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Law of Agency
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Every state now has its own definition of the law of agency, and some have even done away with traditional common law in this matter altogether. It is possible that in your state, every broker is assumed to be the seller’s agent, or the buyer’s agent, or even nobody’s agent. Find out early on just what applies in your state.
The information that follows describes the special relationship that will apply once you have specifically hired a broker to represent you in the sale of your home. It describes the relationship between you and the person who is indeed your agent.
The law sets up a special set of duties and responsibilities between you and the broker with whom you have listed your home. Legally, your broker owes you a fiduciary duty, and you are known as the client, or principal. (Where the word broker is used in this book, it also applies to salespersons under the broker’s direction and in some locations to cooperating offices in a Multiple Listing Service. All of these are subagents of the broker and bear exactly the same responsibility to you as does your listing broker—unless, as discussed in Chapter 4, you have disavowed the subagent status for cooperating brokers.)
Primary to the fiduciary relationship is a requirement that your broker put your interests above everyone else’s, including the broker’s own. The broker owes you first loyalty; anything short of that is considered a breach of duty. One of your agent’s primary duties is to obtain the highest possible price for your property.
Note that buyers are not your broker’s clients. Law requires a seller’s broker to be trustworthy in dealing with buyers, and a good one knows the buyers well and identifies with their needs. Nevertheless, legally speaking, buyers are merely customers, and when push comes to shove, your broker’s first loyalty is due you, the client.
Broker’s Responsibilities
This fiduciary duty includes the following specific responsibilities.
Obedience. The broker must obey instructions, except when asked to do something illegal (concealing a hidden defect, for example, or discriminating against buyers of a certain race).
Information. Your broker must inform you of any facts, figures, or trends that may be helpful. If you are innocently ignorant of the market and plan to list your house at a figure well below its true worth, the broker cannot take the listing as a quick and easy sale or, even worse, buy the house through a cousin. The broker’s duty is to inform you of the present state of the market and to suggest a price closer to the proper value. If your agent has knowledge of the shaky financial situation of a prospective buyer, those facts must be volunteered even if you do not request them. If the buyer tells your agent, “We’ll pay more if we have to,” your broker is duty-bound to pass that information on to you.
Not to buy. Brokers are specifically prohibited from buying real estate listed with them unless they disclose their interest in the transaction. They may not purchase through a dummy corporation or a relative. If you do sell property to a broker, you may well find the notification spelled out in the purchase contract itself: “It is understood that the buyer is a licensed real estate broker.” In such a case, the broker should not charge commission and should make clear that he or she is no longer acting as your agent. Otherwise, the question of whose interests are being put first would arise, and conflict of interest would seem inevitable.
5 / Some Legal Matters 59 Present offers promptly. The broker is not permitted to screen or block offers but must present any written offer to you immediately, no matter how inconsequential the offer may seem. When the seller says, “Don’t bring me anything under $200,000,” and an offer comes in for $195,000, the broker faces a conflict between obeying instructions and presenting all offers. Unpleasant as the confrontation might be, most brokers would convey the offer.
Confidentiality. The broker may not divulge confidential information that is not in your best interest. The broker may not suggest an offering price under your listed figure without your authorization, or reveal the figure at which you have confided that you might sell. Although many people don’t realize it, this duty of confidentiality does not extend to the buyer dealing with a seller’s broker.
Accounting. The broker is required to maintain a separate escrow account in which the buyer’s deposits are kept until time of transfer. You have the right to know the amount and form of any deposits. In the event of dispute, the broker should not return deposits to the buyer without your authorization. Each state requires deposit of the buyer’s earnest money within a specific, short period of time.
Diligence. The broker also owes you continuous bona fide efforts to obtain a satisfactory purchaser for your house. This duty implies advertising, which is usually paid for by the broker, and showing your property.
Other Requirements
Real estate licenses are issued by the various states, and each state has set up additional regulations for brokers. Some of the more common ones are these.
Reveal extra profits. If the broker is receiving any fee in connection with your sale from an insurance company, mortgage broker, escrow company, home warranty insurer, or the like, your broker should reveal the amount of money involved.
Furnish copies. You and other parties to a real estate transaction are entitled to receive immediately duplicate originals of anything you sign. The first such document will probably be your listing contract, which may be in duplicate or triplicate form for this purpose. You shouldn’t have to go to bed that night wondering what you signed.
No directed appraisals. Appraisers’ ethics forbid a directed appraisal, which is specifically mentioned in some state laws. A directed appraisal is one elicited by instructions such as “See if you can come in at a high price,” or “Remember that there’s a contract to buy this place for $152,000.”
Legal advice forbidden. Brokers walk a tightrope in this respect, for they accumulate a certain degree of expertise in narrow fields of law as they apply to real estate. Constantly alert to avoid the practice of law without a license, brokers may refer you to your attorney even though they know the answer to your question. In negotiating the purchase contract, brokers should refuse to draft an unusual provision, even when they know exactly what the wording should be. Paying unlicensed person. It is illegal for the broker to pay any unlicensed person for help in a real estate transaction, and it is also illegal for anyone who is not licensed to receive a share of the commission. In some states, this prohibition against kickbacks includes even you, as the person who is paying the commission. If there is any adjustment or concession to be made, the broker may suggest, instead of turning back funds to you, that the commission rate be renegotiated to reflect the discount.
Commingling. The term refers to mixing the broker’s own funds with money held in escrow, and the practice is strictly forbidden.
Representing both parties. On rare occasions, a buyer will offer to pay your broker for securing property. The buyer thus becomes a client, and the broker has a conflict of interest. The broker may not accept commissions from both parties, with one exception in some states: if 5 / Some Legal Matters 61 you and the buyer each know about the situation and agree to it, preferably in writing, the broker may then represent both of you. State laws, in recent years, have varied considerably in this matter. Your state may have set up specific duties for such dual agents, or it may prohibit dual agency altogether. Concealing facts. Even under your direction, the broker may not conceal relevant information about your property. As the principal, you assume a certain amount of legal responsibility for the broker’s acts, and you could be held liable for any misrepresentation on the broker’s part, or on the part of subagents. Caveat emptor (let the buyer beware) is no longer looked upon as a way of doing business. You can even be held responsible these days for not disclosing items you may have been in a position to know about, but failed to look into.
Do you understand the agent’s fiduciary duties? See Figure 5.1 for a quiz.
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