Hiroshi Horiike, a Hong Kong multimillionaire, at his mansion in Malibu in 2014. In a lawsuit that could have major implications for many of the state’s real estate brokers and agents, Horiike said the size of his home was inflated when he bought it. (J. EMILIO FLORES, NEW YORK TIMES FILE PHOTO)
When Martin Welc asks his real estate classes at Saddleback College if one agent should represent both the buyer and the seller in a negotiation over a house, the students widely disagree.
“We ask them: ‘Dual agent or double agent?'” said Welc, co-chairman of the college’s real estate program, in encouraging the students to play devil’s advocate. “We look at all of the pros and cons. We say, ‘Can this be done?'”
It is done, but the controversy over its fairness to buyers and sellers goes beyond a homework assignment. Real estate agents, lawyers and consumer advocates all have opinions about it. Now a rift involving what’s known as “dual agency” has reached the California Supreme Court.
Those on both sides of the argument know the high court’s decision in the case — pitting a Malibu homebuyer against brokerage Coldwell Banker — could shake up the industry.
“There is a great deal of concern about this ruling in the California real estate community,” said Bob Hunt, a San Clemente agent and a director of the California Association of Realtors, of the appellate court’s conclusion. “It runs counter to the way — rightly or wrongly — that agents and brokers have thought things were.”
A FINE LINE
A dual agent must walk a fine line, careful not to favor the buyer or seller. There are details that cannot be shared — for example, the agent can’t tell the buyer the seller is frantic to unload the house because of a divorce or job change. Nor can the agent share with the seller how much the buyer privately said she’s willing to pay.
Lee Stimmel, a San Francisco attorney who opposes double-ending deals, said the rules create a conflict of interest for the lone agent, who must serve two masters as a “superhuman.”
But as Hunt and many other agents see it, a dual agent, privy to what’s motivating each side, is in a position to more swiftly and efficiently get a deal done.
“Hiring a real estate salesperson is not the same as buying a burger,” the association says in court papers. “It is all about the relationship … The real estate salesperson is the equivalent of a therapist, a bartender, a friend.”
In California and many other states, the law mandates that a broker must have a fiduciary responsibility to clients. But laws in about two dozen states have allowed agents to act as “facilitators” or “transaction brokers” without fiduciary loyalties, according to a report on Inman, a real estate industry site, titled “Buyer and Seller Beware: Your agent may not represent your best interests.”
THE CASE
At the core of the case before the state Supreme Court is a discrepancy about the size of a Malibu manse.
Hong Kong multimillionaire Hiroshi Horiike bought the Tuscan-style home overlooking the Pacific Ocean for $12.25 million in cash in 2007. A high-profile listing agent provided him with a brochure stating the house had 15,000 square feet of living space, but county records said the residence actually was under 9,500 square feet.
The difference in square footage was complicated by Malibu using a different metric than elsewhere, extending the measurements to garages and other spaces beyond the primary residence.
Both Horiike’s agent and the listing agent worked for Coldwell Banker, so the brokerage was the dual agent of the buyer and seller, as confirmed in the disclosure forms Horiike signed.
A couple of years later, when seeking a permit to remodel a room, Horiike discovered the house wasn’t as large as he thought. In 2010, he sued the listing agent, Chris Cortazzo, and Coldwell Banker, stating they violated their fiduciary duty to him. (He did not sue his own Coldwell Banker agent, however.)
The jury disagreed that the listing agent had a fiduciary duty to the buyer or that the broker was liable for a breach of fiduciary duty based on the agent’s acts.
Horiike prevailed on appeal. The justices found that Cortazzo “did not add a handwritten note of advice to hire a qualified specialist to verify the square footage of the home” to a visual inspection disclosure, as he had done with a previous prospective buyer.
“A trier of fact could conclude that although Cortazzo did not intentionally conceal the information, Cortazzo breached his fiduciary duty by failing to communicate all of the material information he knew about the square footage,” the justices wrote in their decision.
They also stated, “When a broker is the dual agent of both the buyer and the seller … the salespersons acting under the broker have the same fiduciary duty to the buyer and the seller as the broker.”
And they cited a finding in another case about confusion in the industry:
“Salespersons commonly believe that there is no dual representation if one salesperson ‘represents’ one party to the transaction and another salesperson employed by the same broker ‘represents’ another party to the transaction. The real estate industry has sought to establish salepersons as ‘independent contractors’ for tax purposes and this concept has enhanced the misunderstanding of salespersons.”
FRIENDS OF THE COURT
Some compare a dual agent to an attorney representing opposing sides in a legal claim, which is not allowed.
“Use common sense … you have fiduciary duty to both. How do you do that? Could you be a lawyer for both?” said Stimmel, the San Francisco lawyer.
Besides, he said, it gives the real estate industry a bad reputation: “Most real estate agents are honest, and I don’t think they understand how much their integrity is undermined by dual agency.”
Hunt maintains that a real estate deal isn’t necessarily adversarial; instead of winding up with a winner and a loser, as in a court proceeding, the goal is to satisfy both sides.
Other agents add that often the seller can benefit because a dual agent will reduce the commission; the standard 6 percent doesn’t have to be split with a buyer’s agent.
The National Association of Exclusive Buyer Agents, which opposes double-ending deals, has filed an amicus — or friend of the court — brief before the state Supreme Court. The California Association of Realtors has filed its own brief, asking the court to reject the appellate ruling and uphold the jury’s verdict.
As both sides watch closely, “It is certainly possible that dual agency, as it is now commonly practiced in California, will become untenable,” Hunt wrote in an article for RealtyTimes, a trade site.
The high court could add further rules or disclosure requirements. But, noting that the state generally has been strict about matters involving fiduciary duty, Stimmel hopes the argument over double ending doesn’t end there.
“If any state is going to stop it,” he said, “it’s going to be California.”
Contact the writer: mkalfus@ocregister.com
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