The Basics of Real Estate Agency Law in Colorado

As a home buyer in Colorado, you don't need to understand all the intricacies of agency law and how they apply in real estate. But if you don't know the basics you will be confused and could suffer some serious financial harm. Because agency relationships are so critical to consumers, real estate laws in Colorado and in most other states have long required that agents disclose their legal or agency relationship as soon as they begin to work with a home buyer or seller. In Colorado, the required disclosure form and all of the most commonly used real estate forms, are drafted by the Colorado Real Estate Division of the regulatory arm of the state government and are mandated for use by real estate agents.

Unfortunately, reading these disclosures won't help you much in understanding what agency is or what its implications are for you as a potential home buyer. But there is really nothing difficult to understand about the legal relationships that exist between you and the various real estate "agents" or "brokers" you may interact with when you're buying a home. Under current Colorado law, there are three such legal relationships:

1. Buyer Agent or Buyer Broker. Like an attorney who represents you in a legal matter, a real estate licensee who is working as a buyer agent or buyer broker has a responsibility to represent your interests in the process of searching for a home and buying it. Once you establish an agency relationship, your agent has a positive duty to try to make you aware of all the possible homes on the market that meet your needs. If she knows of any problems with the home or the neighborhood that could have a negative impact on you, she has an obligation to point these out to you. In negotiations, she must use her knowledge and experience to promote your interests and try to negotiate the best possible price for the property. In the words of recent Colorado agency legislation, a buyer agent must "promote the interests of the buyer...with the utmost good faith, loyalty, and fidelity."
2. Seller Agent. A seller agent has comparable duties to the seller. Assuming that they have an agency agreement with the homeowner, the broker whose sign is in the yard or who conducts a Sunday open house, is obligated to represent interests of the seller with the " utmost good faith, loyalty, and fidelity." While they and the seller are required to disclose to the buyer any material defects in the home (e.g., a leaking roof or a flooding basement), the seller's agent is prohibited by these legal obligations to the seller from making you aware of other problematic features of the home or neighborhood, that the one car garage may make it a difficult resale property or that the proximity of the airport may make future buyers shy away. A seller's agent shouldn't suggest to you that the property is overpriced or that there may be better properties on the market at comparable or lower. This agent is also required to disclose to the seller anything they find out about you, about how much you want the home, or about how much you're willing to pay for it. In a word, she is obligated to represent the seller's interests and to undercut yours whenever the two come into conflict.
3. Transaction Broker. Created and defined by legislation in 1994, the transaction broker role can best be defined only contrast to these buyer and seller agency relationships. A transaction broker is a real estate agent or broker who is working with the buyer, the seller, or both, but is not an agent for either party. Working in this capacity, the agent is required to act competently in facilitating the real estate transaction, but has no responsibility to protect the interests of any of the parties involved in the transaction. She must stay scrupulously neutral throughout the transaction, neither conveying information nor giving advice that could be construed as promoting the interests of one party over the other. A transaction broker may have a great deal of knowledge and experience, but if she knows her job and does it right, she will not use this knowledge and experience to protect you or to advance your interests in the transaction. That's her job.

Agent/Broker Preferences Regarding Agency Relationships

As we have noted elsewhere (see Our Commitment), at Agents for Home Buyers LLC we will only work as buyer agents. We will not help sellers market their property and we will not work with buyers under a transaction broker relationship. Under Colorado law, it is perfectly legal for us to work with buyers under a transaction broker relationship., but to do that would mean that we couldn't use what we know to help our clients avoid bad properties or to get the best possible deal on a good property. We won't work under those restrictions.

Most other real estate brokers in Colorado will work with either buyers or sellers and most will work either as agents or as transaction brokers. There are some agents who will only work as transaction brokers. In fact, office policies in some real estate businesses prohibit agents from representing buyers or sellers under an agency relationship. Why? Reduction of liability. If a broker working under an agency agreement with a buyer or seller fails to alert them to something in the transaction that could harm them, the broker is very likely liable for any harm suffered by their client. Under a transaction broker relationship, the broker is much less likely to have any liability since as a transaction broker they have little or no duty to protect the interests of the consumer. Because of this liability issue, many brokers who offer the option of either agency representation or transaction brokerage will strongly recommend the latter. They'll make the same money with a much lower level of responsibility and liability. It's a win/lose deal. The broker wins. The consumer loses.

