Real Estate Agency

To buy or sell real estate, most people use the services of one or more real estate agents. In any real estate transaction, it is important to understand the relationship of the various agents, and to whom they owe a fiduciary duty, and to those who are not represented.

Common and statutory laws govern the relationships in an agency. An agent is one who represents the principal, or client, in a transaction, has a fiduciary responsibility to the principal, and acts on behalf of the principal. The fiduciary duty of the agent to the client is to represent the client to the greatest extent possible within the confines of the law. A customer is the other party to the transaction who is not represented by the agent. Although the agent owes no fiduciary duty to a customer, the seller's agent must, nonetheless, disclose important information about the property and be honest to the customer. A customer can, and often will, have their own agent. For instance, in a real estate transaction where both the buyer and the seller are represented by agents, the buyer is a customer of the seller and the seller is a customer of the buyer. The seller's agent owes no fiduciary duty to the buyer and the buyer's agent owes no fiduciary duty to the seller.

Types of Agency

Although most people have a vague idea of what an agent is, agency law is specific—a confluence of common law, as established by the courts, and of statutory laws and regulations passed by state governments.

In most real estate transactions, an express agency is established by contract between the principal and the agent. Sometimes, however, an implied agency may be established by the actions of the parties, if such action is typical of a principal-agent relationship, such as a real estate agent finding a buyer for a friend's house. Although the principal usually pays the agent's commission, the responsibility for paying the agent could, by agreement, be the customer. For instance, in many cases, the seller agrees to pay the buyer's agent, even though the agent represents the buyer. Therefore, agency is not established by the payment of the commission. An agency relationship can exist even if no commission is paid, as in a gratuitous agency.

Principal-agency relationships can vary by agreement as to the extent of the agent's representation of the principal or to whom the agent will represent, or how many are represented.

A universal agent is one that can serve the principal in any capacity. An agent with a power of attorney would have such a capacity, but this is rare in real estate.

A general agent represents the principal in a particular business. Thus, employees, for instance, are general agents of the employer. A property manager is usually a general agent of the owner and real estate agents are general agents of the brokerage that they represent. A broker may also assign one of her agents as the designated agent for a particular client. Sometimes, for an in-house sale, a broker may designate an agent for the seller and another agent for the buyer of the same property.

A special agent represents the principal in a particular activity or transaction—this is the relationship that most real estate agents have with their clients. The agents are contracted specifically to buy or sell a particular piece of property. A special power of attorney can also confer a special agency relationship.

Single agency is the representation of 1 principal by an agent, which is usually the case, because of the potential conflict of interest that can result from representing both parties to a transaction but, nonetheless, dual agency does exist to facilitate transactions in rural areas with a small number of agents. In sparsely populated areas, the dual agent would likely know both parties. Because a dual agent cannot represent both parties as well as one could be represented, dual agency is sometimes known as limited agency. For instance, 1 duty of an agent is to get the best possible price for his client, but if he is representing both parties to the transaction, then obviously, he has to suggest a price that is agreeable to both parties. By law, both parties must know about and consent to the dual agency. However, in certain circumstances, an undisclosed dual agency may be implied by the actions of an agent, such as a seller's agent suggesting to the buyer that his client will accept a certain price. Undisclosed dual agency is illegal in all states, but it may exist because of the inexperience, or for the convenience, of the agent.

To carry out the duties of a real estate agency, agents can use their own agents—subagents—who also have a fiduciary duty to the client. Often, subagents are other brokers who find buyers for a house listed in the Multiple Listing Service (MLS). However, because of liability, subagency among different brokerages is becoming less common.

Nonagents (aka contract broker, facilitator, intermediary, transactional broker, or transactional coordinator) to a specific party may also perform some services to effect the real estate transaction, but as nonagents, they owe no fiduciary duty to the party.

Fiduciary Duties of the Agent to the Principal

In any real estate transaction involving real estate agents, the agent owes his duty to whomever hires him—the principal. Traditionally, this has been the seller, although many buyers are now hiring their own agents to represent them. The agent's main fiduciary duty is to represent the principal, but must deal fairly and truthfully with the customer. While both buyers and sellers can have agents, the seller's agent will generally have more duties because it is the seller that has the property to sell and must be truthful about the property.

The main duty of the seller's agent is to sell the property for the highest possible price, while the duty of the buyer's agent is to get the lowest possible price. Because buyers' agents are usually paid a commission of the sale, the incentive for the buyer's agent is antithetical to her duty to her client, which is to get the lowest price possible.

The fiduciary duties of a real estate agent are often epitomized by the mnemonic acronym COLD AC: Care, Obedience, Loyalty, Disclosure, Accounting, and Confidentiality.

Since the agent represents the client, the agent must exercise care in effecting a legal transaction to the best of her ability. The principal hires the agent for her expertise in the real estate market, and to follow the law to finalize the purchase or sale of the real estate. However, the agent must carry out these activities according to the wishes of the principal, but within the confines of the law—obedience. Loyalty means that the agent must place the principal's interest above all others—even her own. If there is any conflict of interest, it is her duty to divulge it to her principal.

Disclosure is the duty of the seller's agent, and the seller, to disclose any information that is known or should have been known that may affect the value of the property, including latent defects, which are defects that would not be noticed from a simple examination of the property. It may even include events that happened on the property that may affect its value to the customer or to others, such as a murder or suicide. To sell it, a seller or his agent may exaggerate any aspect of the property, in what is known as puffery, as long as it is an opinion and not a false statement. Any statements made by principal or agent that are known to be false and that adversely affects the customer may constitute fraud. An agent must also avoid negligent misrepresentations, which are statements that the agent should have known to be false.

The agent must also disclose to the principal all information relevant to the potential transaction, such as all offers received or the agent's estimated fair market value of the property.

Confidentiality requires that the agent not discuss with anyone, other than the principal, any facts that need not be disclosed and that may negatively affect the real estate transaction for the principal. Thus, the agent cannot tell the customer about offers already received or even the results of a real estate appraisal.

Accounting is the need to document all monies paid or received in the transaction by the agent, including earnest money, which is the money paid by the buyer to the seller to secure the transaction, and which is forfeited if the buyer defaults. This money must be kept in a trust or escrow account and not commingled with the funds of the agent or the brokerage. The agent must also keep all relevant documents for a legally specified time, and must give copies to all involved parties.

Termination of the Agency Relationship

An agency relationship can be terminated in the same way that virtually any contract can be terminated:

The agency relationship will also be terminated if the contract cannot be fulfilled, such as when the property is destroyed or condemned, or if the principal or agent dies or is incapacitated, if either party breaches the contract, or the principal declares bankruptcy.

In some states, the confidentiality owed by the agent to the principal ends when the agency relationship ends.