Real Estate professionals earn their income through the establishment of agency relationships. Every time a salesperson or a broker earns a commission or a fee, it is as a result of some form of agency relationship, whether a listing agreement, management contract, or financing arrangement. An agency relationship exists when one person represents another person in a transaction. The agent is the person or firm who represents the principal in the transaction.

Overview of Agency

The most common way that an agency relationship is created in the real estate business is when a property owner signs a listing agreement with a salesperson or a broker. It would also be created through the execution of a property management contract. It is now becoming more common for real estate offices to ask for some variation of a buyer’s listing, whereby a buyer gives the salesperson or broker the exclusive right to represent him or her in the purchase of property.

In a sale transaction, the real estate licensee can act as agent of:

• The seller,
• The buyer, or
• Both the seller and the buyer.

The real estate licensee who takes a listing contract from the owner of a property most often acts as agent of the seller. This licensee would be representing the seller in the transaction and would therefore have a fiduciary obligation to the seller. This fiduciary obligation requires the licensee to put the interests of the seller ahead of the interests of all others, including those of buyers and of the licensee personally. As will be discussed later, the licensee has certain obligations to third parties (buyers), such as full disclosure and fair and honest dealings, but the only fiduciary obligation is to the seller.

In some areas (and in some offices) it is becoming a more common practice for licensees to obtain "buyer’s listings," which authorize the licensee to be the sole agent for the buyer in the buyer’s purchase of a property. In this case, the agent’s fiduciary obligation would be to the buyer. The agent would owe the seller the obligation of full disclosure of material facts and fair and honest dealings, but the higher (fiduciary) obligation would be to the buyer.

Licensees can also act as agent for both the seller and the buyer, but this would be legal and ethical only if it was done with the permission of both parties. The licensee would have to disclose to both parties that the licensee is acting as agent of both parties.

Ethical Creation of Agency

The ethical implications of the agency relationship begin before the agency even starts. The licensee must be careful that unethical means are not used to obtain the listing which creates the agency relationship. Some licensees will overestimate the value of the owner’s property in an effort to obtain the listing. Naturally, a property owner who is considering listing his or her property with one of several licensees will be attracted to the one who claims to be able to get the highest value of for the property. Overstating the property’s value is sometimes seen as a way to gain an advantage in obtaining the listing. The licensee then hopes to get the owner to lower the price at some later date.

It is not always the licensee who overstates the value of the property. Owners will often have an unrealistic opinion of the value of their property. They feel that their home is the best in the neighborhood, perhaps in part because of all the fond memories they associate with the home. It could well be that it is the owner who has an exaggerated sense of the value of the property. The licensee may simply be agreeing with the owner’s expectations in an effort to obtain the listing.

Whether the overvaluation is instigated by the licensee or the homeowner, it would be unethical conduct for a licensee to obtain a listing through an overstatement of the value of the property. In the long run, it is contrary to the agent’s interests as well, since an overvalued property is not going to attract as much attention in the market as it would if had it been priced more realistically. New salespeople are sometimes especially tempted to overprice the home in an effort to obtain the listing. They soon learn, however, that a listing contract, by itself, does not create any commission income. If the new salesperson has a great many listings, but they are all overpriced, the salesperson is not likely to see many of those listings translate into closed sales.

Sometimes, licensees are tempted to set the listing price too low, so that they can be assured that the property will sell and generate a commission. They are willing to trade a potentially higher commission for a virtually certain lower commission. The ethical implications of this action are obvious. The property owner is not getting full value for the property, which makes this agency relationship an expensive one indeed.

One of the reasons that people use the services of real estate licensees to sell their properties is to take advantage of a professional’s estimate of the proper market valuation of those properties. An undervaluation damages the principal’s interests by not getting full value for the owner. An overvaluation damages the principal’s interests by reducing the willingness of buyers to consider the purchase of that property. One of the ethical obligations of a licensee is to make a competent valuation of the property and set a realistic listing price.

