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What You Should Know about the Agent and Customer Relationship for the Real Estate License Exam

Clients or principals clearly benefit from representation by an agent. This relationship will be covered on the Real Estate License Exam. Customers have rights, too. Remember that the customer can be either the buyer or the seller, depending on who the agent is representing as a principal. The agent is obligated to see that the customer gets whatever the customer is entitled to.

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. Some specific things about a property must be disclosed to the buyer.

The customer mostly is entitled to information. 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.

Just to be clear in case you didn’t catch this, the seller acting alone, without representation, may have disclosure obligations to the buyer as governed by your state even though no real estate agent is involved. Expect there to be a question or two on the state test about this.

Defects in real estate

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. On the other hand, the things that need to be revealed usually are called material defects. The word material, in this case, means important.

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.

Stigmatized real estate 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 for the property to become stigmatized, but an agent may still have an obligation to tell a customer about it. A known murder or suicide can stigmatize a property.

Stigmatized property is an extremely state-specific item of disclosure because of varying interpretations by different states and different court decisions regarding the requirement for disclosure. So research your state’s requirements.

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. 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.

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. 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 court, which is where you may end up, your actions in either of these examples can be interpreted as fraud or an intentional misrepresentation done in order to sell the property.

Negligent misrepresentation is a little trickier. 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 you to have a level certain of expertise. 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. 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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