Buyers and Choices in the Agency Relationship

As a buyer, your choice is whether you want someone helping you who is obligated to use their knowledge and experience to represent your interests with the utmost fidelity and loyalty -- or not. There is nothing complex or difficult here. In general, unless you know the local market, real estate law and real estate practice as well as a good real estate broker, you would be unwise, even stupid, not to find someone to represent you as a buyer agent when you buy a home.

For the buyer, the only downside of entering into an agency relationship with a real estate broker in Colorado is that this requires a contractual agreement that can creates some obligations for the buyer. Colorado law creates a presumption that any broker assisting you find and purchase a home is acting as a transaction broker unless you sign a buyer agency agreement with that broker. And while the standard Colorado buyer agency agreement is a product of the Colorado Division of Real Estate, you do assume some obligations to the broker by signing it. I have three recommendations here:

• Sign a buyer agency agreement with any agent who helps you purchase a home.
• Have the agreement reviewed by a good real estate attorney before signing it so that you are aware of any obligations you're assuming.
• Either write the contract for a short time period or include a clause that gives you the right to terminate the contract if you aren't satisfied with the work the broker does for you.

If you sign a buyer agency agreement with any real estate broker in Colorado, that broker is assuming the same legal obligations that we assume when we represent our clients. They are agreeing to show you all the available homes that might be of interest to you and to represent your interests in evaluating and negotiating offers on those homes.

For an agent who represents both buyers and sellers, your agency relationship with your agent should falter only in situations where your agent has listed a property that may fit your needs. If your agent has listed that property, she will have signed an agreement specifying that she is working with that seller either as a "seller's agent" or as a "transaction broker". In neither case can she continue to represent you under a buyer agency relationship, since that relationship conflicts with her promise to represent the seller, or with her promise to be neutral between buyer and seller. In most cases, this broker will have to drop back into a transaction broker -- or neutral -- relationship with you as well.

The problem with this, from the buyer's perspective, is that this is precisely the situation in which the buyer's "agent" has the greatest conflicts of interest (see How Are Agents Paid?). That is, it is precisely the time when the buyer most needs an unbiased advocate representing their interests. If this happens to you, find a good real estate attorney to represent your interests through the remainder of the transaction. Or, better yet, work with an exclusive buyer agent (EBA), and agent who works with a real estate company that represents buyers only, so that you don't end up in this situation (see Our Commitment).

Buyer Agents vs. Exclusive Buyer Agents

Why should a buyer work with an exclusive buyer agent (EBA) rather than signing a buyer agent agreement with a broker who works for a traditional real estate company? While there is a possibility that you could get involved in an in-house deal with a traditional broker and lose your representation, the more important difference has less to do with the law that than with the broker's commitment to representing buyers.

Ask an EBA to help you buy a home working with you as a transaction broker. We won't do it! Why? Because we know it's not in your best interest. We're not interested in helping people make stupid mistakes, even if we get paid well for doing so. Ask most traditional brokers to work with you as a transaction broker and they'll jump at the chance. Have a friend call and ask us to list their property. We won't do that because it limits our ability to represent our buyer clients. It creates very serious conflicts of interest. Ask a traditional agent and they'll jump at the chance. We have a different level of commitment to home buyers.

If you look back at the history of buyer agency in residential real estate, EBA's played a central role in introducing the concept to the residential real estate market in the late 1980s and early 1990s, long before many buyers even knew the option existed. Why? Because we believed that home buyers needed professional agency level representation. In contrast, brokers with traditional companies initially resisted buyers' demands for agency representation, partly because it created legal dilemmas when they tried to sell their own listings to these buyers. They gave in to consumer demand and began signing buyer agency contracts only when it became apparent that they were going to lose money otherwise. We have a different level of commitment to home buyers.

You can learn more about exclusive buyer representation by reading our section titled Our Commitment or by checking out the web site of the National Association of Exclusive Buyer Agents. Whether or not you choose to use an EBA to help you buy a home, reviewing the material on how we work and how we differ from more traditional agents will give you a richer understanding of agency issues and their significance in your home purchase.