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Agency law

Agency law is an area dealing with contractual, fiduciary relationships that involve a person called the agent who is authorized to act on behalf of another called the principal.


Principal and agent relationship

Principal authorizes the agent to work under his direction on his behalf.
Agent, under their fiduciary responsibilities the agent is required to negotiate on behalf of the principal and bring home the best deal.



A person with whom there is NO agency agreement.



A person with whom agency has been created (a contract).
This person is sometimes called the principal or seller/buyer.



A person contractually bound to a client


Fiduciary responsibilities

The suites and obligations that define each particular agency


Listing agent

An agent who represents the seller, or landlord, of property in a transaction.


Selling agent

An agent who represents the buyer, or tenant, of property in a transaction


Dual agent
Also called Limited agent

An agent who represents both buyer and seller on the same real estate transaction


Transactional agent

An agent who represents neither party in a transaction it does aid in the preparation of the documents.


Two ways an agency (contract) is created.
1. Express
2. Implied

* most preferred created by either an oral or a written agreement between principal and agent that indicates their express intent for this representational status.
* although written is preferred, some states allow oral contracts in RE and consider them legally binding.


Statute of Frauds

Is a law that requires that certain contracts be in writing and signed by the parties who are to be bound by the contract.


Implied Agency
Note: some states have specific legislation that states no agency can exist without a written agency agreement. This helps avoid accidental implied agency.

It's also possible to create an agency relationship by the action of the parties.
1. Agent taking on re agent responsibilities without signed agreement is implied.
2. Customer asking agent for advice or actions and relies on that advice is implied.


Single Agency

Most common type of agency. The agent only represents one side of the deal-the seller or buyer.
Listing agent represents the seller. Agent markets and lists the property on MLS
Selling agent represents the buyer. Agent sells the buyer on attributes of the property and therefore sells the house.


Dual or Limited Agency

Listing agent also represents the buyer.
Must have a permission in writing from both parties prior to showing the house to the buyer.

Some states have enacted laws that prohibit dual agency to avoid potential problems for the agent or either party.


Gratuitous Agency

Agent works for free.
Aka gratis or free agency. Analogous to lawyer working pro bono.
An agent does not have to be paid by principal in order to be his agent.
The act of agent entering into the agency agreement at his own free will is what creates an agency.


Fiduciary responsibilities of agency.l
List 6 crucial ones for REs.

1. Care
Listing Agent: determine correct listing price, making property available and holding open houses.
Selling Agent: locate property suitable for buyer, find suitable financing, evaluating properties and neighborhoods, writing offers and counter offers.
Failure to do either by agent can be found negligent by a court or state association.
If violation is found, an agent could be liable for any loss to their client.

2. Obedience
Agent must act in good faith to represent client and vice versa.
An agent is Not bound by obedience if any instructions from the client violate local, state or federal law like failing to disclose lead-based paint.
However, the agent should not act without the direction of the client now exceed the authority granted to him or her by the contractor risk potential liabilities for such actions.

3. Loyalty
4. Disclosure
5. Accounting:
Accounting of all monies for each deal must be carefully tracked. Misplacement or loss or misuse of funds can be both criminal and civil violation The agent and broker.

6. Confidentiality:
Agent can not reveal intimate personal and financial reasons as to why they are selling or buying a property.

* after agency is Terminated, the agent is not required to follow above Except for Accounting and Confidentiality; they shall maintain accounting and confidentiality forever.

Customers are entitled to lesser degree of the above responsibilities. Misguiding by agent is not allowed. Agent must give factual information or those listed only in MLS


Disclosure under Fiduciary responsibilities.

Agent must disclose ALL pertinent facts about the property, buyer and seller. Furthermore you must disclose these facts even if your client hasn't asked you to.

In some states disclosure can be defined as timeframe with which you make known to your client any offers you receive. An agent must give all offers to his or her client promptly.

The agent must also disclose material defects regarding the property to give all potential buyers a true and accurate picture of the property.
A Latent defect, once known must be disclosed in future dealings with buyers unless the issue has been rectified.


Latent defect

Is an unforeseen or hide. Defect in the property. Typically cannot be determined by someone other than a professional specifically seeking that defect.


How is an Agency/Contract Created?

Through Listing agreements and Buyer agreements.


Types of listing agreements.
4 types

1. Exclusive right to sell listing agreement
2. Exclusive agency LA
3. Open listing
4. Net listing


Exclusive-right-to-sell listing

Allows the listing agent to be paid no matter who brings the buyer.
Under this listing the agent is the procuring cause.


Procuring cause

Is a broker who by their actions brought about the sale of a property. This may be by getting the seller to sign the listing agreement.
For the buyers agent, it might be the agent who showed the property to a buyer who ultimately entered into a purchase agreement with the seller.


Exclusive agency listing

Allows the property owner/seller to bring the buyer without paying a commission to the listing agent. Thus the seller retains the right to bring the ultimate buyer. The seller is only obligated to pay the commission should the agent bring a buyer which includes a buyer's agent bringing a buyer as well.


