Agency concept in law. Is your real estate agent a secret agent?

October 14, 2014

On its face, agency is a simple concept. But there are a variety of circumstances in real estate that complicate the rules. Don’t be discouraged, many real estate agents do not understand it well either.

People inspecting home

Reader Question: We have been looking at homes with a real estate agent friend. We saw one we like and asked her what is it worth. She told us she couldn’t offer an opinion on anything but the listed price. She explained agency, but it did not make sense to us. What can you tell us about agency? Marty and Joanna P.

Monty’s Answer: Each state handles real estate agency differently. Here is a brief sketch about agency and how agents disclose agency to customers. Take these talking points back to your agent and have a good conversation. If you like the house, consider getting back to her quickly.

Agency is a concept in the law

In real estate, a transaction begins between a real estate broker(the agent) and a principal (the seller or buyer). A principal can be a buyer or a seller, but most transactions begin with a home seller at the time of listing a property for sale. A key principle in the agency concept in law is that the real estate broker must always perform the assigned duties in the principal (client’s) best interest.

When a buyer arrives, the interests of the seller and the buyer will be in conflict. Before negotiations begin, a broker’s agent showing property to the buyer must provide a written disclosure notice of the agency options available. In most states, there are fundamentally two options for a buyer:

  • The buyer may choose no representation and act as a customer.
  • The buyer may choose representation and sign an agency agreement to become a client.

Become a client or remain a customer?

Each state’s rules about when this notice occurs and the differences between choosing to be a customer or a client vary. Real estate brokers duties to all parties, clients and customers,  in a real estate transaction are:

  1. Fair and honest treatment
  2. Reasonable care and skill
  3. Disclosure of material adverse facts
  4. Confidentiality
  5. Accurate market condition information
  6. Safeguard all funds
  7. Objective presentation of all offers

If a consumer chooses to become a client, a real estate brokers additional duties in a real estate transaction are:

  1. Duty of loyalty – place the interests of the client ahead of other parties; provided its within the law.
  2. Give information and advice – if the client requests it, give material advice; if within their knowledge
  3. Disclose material information – that is unknown to the client and not readily visible, if within the law
  4. Obedience – honor the client’s lawful orders within the scope of the agency agreement
  5. Negotiate – negotiate on behalf of the client

Many states have approved contract forms that spell out the conditions of each agency option from which the buyer selects. In some states, the Realtor organization provides a buyer agency form.

The wild cards in agency

Agency relationship are established in two ways; “expressed” and “implied.” Expressed agency is created intentionally through a written document. An implied agency is unintentionally created through the behavior of one party that causes the other to believe an agency relationship exists.

The second wild card is human nature. People make friends. People like other people and trust them. It is also easy to assume the agent is working for them.

The third wild card is either explaining or understanding the different forms of agency available to customers when becoming a client. Here are three options in most states that any client, either the seller or a buyer may have:

  • Consent to designated agency – means client wants the broker to select an agent to represent the seller and an agent to represent the buyer. All parties to a transaction must consent in writing and have the right to withdraw at any time.
  • Consent to multiple representation, but not to designated agency – means the client consents to the broker representing both buyer and seller, but does not consent to the broker selecting a designated agent for each party.
  • Reject multiple representation relationships – when they do not consent to the broker representing any other party in the transaction.

What is a buyer or seller to do?

The consumer must make a written choice to be represented by an agent and become a client, or reject representation and remain a customer. There are advantages and disadvantages with either choice. As an example; with buyer agency, the liability for agent compensation could become their obligation under certain circumstances, unless there is language added to the contract that specifically removes it.