If you choose to buy or sell a house or parcel of real estate, there is no shortage of real estate agents. You might not be aware of what “agency” is. What interests are being represented? If your time frame is compressed, you might view representation as a technicality, a disclosure to be signed. This article talks about what an agency is, how an agency is established, and what to expect in a fiduciary seller agency relationship.
What is Agency?
An agency relationship is an agreement between a principal and an agent, in which the agent agrees to work on behalf of the principal. The principal under agency law may be an individual or a company, and the agent under the typically written agreement may be an individual or a company. The agency agreement is usually a short document that is signed when a formal agreement for representation is created. There are three essential elements to creating an express agency relationship:
- The principal must appoint the agent.
- The agent must agree to act on behalf of the principal.
- The agent must have the authority to act on behalf of the principal.
How does express Agency in Real Estate work?
An agent who expressively represents or binds a principal in a real estate transaction is said to be working under an “express buyer agency agreement.” The agency relationship is created when the principal and real estate agent agree, orally or in writing, that the agent will represent or bind the principal in the real estate exam. The agency agreement gives the agent the authority to perform certain acts on behalf of the principal. The agent is obligated to use reasonable skill and care in performing these duties.
Common examples of express agency in real estate include an agent representing a seller in marketing and selling a property, or a real estate agent representing a buyer in negotiating and contracting for the purchase of a property. In either case, the expressed agency real estate agent must disclose their agency relationship to all parties involved in the real estate license transaction. Additionally, the agent must follow any specific instructions given by the principal.
The first step in a real estate transaction in creating an express agency agreement is for the principal and agent to agree, either orally or in writing, to work together. The agency agreement should outline the scope of the agent’s authority and what type of transactions the agent is authorized to enter into on behalf of the principal. Once the written agency agreement is in place, the real estate agent has the authority to act on behalf of the principal.
There are several advantages to having an express agency agreement. First, it allows the parties to clearly define their roles and responsibilities. Second, it creates a clear communication channel between the agent and buyer agency agreements and the principal and buyer’s agreement. And third, it helps to avoid misunderstandings or disputes down the road.
If you’re a buyer agency thinking about hiring an agent, be sure to ask about their experience with express agencies. This will help you determine whether they’re the right fit for your needs.
What is the authority of an express agent?
An express agent authority is an authority that the principal has expressly given to the agent, whether orally or in writing. The agent is then able to act on behalf of the principal under this express contract authority. This type of listing agent authority is usually granted in specific situations where the principal trusts the agent to act in their best interests.
How is Agency created – Express Agency
Express agency: Express agency is where an agreement creates an agency relationship. An agency relationship existed when the agent and principal state their intentions to enter into an agency relationship. The agreement states that the agent will represent the principal. The parties state or express their intentions in words, orally, or in writing. Oral agreement establishing a binding agency relationship varies from state to state.
- Oral agreements may establish an agency relationship but are not enforceable. Agency relationships are written agreements. They take the form of a listing agreement or a buyer’s agency agreement. A written agreement is the most appropriate and legally safe way to create an agency relationship.
The agent must also adhere to any state and federal laws that govern real estate transactions. An express agency can be either oral or written, but it must be clear that the agent has been given authority to act on behalf of the principal. The agent must then use this implied authority to benefit the principal, and not themselves.
Many different types of listing agreements express agencies can be written or oral agreements are formed in real estate, depending on the needs of the principal. For example, an Exclusive Right-to-Sell Listing Agreement gives the agent the exclusive right to sell a property for a set period, usually six months to one year. This type of agreement is typically used when a property owner wants to list their home for sale but does not want to be actively involved in the selling process.
Additional ways ‘agency’ is created
- Implied agency: Implied agency establishes an agency relationship through actions. Specifically, the actions of the two parties involved. No written agreement exists between the agent and the principal. They act as if they have an agency relationship. The two parties may not intend to create an agency relationship. Regardless, an agency relationship may exist.
- Example – A “by owner” seller tells you that she doesn’t want to list but to bring any buyers through the listing.
- The next day you bring a potential buyer who wants to make an offer.You start to negotiate with the seller
- Example – A “by owner” seller tells you that she doesn’t want to list but to bring any buyers through the listing.