This discussion should not be taken to mean that a listing price should never be set above a property’s fair market value. Determining the value of a property can be as much of an art as it is a science. It can often be difficult to set a single price as being the market value of a property. Sometimes a price range is more realistic, such as between $240,000 and $260,000, for instance. In such a case, it might well be reasonable to set a listing price slightly above $260,000. Experience has shown that in most situations it is easier to lower the price than to raise the price. Further, a slightly higher listing price allows room for the often inevitable bargaining that goes on between buyers and sellers. While it might be perfectly ethical to list this sample property for $268,000, a listing price of $320,000 would be difficult to justify.

The ethical obligation of a licensee to assist the property owner in setting a realistic listing price carries with it several important implications:

• The licensee must become familiar with the real estate market in which the property is located. This would include the obligation to be aware of recent sales in the area and how the sales prices were influenced by property characteristics, such as lot size, conditions, room counts, etc.
• The licensee must be aware of recent trends in sales prices. In a rising market, listing prices can be set more aggressively than in a declining market, for instance.
• Licensees should be aware of the recent trends in marketing time, meaning how long the typical property is on the market prior to the sale.

Another ethical implication in the creation of an agency relationship concerns the agent's obligation to obey the instructions of the principal. This is one of the fiduciary duties the licensee undertakes when agreeing to act as the agent of the principal. There are limits to this obligation to obey the instructions of the principal, however. The agent cannot violate any state or federal law, whether or not instructed to do so by the principal. Examples of instructions from a principal which would violate state or federal law would include:

• A principal might instruct the licensee not to show the property to minority prospects. Compliance with such an instruction would violate both federal and California fair housing laws.
• A principal might instruct the licensee not to inform buyers about specified defects of the property, such as a leaky roof. While a seller’s agent owes no fiduciary obligation to a buyer, there is a duty of fairness and honesty, plus a duty to make full disclosure of all material facts to the buyer. Compliance with such an instruction would operate as a fraud upon the buyer and would violate both ethical and legal standards.

Licensees also need to be aware of the fact that they have disclosure requirements to the principal and to third parties when an agency relationship is created. Specifically, licensees need to disclose, as soon as possible, whether they are acting as agents of the seller, agents of the buyer, or agents of both the seller and the buyer. For instance, a licensee who takes a listing on a property will most often act as agent of the seller only. Upon signing the listing contract, the agent will also give the seller a disclosure form which specifies that the licensee is acting as agent of the seller and which will spell out the agent’s obligations and rights under the agency relationship. This disclosure is usually confirmed when an offer is presented.

When a licensee first begins dealing with a prospective buyer of a property, whether or not the property is listed with that licensee’s office, the licensee must also give a disclosure form to the buyer. This disclosure will reveal whether the licensee is acting as the agent of the buyer, the agent of the seller, or the agent of both the buyer and the seller. This disclosure form will specify the obligations of the agent towards the buyer, whether the obligation is a fiduciary one (if acting as agent of the buyer) or one of honesty and fairness (if acting as the agent of the seller).

Obligations of Agency

As stated earlier, when a licensee agrees to act as agent for a principal, the agent has a fiduciary obligation towards that principal. This fiduciary obligation imposes several duties upon the licensee, including:

• A duty of due diligence;
• The avoidance of conflicts of interest; and
• Respecting the confidential nature of information received.

Due Diligence

The typical listing contract is a bilateral contract, which means that both parties to the contract make promises. The seller promises to pay a commission to the broker upon specified conditions and the broker (along with the salesperson) promises to "use diligence" in procuring a buyer for the property. This promise to use diligence simply means that the licensee will use his or her best efforts and take all reasonable steps to sell the property.

Part of this due diligence obligation would include the need to publicize the fact that the property is for sale. Normally, a broker or salesperson would be expected to have an advertising plan for the property. There is no one standard for how much advertising is enough, but common sense would argue that the licensee should, at a minimum, conduct at least as much advertising for the subject property as for other, similar properties. If the licensee feels that advertising would not be necessary, ethical standards would require that opinion to be disclosed to the property owner.

Along the same lines, a licensee would be expected to promote the sale through other real estate offices in the area. This is normally accomplished through the local Multiple Listing Service (the "MLS") which is operated by the local board of REALTORS®. It is to the seller’s advantage to have the property included in the MLS, so that all of the members of the board can be looking for buyers, rather than only the listing office.

