Agency Relationships

Agency Relationships

New home purchase, resale home purchase or are you selling your home Buying a home listed with the agent you are working with Who is representing You

PLEASE read this section. It may be in your best interests to understand whether or not you are being represented by the agent with whom you are speaking! Far too many buyers believe they have representation by the agent they are speaking with or working with on a daily basis, when in fact without certain disclosures, this is definitely NOT the case.

Until the last decade or so, all real estate agents in California automatically represented the seller in a real estate transaction and owed their loyalty (fiduciary duty) to the seller even when they were working with the buyer. For a seller, this was a win-win situation since they felt protected throughout the transaction. But the buyer, often unknowingly, was not represented in the same way the seller was. Although an agent had and still has, the duty to act diligently in his/her duties in assisting the buyer, the agent owed no loyalty (fiduciary duty) to the buyer. Any information acquired by an agent, from the buyer, during the transaction could, and in fact was required, to be given to the seller. This has changed.

Agency is defined as the relationship between a principal and an agent whereby the agent represents or acts on behalf of the principal in dealings with a third party. The relationship requires mutual agreement between all parties to the transaction and the licensee. The licensee is subject to regulation by the Real Estate Commissioner.’

When you are the seller, unless disclosed to you to the contrary, all agents and their brokers represent and owe fiduciary responsibility to you.

When you are the buyer, and you have agency representation by your agent, the agent is rejecting an implicit seller agency and owes his/her fiduciary responsibility to you.

The written contract, whether a listing contract, purchase contract, or buyer representation contract, should clarify fully what kind of agency relationships are set up between clients and agents. A discussion and understanding of Agency is extremely relevant in understanding when there is a requirement of fiduciary duty on behalf of the agent to the client. When are you represented and when are you NOT represented, by the agent you are dealing with

Let’s look at the particular types of Agency that can be created. In California these are:

  • Buyers Agency
  • Sellers Agency
  • Dual Agency.

Seller Agency – When a listing agreement is signed for the sale of property, full disclosure must be made to the seller as to the fact that the agent represents the seller. The agent owes the seller an obligation to act diligently and honestly and with due regard in the best interests of the seller at all times as a fiduciary. This means that any private and confidential information provided to the seller’s agent, particularly information which may affect the bargaining power of the seller, MUST remain with the agent unless otherwise authorized in writing. The sellers interests are place above all others, including those of the buyer.

The seller should remember however, that any information that he/she does NOT want a potential buyer to know, should NOT be communicated to another agent particularly since that agent may be representing a buyer as buyers agent and that agent has the fiduciary responsibility to relay that information to the buyer. The days of every agent automatically representing the seller, are over.

Buyer Agency – More and more buyer’s are understanding the value and importance of representation, as are more and more agents. As a result Buyer Representation contracts are becoming more common. Under this contract, the agent has full fiduciary responsibility towards his/her client from the moment the agency is affirmed. The client is owed a loyalty to act with due regard in the best interests of the buyer at all times. This means that any private and confidential information provided to the buyer’s agent, particularly information which may affect the bargaining power of the buyer, MUST remain with the agent unless otherwise authorized in writing. The buyer’s interests are placed above all others, including those of the seller.

These agency differences have greater implications than may at first be apparent. Here are a few possible scenarios.

