What You Should Know about the Agent and Principal Relationship for the Real Estate License Exam
The elements of an agent’s responsibility to the principal are summed up in one word — fiduciary. The Real Estate License Exam will undoubtedly ask questions about these fiduciary duties. Fiduciary means faithful servant, and an agent is the fiduciary of the principal. The agent faithfully represents the interests of the principal above all other interests including the agent’s own.
The specific fiduciary responsibilities of an agent have been handed down by practice and common law. Some states examined the fiduciary duties of real estate agents and incorporate them with their respective real estate license laws. Don’t forget that the agent owes a fiduciary obligation to the principal or client.
As a real estate agent, you handle money; sometimes, large sums of it. Most often you’ll handle money that goes with the buyer’s offer to purchase a property that is variously called the binder or earnest money. These funds are credited to the buyer and become part of the down payment. Eventually they belong to the seller but may be held by the broker for a considerable amount of time.
The duty of accounting for all the funds that are given to you for safe keeping is part of your fiduciary responsibilities. Most states require that funds that belong to clients and customers be kept in a bank account that’s separate from the broker’s business account to avoid commingling or combining of client and customer funds with the broker’s business or personal funds.
Commingling is illegal even if you don’t actually spend the money on yourself and can account for every penny. Conversion, or the act of using client or customer funds for the agent’s personal or business expenses, also is illegal.
Care is a best described as agents using their best efforts and skills on behalf of their clients’ respective interests. Activities such as helping a seller client determine a fair asking price for a property and then making every reasonable effort to market the property are expectations of the client under the care provision of fiduciary duties.
The agent is expected to keep all information that can harm the client’s interest in the strictest confidence in addition to any personal information the client wants to be kept confidential, even if the information won’t harm the client were it known. For example, seller client’s desperate need to sell a property because of a financial situation needs to be kept confidential.
In some places, the duty of confidentiality is considered to be part of the fiduciary duty of loyalty.
The fiduciary duty of disclosure requires you, as an agent, to reveal any facts you’re aware of that benefit your client. Disclosure applies to information that may benefit the client even if the client hasn’t asked about it.
As the agent, perhaps you know that the town is undergoing a tax reassessment that drastically may change the taxes on all the houses in town and your buyer client wants to buy a home for the first time and doesn’t have a clue what a reassessment is. As a buyer’s agent, you’re required to tell your client about the proposed reassessment, even though they didn’t ask about it.
Disclosure also applies to information that can hurt your customer’s interest and that your customer has asked you to keep confidential. Perhaps your buyer customer reveals to you some financial difficulty that may make getting a mortgage difficult. You need to tell your seller client about the possibility that the buyer may have difficulty getting a mortgage, even if they asked you to keep it secret.
Keep in mind that the disclosure that is part of an agent’s fiduciary responsibility isn’t the same as a seller’s obligation to disclose latent and material defects.
Too often, buyer customers begin to get so comfortable with the real estate agent that they reveal information that can hurt them in a negotiation and which the agent must reveal to his seller client. The customer either forgets that the agent represents the seller or never fully understands exactly what that means in terms of fiduciary duties.
Loyalty means always putting your client’s interests above everyone else’s, including your own. You must never profit by doing something against your client’s interest.
Say, for example, that you represent a buyer who wants to offer $200,000 for a house. You know the seller will take $180,000, and you’re being paid a percentage of the total commission paid to the seller’s broker based on the final sale price of the house. That means the higher the price of the house, the more money you make as the agent, right?
Even though disclosing the seller’s acceptable price is against your interest and you’ll make less money, you nevertheless have to advise your buyer client to make the lower offer. If you don’t, you’re violating the fiduciary duty of loyalty and profiting at the expense of your client.
Obedience, as a fiduciary duty, requires you as an agent to follow the instructions of your principal. The only limitation on adhering to the duty of obedience is if the client’s instructions are illegal or unethical. If your seller client gives you instructions that violate some provision of fair housing laws regarding marketing the property, your fiduciary duty of obedience doesn’t require you to break the law.
The obedience requirement also doesn’t extend to keeping things confidential regarding problems with the property itself. If your seller client instructs you not to tell potential buyers about a leaky roof, you wouldn’t obey the client.