Real Estate Exam: Agency Law, Fiduciary Duties, Buyer vs Seller Representation

Agency is a legal relationship where one person, the agent, is authorized to represent and act on behalf of another person, the principal, in dealings with third parties. In real estate, agency is most commonly created by a written agreement such as a listing agreement between a seller and a listing agent, or a buyer representation agreement between a buyer and a buyer's agent. Agency can also be created by ratification when a principal approves an agent's unauthorized act, or by estoppel when a principal's conduct leads a third party to reasonably believe an agency exists.

A real estate agent owes six fiduciary duties to their client, commonly remembered by the acronym OLD CAR: obedience, loyalty, disclosure, confidentiality, accountability, and reasonable care. Obedience means following the client's lawful instructions. Loyalty means placing the client's interests above all others including the agent's own. Disclosure means revealing all material facts that could affect the client's decisions. Confidentiality means protecting the client's private information. Accountability means properly handling all funds and documents.

A client is the party with whom the agent has a formal agency relationship and to whom the agent owes full fiduciary duties. A customer is the other party in the transaction whom the agent treats fairly and honestly but does not represent. For example, when a listing agent shows a property to an unrepresented buyer, the seller is the client and the buyer is the customer. The agent must treat the customer fairly, disclose material defects, and not misrepresent facts, but the agent does not owe the customer loyalty, confidentiality, or obedience to their instructions.

Dual agency occurs when a single agent or brokerage represents both the buyer and the seller in the same transaction. It is controversial because the agent cannot fully serve the fiduciary duty of loyalty to both parties simultaneously, since the buyer wants the lowest price and the seller wants the highest. Most states require written disclosure and informed consent from both parties before allowing dual agency.

A listing agreement is a written contract between a property owner and a brokerage authorizing the broker to market and sell the property. Three types exist: exclusive right to sell, where the broker earns a commission regardless of who finds the buyer, including the owner; exclusive agency, where the broker earns a commission unless the owner finds the buyer independently; and open listing, where the owner can engage multiple brokers and only the one who produces the buyer earns a commission.

A buyer representation agreement is a written contract between a buyer and a brokerage that establishes the broker as the buyer's agent and defines the scope of representation, compensation terms, and duration. It obligates the agent to act in the buyer's best interest and the buyer to work exclusively with that agent during the agreement period. Following the 2024 National Association of Realtors settlement, buyer representation agreements became mandatory before agents could show properties.

A special agent is authorized to perform one specific act or transaction on behalf of the principal, such as finding a buyer for a particular property. Most real estate agents are special agents because their authority is limited to the scope of one listing or buyer agreement. A general agent is authorized to handle all affairs of the principal within a defined area, such as a property manager who can sign leases, collect rent, hire contractors, and handle maintenance on behalf of the owner. The broader authority of a general agent creates greater liability for the principal.

Vicarious liability means a broker is legally responsible for the actions of their agents performed within the scope of the agency relationship. If a sales agent makes a material misrepresentation to a buyer while acting on behalf of the brokerage, the broker can be held liable even if the broker personally did nothing wrong. This is why brokers must supervise their agents, maintain training programs, and carry errors and omissions insurance.

A material fact is any information that could affect a reasonable buyer's decision to purchase the property or the price they would offer. Common material facts include known structural defects, water damage, mold, foundation problems, roof leaks, boundary disputes, environmental contamination, deaths on the property in some states, proximity to nuisances like landfills, and pending special assessments. Agents must disclose material facts they know or should have known through reasonable diligence. Failure to disclose can result in lawsuits, license revocation, and rescission of the sale.

Puffing is the use of exaggerated, subjective opinions or superlatives to promote a property, such as calling it "the best house on the block" or saying it has "an amazing view." Puffing is legal because reasonable buyers are expected to recognize it as opinion rather than fact. It becomes illegal misrepresentation when the statement crosses from subjective opinion to a specific factual claim, such as saying "this basement has never flooded" when the agent knows it has. The line between puffing and misrepresentation is whether the statement is a verifiable fact or an obvious opinion.

The duty of confidentiality requires an agent to protect all private information that could weaken their client's negotiating position, such as the seller's willingness to accept a lower price, the buyer's maximum budget, financial difficulties, personal circumstances motivating the sale, or any other information the client has not authorized for disclosure. This duty survives the termination of the agency relationship, meaning the agent must keep confidential information private even after the transaction closes.

A transaction broker facilitates a real estate transaction without representing either the buyer or the seller, providing services like preparing paperwork, presenting offers, and coordinating inspections without fiduciary duties. Unlike an agent who owes loyalty and confidentiality to one party, a transaction broker owes equal duties of honesty, fairness, and competence to both parties. Transaction brokerage is used in states that have eliminated dual agency, such as Colorado and Florida. ---