- Agency by estoppel: This agency relationship exists when the principal allows an agent to exceed their normal duties. This gives the impression that an agency relationship exists.
- Ex. A building owner allows an agent to show an apartment. The agent negotiates the lease without direct authority. The tenant assumes an agency relationship exists.
- Agency by ratification: An agency by ratification exists because of actions after the fact.
- Ex. an agent presents an offer without any prior agreement. Agency by ratification exists when the seller signs the offer.
- The courts must decide if the agency relationship exists for the agent to receive a commission.
- Agency coupled with an interest: An agent has some interest in the subject property.
- An agent is not separate from the agency relationship since they have an interest in the property.
- Ex. A broker/architect designs spec houses for a builder in return for the listing. The builder can’t cancel the agency relationship.
- The agency relationship exists because the broker/architect invested in the project. The listing was not a condition of the design work.
- An agent is not separate from the agency relationship since they have an interest in the property.
What does ‘fiduciary’ mean?
Investopedia defines fiduciary duties as:
A fiduciary’s responsibilities and duties are both ethical and legal. When a party knowingly accepts a fiduciary duty on behalf of another party, they are required to act in the best interest of the principal (i.e., the client or party whose assets they are managing). This is what is known as a “prudent person standard of care,” a standard that originally stems from an 1830 court ruling.
How is a fiduciary relationship created in real estate representation?
- A fiduciary relationship is often created with the expressed agency. Some states say that unless there is a document to the contrary, an agent working with a particular party is representing that party. The exceptions to a fiduciary relationship happen if an agent
- Represents both parties.
- Performs transaction duties only with no representation.
- Is a subagent of the seller and offers no representation to a buyer.
These exceptions should be disclosed with an expressed written agreement.
What to expect from a fiduciary relationship in real estate
When you have a fiduciary relationship with a real estate agent, US common law establishes the definition of one party to the fiduciary relationship with the following definition
Definition of Fiduciary: A relationship of trust and confidence wherein one person is usually entrusted to hold or manage property or money for another. A fiduciary (e.g., agent) is bound to act primarily for the benefit of the principal (e.g., client) before any self-interest.
- Basic Agency Duties of a fiduciary relationship with a real estate agent:
- Obedience to all client’s lawful instructions pertaining to the transaction
- Loyalty to the client’s best interests over and above the interests of others including those of the agent.
- Avoidance of self-dealing by the agent
- Written client consent to represent adverse interests (e.g., dual agency)
- Disclosure of Information to include the agent’s affirmative duty to discover and disclose all transactional information including, but not limited to, material facts
- Note: Personal information known to an agent about a third party that might influence the agent’s principal in the transaction must be disclosed to the principal.
- Confidentiality of client’s personal information that would hurt the client’s bargaining position, unless disclosure is required by law or rule
- Accounting for safeguarding goods & funds handled plus the retention of transactional records
- Reasonable Skill, Care, and Diligence in the delivery of brokerage services to the standard of other competent brokers. Examples of services:
- Reliable info relevant to the transaction
- Competent advice on the property’s probable selling price
- Discover pertinent facts related to property
- Effectively advertise listed property
- Advise about offers
- Assist with contract preparation
- Property value has no effect on agency duties
- Agent’s Duty to Principal after Termination of Agency Relationship
- The duty of confidentiality may be expected to continue as long as the agent has no duty to disclose to a new client
- Duty generally ends when the agency ends, the following exceptions
- Express promise or implied obligation
- Pending transaction at the termination date of an agency agreement
- Self-dealing
Agency relationships are in writing with the exceptions of implied agency agreements. Agency relationships take many forms. Some deal with buyers and some with sellers. Details of most agency relationships concern the activities performed.
- The activities describe those that will receive compensation.
- Procuring cause describes the party that finds the buyer or seller in a transaction. The procuring cause is the person that created a “meeting of the minds”. Often the broker/agent that brings the ready, willing, and able buyer to the deal
Conclusion
In conclusion, a good example of an express agency in real estate is when the agent legally makes representations for the principal or legally binds the principal in a contract. This can be a beneficial arrangement for both parties involved, as it allows the agent to have a more active role in the real estate process while still protecting the interests of real estate laws the principal.
