Real estate agency – What is it?

January 8, 2012

Instead of depending on real estate agency to insulate you from risk, it will be more advantageous to focus on educating yourself to protect your interests. The right agent has a lot to offer and can make your job much easier. By spending a little time educating yourself about the real estate process, and following the advice on these web pages, your new found awareness and knowledge will reduce the unseen risks you face.

Real estate agency is a concept in the law

It is the relationship between a principal and an agent. 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. The “listing contract” defines the duties the principal (home seller) is authorizing the agent to perform. A key principle in the law of agency is that the real estate broker must always perform the assigned duties in the principal (client’s) best interest. The contract is between the broker and the client. It is not between the broker’s agent and the client. The agent is simply signing the agreement at hand for the broker.

The broker’s agent also has an agency agreement with their broker, most often with an independent contractor agreement.  This agreement defines the duties the agent can perform for the broker. Both the broker and the brokers agents must obey the law, which is different in each state.

When a buyer enters the picture, the interests of the seller and the buyer will be in conflict. There is a period after a customer meets an agent, when both parties are determining if there is a fit for establishing a relationship. Before negotiations begin, a broker’s agent showing property to the buyer must provide a written disclosure notice to the buyer of the agency options available to deal with the seller of that property. It is about this time that the customer is exposed to a buyer agency agreement. As a buyer, you can hire an agent to represent you before you ever look at your first house. 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. This fact is just one of the reasons why agency is not well understood by either consumers or real estate practitioners. For example; in Wisconsin, regardless which option a consumer chooses, real estate brokers duties to all parties 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 within the law.
  2. Give information and advice – if the client requests it, give material advice; if within your 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.

The wild cards in agency

There are two ways in which the agency relationship are established; “expressed” and “implied.” Expressed agency is created intentionally through a written document in which the principal sets up the guidelines or boundaries of the relationship with an agent. An implied agency is unintentionally created through the behavior of one party that causes the other to believe an agency relationship exists. Real estate agents must be very careful not to imply an agency relationship in this manner.

The second wild card is human nature. People make friends. People like other people and trust them. It is very common for real estate agents  to not remember they are not the agent; that their broker is the agent. It is very easy for a customer with no exposure to agency law to come to like an agent during that “get acquainted” period. 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 within the agency agreements. Here are the three options in most states that any client, either the seller or a buyer has:

  • Consent to designated agency – means client wants the broker to select an agent to represent the seller and an agent to represent the buyer. Each designated agent must keep confidential their clients information and favor their clients interests over  the interests of the other client. All parties to a transaction must consent in writing to designated agency 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 to the buyer and a designated agent to the seller.  The broker or their agents must remain neutral and offer no advice to either party.
  • Reject multiple representation relationships – a client chooses this when they do not consent to the broker representing any other party in the transaction.  This choice may affect the number of properties a buyer has when limiting the pool with whom a broker can work.

These descriptions are based in part on Wisconsin law. Be cautious, as every state has their nuances and peculiarities, even in how to educate consumers about agency. These descriptions are also incomplete as space here is limited. If you have more questions or want to learn more check out your state’s agency laws within their real estate statutes or speak with local real estate broker or agent.

What is a buyer or seller to do?

The consumer must make a choice, most often in writing, 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 a cautionary example; buyers should be aware that with buyer agency the liability for agent compensation could become their obligation, unless there is language added to the contract that specifically removes it.

In a perfect world agency law is a good idea. In many states, current legislation is confusing at best. The subject of agency can be simplified. It is a discussion continuing to evolve. Agents and customers alike do not understand it well. In an industry plagued with other issues, it may take lifetimes before the agency issue is settled, if at all.

While there are some agents that can explain agency properly, they are a small percentage in the total agent population. Unfortunately, some real estate agents utilize “buyer agency” simply as a marketing tool to capture customers, but in practice, deliver service in the sub-agent mode. Regardless the declared philosophy of the agent the consumer risks having “unwanted surprises” no matter the agency choice they make.

Our recommendation regarding agency

Overall, agency law is not working well. Agents are not disclosing the choices well, and customers do not always know enough to realize it. Rather than expecting “agency” to insulate you from risk, it will be more advantageous to focus on educating yourself to protect your interests. The right agent has a lot to offer and can make your job much easier. By spending a little time educating yourself about the real estate process, and following the advice on these web pages, your new found awareness and knowledge will reduce the unseen risks you face.