Agency Relationships You Should Know for the Real Estate License Exam

Agency relationships will likely be covered on the Real Estate License Exam. Representing a party to a real estate transaction as an agent and (hopefully) getting paid for it are based on the agency relationship that you establish with that party. How you can establish agency relationships is pretty universal, so it applies in most (if not all) states.

Nevertheless, you need to check whether your state’s licensing law recognizes or prohibits any of the following ways of establishing an agency relationship and whether your state perhaps recognizes other ways not listed.

An agency relationship can be established either by means of an agreement between the parties, an agent and a principal (client), or by means of the actions of the two individuals. The first of the bullet points that follow is the former, and all the rest are the latter.

You should remember that if the statute of frauds in your state requires that all real estate agency agreements be in writing, then it’s unlikely that you can collect a commission by any of the non-written agencies.

  • Express agency: Express agency is where the agency relationship is created through an agreement in which the agent and the principal state their intentions to enter into an agency relationship, that the agent will represent the principal. The parties state or express their intentions in words, either orally or in writing. Whether an oral agreement establishing an agency relationship is binding varies from state to state.

    It may also be possible for an oral agreement to establish an agency relationship but not be enforceable by you, the agent, to collect a fee. The typical written agreement is a listing agreement or a buyer’s agency agreement. The written agreement is the most appropriate and legally safe way to create an agency relationship.

  • Implied agency: Implied agency establishes an agency relationship through the actions of the two parties. Although nothing formal has been said or written down, the agent and the principal act as if they have an agency relationship. Creating an implied agency may not have been what the two parties intended, but an agency relationship can be created anyway.

    Ms. Seller is selling her home by herself and puts up a for-sale sign on the lawn. You drive by, see the sign, and stop in. You identify yourself as a real estate agent and ask some questions about the house. Ms. Seller tells you she doesn’t want to list the house for sale with any brokerage. She does tell you to bring any possible buyers around.

    The next day you bring Mr. and Mrs. Buyer, who really like the house and want to make an offer. You tell Ms. Seller and begin negotiating a deal. If the matter comes down to commissions and lawsuits, only a court can finally decide, but you and Ms. Seller probably have established an implied agency relationship because of both your actions.

  • Agency by estoppel: An agency by estoppel is created when a principal doesn’t stop an agent from going beyond the agent’s normal duties, which thus gives the impression that an agency relationship has been established.

    Say you’re the owner of a building and you tell your agent to show an apartment to a possible tenant. The agent goes ahead and negotiates a lease even though you didn’t give the agent any direct authority to do so. The tenant assumes the agent has the authority and an agency by estoppel has been created.

  • Agency by ratification: An agency by ratification is created by accepting circumstances that created the agency after the fact. Suppose a real estate agent, without authorization and without ever speaking to the seller, negotiates a deal for a house that’s for sale by the seller. One day the agent arrives with a completed contract simply awaiting the seller’s signature and acceptance of the deal.

    An agency by ratification probably has been created when the seller ratified what the agent had been doing by accepting the deal. The word “probably” is used here because the agent wants a fee for his services and may have to sue the seller to collect. When that’s the case, the courts determine whether an agency relationship existed from the beginning of the negotiations.

  • Agency coupled with an interest: An agency coupled with an interest is a situation in which an agent has some kind of interest in the property that’s being sold.

    For example, suppose a part-time broker is also an architect. The broker/architect agrees to design some houses for a builder who’s giving the broker/architect the listings for the sale of the finished houses. In essence the broker/architect made an investment in the project, so the builder can’t cancel the agency agreement.

    If this sounds like a tie-in arrangement, remember that the broker/architect isn’t making one activity conditional on the other. A tie-in arrangement would’ve been created if the broker had said that the builder had to hire him to design the houses if the builder wanted him to sell the houses. In an agency coupled with an interest, it’s as if the broker/architect was investing in the project.

Most agency relationships are established in writing with different agreements for buyer and seller agency relationships. Listing agreements involve sellers, and buyer agency agreements involve buyers. Within the two categories are different kinds of agreements. Many details within various types of agreements are similar with respect to the duties to be performed.

The differences usually deal with circumstances under which an agent will or won’t get paid. The procuring cause means the person who found the buyer or seller. Often it’s referred to as the person who brought about a meeting of the minds between a buyer and a seller. It also may be defined as the broker who brought a ready, willing, and able buyer to the deal.

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