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Meeting Obligations: The Relationship Between a Real Estate Agent and a Customer

Clients or principals clearly benefit from representation by an agent. Customers, who sometimes are thought of as the third party to a transaction, have rights, too. The agent is obligated to see that the customer gets whatever the customer is entitled to, although a seller working alone may also have obligations to the buyer. The agent's obligation to the customer is outlined in most places as providing

  • Honest and fair dealing. Agents must be honest and fair with their customers, including properly accounting for the funds left in their possession.
  • Reasonable care. Agents use their skills and expertise to help their customers, provided that doing so doesn't compromise their clients' interests.
  • Disclosure of material facts. Check out the sections that follow for more about the specifics of disclosure of information to the customer.

Beyond the agent being trustworthy in handling the customer's funds, the customer mostly is entitled to information. There are several kinds of information that the agent is obligated to provide regardless of whether the customer is the buyer or the seller. The types of information principals and agents are obligated to reveal vary from one state to the next and frequently are interpreted by the courts. Be sure to find out what your state expects an agent and a client to reveal to the customer. And expect there to be a question or two on the state test about this. Remember that disclosure of these facts applies to the customer, whether it's the buyer or the seller. In most cases real estate agents deal with seller clients and buyer customers, so most of my examples approach the issue from that perspective.

Discovering defects

Latent defects are problems with the property that the buyer customers or buyer agents wouldn't find out about through a normal inspection. Some states interpret latent defects to mean structural items and safety items. Structural items are things like problems with the foundation. On the other hand, the things that need to be revealed usually are called material defects. The word material, in this case, means important. A latent defect, such as a crack in the plaster in a closet, wouldn't necessarily be a material defect because it's not very important and probably wouldn't affect the decision of the average buyer to buy the house.

Disclosure of environmental risks, particularly the ones that pose health hazards, may also be information that you have to disclose. A leaking underground oil tank or the presence of a nearby nuclear power plant has to be disclosed to the buyer customer.

The seller may also have an obligation to reveal material or latent defects. In some states real estate agent liability has been reduced by the adoption of specific forms that must be used as seller disclosure statements in which the seller is responsible for telling potential buyers about the condition of the property. Check this out in your state.

Looking at stigmatized properties

Stigmatized properties are properties where events that make the property less desirable to some people have taken place. The event doesn't have to be documented as fact (actually happen) for the property to become stigmatized, but an agent still must tell a customer about it. A known murder or suicide can stigmatize a property, because some people don't want to live in a house where something like that occurred. Reports of a house being haunted by ghosts can also stigmatize a property, even though no hard evidence proves the haunting. Stigmatized property is an extremely state-specific item of disclosure because of varying interpretations by different states and different courts regarding the requirement for disclosure.

Respecting Megan's Law

The interpretation of Megan's Law, a federally enacted law that requires registration of sex offenders with the police and possible notification of neighbors regarding the location of a sexual offender, varies by state. Interpretations regarding the responsibility of real estate agents with respect to providing this information to prospective buyers also differ. Some states may require disclosure of the sex offender's whereabouts to prospective buyers. Some may require disclosure only in response to a direct question or providing a response that includes information about the sexual offender registry. Check out your local state's requirements to be sure.

Finding out about fraud and negligent misrepresentation

"This is the prettiest house on the street." When you, the seller's agent, say that to a prospective buyer, they realize you're giving them your opinion. They can also quite easily check it out for themselves. What you've just done is puff the property. Puffing is exaggerating the virtues or benefits of a property. It isn't illegal, and it's done all the time.

On the other hand, if you say property values are going to go up 10 percent a year for the next few years, you seem to be stating a fact, but the buyer has no way to check it out, because no one can predict the future. As the agent, you're perceived to be the expert and customers have every reason to believe you. However, if you're wrong, you could be in trouble. Worse yet is an outright false statement that you know is wrong: "No, sir, there are no plans to extend the six lane road past your house." In the courts, which is where you may end up, your actions in either of these examples can be interpreted as fraud or an intentional misrepresentation to sell the property.

Negligent misrepresentation is a little trickier than puffing and fraud. If you don't know something, you can't be expected to disclose it. Sounds right but it isn't. Negligent misrepresentation is when you don't disclose something, because you don't know it, but you should have known it. As a real estate agent, the public expects a certain expertise, knowledge, and level of care to be evident in your work regardless of whether you're dealing with a customer or client. The location of the new highway that will bring truck traffic down the residential street of the house you're trying to sell has been all over the local papers. Because you don't read the local paper, you neglect to mention this information to your buyer from out of town. By not telling your customer, however, you may have committed an act of negligent misrepresentation because the buyer expects you to know about such things.

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