Conflict of Interest

April 2, 2005

We’ve been trying to buy a house recently, and have come across the concept of agents double-ending a deal: being both the seller’s agent and the buyer’s agent. That’s legal in California but considered unethical, because it’s a conflict of interest.

I don’t think the phrase conflict of interest applies here. That’s normally used when your interests conflict with, say, your company’s. Maybe you’re in charge of choosing an accounting firm and one of the options is the firm your wife owns.

I would prefer the term conflict of goals. That certainly applies to lawyers. The goal of the plaintiff’s lawyer is to have the plaintiff win, and the goal of the defendant’s lawyer is to have the defendant win. Since only one of those is possible, it doesn’t work to use the same lawyer for both.

Let’s look at the goals involved in bidding for a house. First, the goals of the seller: firstly to have the house sell at all, secondly to have it sell for as much as possible, and thirdly to have it sell soon. The goals of the seller’s agent are identical, since the agent only makes the commission if the house sells, makes the most commission if the house sells for the most money, and they can move on to the next house only when this house sells, so they want it sold soon. (Maybe they would switch goals 2 and 3, preferring to have it sell sooner at a lower price, since they only suffer 3% of the lost sale price.)

The goals of the buyer’s agent are identical to those of the seller’s agent: have their client actually be the one who purchases the house (requiring a very high bid), have the house sell for the most money (to make the highest commission), and have their client buy a house sooner rather than later (meaning bid more right away). The only person with different goals is the buyer, who wants to spend little as possible (e.g., not pay $50k more than necessary).

So there’s really no conflict of goals between the seller’s agent and the buyer’s agent, and they may as well be the same person. In fact, the combined agent will have extra incentive to sell to their own client, since they will make double the commission, so they may even lower the commission to 5% if the seller agrees to accept their client’s bid. The seller wins (he pays a lower commission), the agent wins (he gets 5% instead of 3%), and the buyer wins (he gets the house). The other buyers lose, but it’s their fault for not hiring the seller’s agent first.

There’s another advantage to hiring the seller’s agent: there’s no fooling yourself about whose side he’s on. Buyers often believe that their agent is somehow on their side; that their agent’s goals are the same as their own. But the buyer’s agent is actually on the side of the seller, and hiring a single agent makes that perfectly clear.

Jennifer raises the objection that the double-ending agent will be tempted to lie. For example, if their client’s bid is $750k, and that’s the highest they can afford, and a competing bid comes in for $760k, the agent could silently drop that bid into the trash. No one involved would know, and the agent would be $15k richer. (The seller would be $2k poorer.) Would an agent break the law for $15k? Sure. The loser in that case is the seller, so it’s up to him to make sure he’s there when all bids are submitted.

(There may be other problems I don’t know about. For example, what happens if there’s a genuine disagreement during the escrow process? Whose side would the agent take? Probably the seller’s, so the buyer takes a risk in doing this.)

So far we have our own buyer’s agent, but we keep getting advice to drop our agent and just hire whatever agent is selling the house we’re interested in. I don’t know if we’ll have the guts to do this. Maybe we need to lose a few more bids first. But the analysis is interesting anyway.