When a licensee obtains a listing on a particularly desirable property, it can sometimes be tempting not to put the listing on the Multiple Listing Service, so that the licensee will be less likely to have to share the commission with another office. This would be unethical, since it would always be to the seller’s advantage to have as many offices looking for buyers as possible. It would also violate most listing contracts, which obligate the licensee to put the listing on the MLS within a specified period of time. The elimination of this provision of the listing contract can only be done with the express, written permission of the seller, and then only if there would be some advantage to the seller in doing so.

The primary aspect of the licensee’s due diligence requirement is the obligation for the licensee to do his or her "best" in trying to market the property. This is a classic example where the standards of the law and the standards of ethical conduct will differ. It is difficult to codify what constitutes one’s "best efforts" into any meaningful law. Certainly it would make no sense to enact legislation that a licensee who takes a listing must always advertise the listing some stated number of times. Nor would it make sense to enact a law which creates a requirement that the licensee must always conduct an open house for each and every listing. When a listing expires without resulting in the sale of the property, ultimately it is only the conscience of the licensee which can determine whether that licensee has given his or her "best efforts" to trying to sell the property.

Avoidance of Conflicts of Interest

One major component of the licensee’s fiduciary obligation to the principal is the avoidance of conflicts of interest, where one action by the licensee would benefit the principal and another would benefit the licensee personally. One common area of conflict of interest involves situations where a licensee is buying or selling property for his or her own account. If a licensee is selling his or her own house, for instance, and takes a listing on a similar home in the same neighborhood, the licensee might be inclined to market his or her own home more aggressively. It is also a conflict of interest for a licensee to purchase a listed property for immediate resale, given that licensee’s obvious interest in obtaining the lowest purchase price possible. Similarly, if a licensee is representing a prospective buyer at the same time that the licensee is personally looking to purchase a home, the licensee might be tempted to purchase the most desirable property personally.

Real estate offices should establish a company-wide policy regarding these kinds of situations. This policy should address the circumstances under which an associate of the firm can buy or sell property for his or her own account, the circumstances under which an associate can buy a property listed with the firm, and a policy for listing properties owned by associates of the firm. The policy should ensure that, at a minimum, full disclosure is made to the parties dealing with associates buying or selling for their own accounts.

Confidentiality

Another aspect of the licensee’s duties to the principal is to respect confidential information entrusted to the licensee as part of the agency relationship. While it is unethical and illegal to fail to disclose material information about a property to the buyer of that property, such as the fact that the roof leaks, there are many facts that an agent of the seller would be expected to keep confidential. This can include the reasons for selling the property, minimum acceptable offering prices, and the like. Consider the following example:

Ima Seller lists her home for sale with Broker Charley. Ima tells Charley that she is faced with the possibility of a foreclosure action if she cannot sell the property within a few months. She and Charley agree on a listing price of $200,000 for the home. Ima gives Charley written instructions not to even bring her an offer for less than $175,000. Billy Buyer inspects the property and gives Broker Charley an offer for $160,000. Broker Charley informs Billy Buyer that he is not authorized to even submit an offer for such a low price. Billy Buyer asks Broker Charley, "You are authorized to submit an offer for what minimum amount?"

In this example it should be noted that Broker Charley has two bits of information which must remain confidential. The first is the fact that Ms. Seller is faced with a possible foreclosure on the property. Giving out this information would only serve to reduce any potential buyer’s offering price. The other confidential fact is the Ms. Seller’s minimum acceptable offering price of $175,000. When Billy Buyer asks what minimum price the seller is willing to consider, Broker Charley must not give out the "magic number" of $175,000. To do so would only guarantee that the buyer’s next offer would be for not one penny more than $175,000. Instead, Broker Charley should have Billy Buyer prepare a new written offer before stating whether that offer could be presented. It might be, for instance, that Billy Buyer might make the second offer for $180,000, which would increase Ima Seller’s price by $5,000 more than would have been received if the minimum figure had been revealed.

It should also be noted that the duty of confidentiality extends beyond the expiration of the listing contract. The confidential information obtained when receiving a listing contract must remain confidential even after the property has been sold or the listing has expired. This is the only obligation that carries on after the expiration of the listing.

Copyright © 2008 Real Estate Trainers, Inc. All rights reserved.