Buying or selling a home is often the single biggest financial decision people make in their lives. Whether you are a first-time homebuyer, are looking for a second home, or need to sell property, you will likely hire a real estate agent for assistance. In fact, according to the National Association of Realtors, about 87% of homebuyers used a real estate agent’s services in 2015, up from about 69% in 2001.
But what happens if your relationship with the agent sours? How do you protect yourself? What steps should you take to ensure that your interests are protected?
While the answers to these questions differ depending on your circumstances, needs, and desires, it is essential to know how to deal with potential problems with your real estate agent. To understand your options, you first need a solid grasp of the relationship between real estate agents and their clients.
The Principal-Agent Relationship
Whenever someone hires a real estate agent to buy or sell property on his or her behalf, he or she enters into a special kind of legal relationship known as a principal-agent relationship, or the “agency relationship.” This relationship imposes on real estate agents a heightened legal duty to act on behalf of the client (known as a “principal”), requiring the agent to act in specific ways.
In everyday situations, people can deal with one another at arm’s length, and are under no legal obligation to protect someone else’s interests. For example, if you want to buy a used car from someone because you believe it is more valuable than the seller believes it to be, you are not under any legal obligation to disclose your beliefs or to try to protect the seller in any way. Similarly, the seller is free to choose any desired price, and doesn’t have to sell at all if he or she does not want to.
The same standard does not apply between agents and the people (principals) whom they represent. For example, when you hire an agent to buy or sell property on your behalf, the agent must act with your best interests in mind. Agents cannot simply use their position to make money off of you. This legal obligation is known as a “fiduciary duty.”
Fiduciary duty requires the agent to act in a number of specific ways:
- Loyalty. Agents cannot act solely to better themselves, and must act to protect your needs and interests. For example, a real estate investor might try to persuade a seller to sell at a low price so the investor can then later sell a property at a much higher price. Agents cannot do this. If you hire a real estate agent, that agent cannot try to persuade you to sell your property to the agent’s friend so that the friend can quickly flip the house at a much higher price. Agents have an obligation to protect your interests and to not use their position solely to better their interests, nor the interests of their friends, co-agents, or business partners.
- Confidentiality. The principal-agent relationship is one in which the agent typically learns sensitive information about the principal, such as personal financial details. Agents have an obligation to keep such information confidential, not revealing any potentially damaging details. For example, if you hire an agent to sell your home, your agent cannot tell a buyer’s agent that you are under strong pressure to sell the home because you have recently lost your job and are willing to accept a price that is substantially below the home’s market value.
- Obedience. Agents work on the principal’s behalf and are obligated to follow all instructions or wishes. So, if you tell your agent you want to list your home for $500,000, but are willing to accept any offers of $450,000 or more, your agent can sell your home for you only if a buyer makes an offer in your specified range. In general, your agent has to do what you say unless your instructions violate the terms of a contractual relationship you have with the agent (or otherwise violate the law). For example, the Fair Housing Act is a federal law that prohibits certain types of discrimination when people buy or sell homes. Under this law, homeowners are not allowed to refuse to sell a home to someone based solely on specific factors, such as race, religion, family status, or disability. So, if you hire an agent to sell your home and tell that agent not to sell to people with children, your agent does not have to follow your instructions, and the refusal to follow those instructions does not violate the agent’s duty of obedience. Otherwise, agents have to follow your instructions during the course of the relationship.
- Candor/Disclosure. Agents must be candid and disclose to you information that furthers your interests. Also, agents cannot use their experience, knowledge, or insights to your detriment. For example, agents cannot keep secret the identity of potential buyers, nor can they keep negative information about the property from buyers in an attempt to make a sale and earn a commission.
- Competency, Care, and Diligence. Agents have to be competent, and must act with care and diligence when representing your interests. For example, an agent must understand the details of any transaction and be able to communicate those details to you so that you can understand them. It also means that if the agent is not competent in any aspect of a transaction, such as negotiating the purchase of a commercial property when the agent only has experience dealing with residential property, the agent has a responsibility to inform you of this and assist you in securing the services of someone who is qualified.
- Accounting. Agents often buy or sell property on your behalf. They might also manage your assets or money during the course of representation. The accounting duty requires agents to tell you exactly how your assets and money are used, and to provide details about any actions taken while managing your property.
Violating Fiduciary Duties
If a real estate agent enters into a fiduciary relationship with you and subsequently violates any of the associated duties, he or she can face substantial penalties. Though the type of penalty differs depending on the circumstances of each situation, a real estate agent who violates these duties can be denied a commission from the transaction, be forced to compensate you for any damages arising from the breach of duty, face real estate license restrictions or revocations, or even face criminal charges.