  • You as the buyer may be approaching a listing agent of a property you are interested in. You call on the phone, go to an open house, or decide to see him/her in your office. You ask about the property, and the agent tells you everything about the home and a lot of nice things about the sellers – you feel at home in the home and with the agent. Either because he asks you, or you want to tell him to get further advice, you tell the same agent what you can afford, how much you LOVE the house, how quickly you absolutely NEED to move, and other personal information. The agent represents the seller NOT you! The agent has no fiduciary duty to act in your best interests and may impart all your confidential information to his client. You may be disadvantaged by this interaction if you later make an offer of this home.
  • You as the buyer enter the sales office of a NEW HOME BUILDER. You talk with the representative at the sales office. You sign their guest register because you are asked to. Later you decide to buy one of the models and have your dream home built. That agent will more than likely already have indicated to the builder, all you information and you are at a disadvantage when you go to write the offer. You are NOT being represented with buyer agency, you are at best represented under dual agency but maybe not being represented at all. The agent represents the seller. Please read more detail about purchase of a new home and how you can be represented by an agent by clicking New Homes.
  • You as the seller are keen to move quickly. You have a new job waiting in another state. Your wife and children have gone on ahead of you. You are anxious. An agent comes to preview your home and tells you he/she has some potential buyers of the home. You feel comfortable with the agent and you tell him/her about your situation and that you would really love to get to your wife and kids. You are giving this agent information that may disadvantage you in a bargaining situation. The agent has told you that he represents the buyer. Do you know what that means The agent has a fiduciary duty to his/her buyers NOT you, the seller, even though the agent’s commission might be paid from the proceed of your sale. That agent has the fiduciary responsibility to tell his/her buyer everything you have disclosed.
  • You the seller are having an open house. Your agent is not there. It is a very poor market for sellers. A potential buyer comes to look at the house without her agent. You get quite personal because the buyer seems very interested and stays a long time complimenting everything about the house. She leaves her agent’s card with you. You get quite anxious by Tuesday when nothing has happened, and on the spur of the moment call the potential buyer’s agent. The buyer’s agent is friendly and tells you he represents the buyer and also tells you that the buyer is considering other homes. You tell the agent you don’t want the buyer to know, but that if the buyer is really interested you MIGHT be willing to take less than normal for the home. This agent represents the buyer and has no fiduciary duty to honor your request. In fact, the agent may inform the potential buyer that she may be able to make a much lower offer and purchase a home she thought she never could afford otherwise.

Dual Agency – Dual agency occurs when a listing agent also represents a buyer on the home listed. In California this agency comes into being whether the agent himself is acting for both parties, or whether two different agents within the same real estate brokerage are acting on behalf of their clients. An agent/broker may not act for more than one party to a transaction, without the full consent of ALL parties involved in the transaction. The fact that one principal may have the knowledge, is insufficient. The rationale behind this law of agency is that the interests of the parties involved, is obviously adverse.Because of a potential conflict of interest, an agent MUST fully disclose to each party all the fact that the agent knows will reasonably affect the principal’s judgment in consenting to Dual Agency. Agents who do NOT disclose a dual agency situation are acting in a fraudulent manner

What about the situation where a real estate broker/agency represents all parties to a purchase contract and sale The broker is clearly the agent of all parties and owes each the duty of utmost fairness and honesty to all. The agent must disclose to each party material facts that will affect the desirability of the property. This is the same as in each of the other forms of agency. However, how can a broker ethically represent all parties to a sale of property when both sides are diametrically opposed The buyer wishes to obtain the real estate for as little as possible, while the seller wants as high a price as possible. Clearly in this context a built-in conflict of interest can, although not necessarily, result. How is this overcome

It is here that Dual Agency differs greatly from Buyer Agency and Seller Agency. In the case of Dual Agency, the agent involved MUST still act diligently and honestly within his/her capacity as agent to both parties. However, in a Dual Agency situation, the agent has a duty NOT to disclose to one principal, confidential information affecting either party’s purchasing or selling power, given to her/him by the other principal, without written consent.

Although there is no uniformity regarding what constitutes Dual Agency, and there are still sharp differences within the real estate community as to whether dual agency is a problem and, if so, what should be done about it, Dual Agency is lawful within California. Licensees may represent both buyer and seller if full disclosure of Dual Agency is made.

Misconception

Many people think that if the seller pays an agent his portion of the commission, that somehow the agent has a fiduciary duty to the seller. This is not correct. Dual Agency is not assumed if a buyer’s agent is being paid out of the proceeds of the sellers sale. For example: Agent of Broker “X” representing the buyer brings an offer to Agent of Broker “Y” representing the seller. The transaction closes and Broker “X” is paid out of the sellers proceeds. The agent has not acted in the role of dual agent.

The information contained herein is believed accurate. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.

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