, with buyers in some states reporting disclosure less than two-thirds of the time. The obvious question that must be asked then is why reported disclosure rates are so low despite the fact that agency disclosure is required by statute in every state in the United States. While part of the problem may be due to comprehension, rather than noncompliance - a large number of homebuyers surveyed did not know or were unsure that they received an agency disclosure document. Such uncertainty among prospective buyers is indicative of serious difficulties with the agency disclosure system.

The purpose of this research is to examine the factors that might be contributing to the low incidence of reported disclosure and, in the process, identify policies that states can employ to improve the incidence of agency disclosure within their respective jurisdictions. This study uses data from the National Association of Realtors� (NAR) Homebuyers and Sellers surveys and data from the Association of License Law Officials (ARELLO), as well as hand-collected data characterizing state disclosure policies. In addition to the demographic and experience characteristics of home buyers, we consider a number of factors that may explain the variation in disclosure rates from one state to the next. These include factors that are unique to each state such as the adoption of a standard disclosure form, the required timing and acknowledgement of disclosure, the size and organizational structure of the real estate regulatory board, as well as current professional education standards.

This paper is organized as follows. In the next section, we discuss related research and provide some historical perspective on agency disclosure problems within the context of a real estate purchase transaction. The model and methodology used in this research are described in Section 3, while variables that could have a systematic impact on the incidence of agency disclosure are identified and described in Section 4. The model is estimated and the empirical findings are analyzed in Section 5. The paper concludes with a summary of the conclusions of this study and the policy recommendations that follow from this research.

Background

In 1984, the Federal Trade Commission (FTC, 1984) published a landmark fiveyear study of the residential brokerage industry that provided evidence that buyers commonly misunderstand the legal nature of their relationship with real estate agents. Among its more notable findings, the report found that in multiple listing situations, which represent a majority of all residential real estate transactions, 74.2% of buyers believed that the agent they were working with represented them, when, in fact, the agent represented the seller.1 In point of fact, this perception was inconsistent with what was then the conventional agency representation model advocated by the NAR and upheld by the courts where the listing and selling brokers represented the seller. Absent a written buyer agency agreement, real estate agents were legally considered fiduciaries of the seller, and agents working with buyers (selling agents) under multiple listings arrangements were deemed subagents of the listing broker. Obviously such misunderstandings concerning the role of the real estate broker could prove very damaging to consumers.

The FTC (1984) study found that many buyers acknowledged providing material information to the agent, such as the highest amount they would be willing to bid for the property. Yet, under the common law of agency, brokers were agents of the seller and were obligated to pass on any relevant information to their seller clients. Clearly this situation could compromise the negotiating position of interested buyers who commonly believed that the broker would keep this information confidential.