Open listing

One in which the seller retains the right to enter into as many agreements with as many different broker's as they want to employ.
Agent who brings the buyer gets the listing thus creating a dual or limited agency with the seller and buyer.
The seller also retains the right to bring in the buyer so he doesn't have to pay commission in an open listing agreement.
Most brokers see this as the least protective listing and often will not participate.


Net listing

One in which the seller needs to "net" a certain amount of money and the agent adds his commission on top of that value.

This can be dangerous and illegal in some states. As the seller may or may not get full disclosure of offered purchase contracts. Offer well above seller net can leave them feeling they left money on the table. Too low an offer can prompt the agent not to present offer due to low commission.


Buyer Agreements: 3 types

1. Exclusive buyer agency
2. Exclusive agency buyer agency
3. Open buyer agency


Exclusive buyer agency
Buyers agreement

Allows the buyer's agent to be paid no matter who brings the buyer. Regardless of whether the agent locates the property or not the agent is entitled to payment even if the buyer finds the property.


Exclusive agency buyer agency

The broker is entitled to payment only if they find the property the buyer purchases. The buyer is free to locate suitable property with no obligation to pay the agent.


Open buyer agency agreement

No exclusive agency contract where multiple brokers can enter into agreement with buyer. Only the agent who actually locates the property the buyer eventually purchases is entitled to commission.

This is common buyer agency for real estate investors. Investors may engage different types of agents for specific types of properties like residential, commercial, multi unit apartments etc.

Note! If an investor entered into an Exclusive buyer agency, than they are liable for paying two commissions, the buyer agent and the listing agent.


Buyer's agent compensation. 3 ways to get paid.

1. Payment through listing agent.
2. Flat fee for service or an hourly rate paid by buyer. Less common.
3. In some cases a retainer fee is requested and is credited toward any fees received during time of closing.


How to terminate an agency.
7 ways

1. Completion of the contract

2. Expiration of the agency/contract. Failure to complete agreement in the agreed time frame negotiated by both parties. State usually does not require a time frame of completion.
Perpetual or self-renewing contracts are not permitted in most states.

3. Death or incapacitation of a client or the managing, or principal, broker. Note the client belongs to the managing broker so if one agent dies designated to work for him, agency is NoT Terminated. The managing broker reassigns the listing to another agent under him.

4. Mutual agreement between both parties. Unilateral termination without grounds is not allowed and could create legal liability for either party. Seller can breach contract but still entitles the broker to damages.

5. Operation of law: bankruptcy, foreclosure or insanity.

6. Breach agency by either party, termination may be invoked by either party. Such as violation of fair housing by seller, agent must report this immediately or civil and criminal chafes can be brought against the client and the agent.

7. Destruction or condemnation of property, the listing agency is terminated. The buyer agency is not bound by this because they are not tied to just one property


Avoid common issues. 3 concerns

1. Mishandling escrow accounts.

2. Puffing, fraud and negligent misrepresentation

3. Not disclosing stigmatized properties from death, murder, or haunted house.


Mishandling escrow accounts must be avoided!
Commingling and conversion

Must maintain a clear identified escrow account or an impound account.
The escrow account is created, maintained, and administered by the broker of the company for the benefit of holding a buyer's earnest money.

Commingling: liable if he places the earnest money into a no earnest money account.

Conversion: if he uses the earnest money for his own benefit.

Earnest money accounts can bear interest. Interest earned must be returned to buyer at closing or to the buyer if getting returned.
A broker can have as many earnest accounts as he wants. Can be separated into residential and commercial accounts.


Puffing, actual fraud, negative fraud and misrepresentation

Puffing: exaggerating the good points of real estate.its not illegal but borders on it.

Fraud: is a misrepresentation of a material fact or facts used to induce someone to do something such as buy real property.

Actual fraud: is intentionally deceiving a person by misrepresenting facts. That influence a person's decision.

Negative fraud: intentionally failing to disclose facts that make a statement misleading. The omission of some detrimental information to present a better picture of the property.


Negligent misrepresentation

Lesser form of fraud. If an agent makes a mistake and unintentionally misrepresents a material fact about the property, they may not mean to cause anyone harm. However if their mistake does end up being relied upon by the buyer and that buyer is harmed because of it the agent and his broker may be liable for the resulting harm. The agent can be held financially responsible for the damages and harm caused by the failure in their duty of care. In these situations, their professional insurance can provide coverage for the harm and damage the buyer or seller incurred.


Stigmatized properties generally buyer beware...

In some states, not disclosing an answer isn't a violation of the law. You could say "our brokerage firm chooses to not discuss this topic." this isn't the same as committing fraud either actual or negative.


What makes a contract valid?

Must contain 5 specific items
1. A voluntary offer and acceptance.
2. An agreement or promise (to transfer the property from one party to another under the specifications of the contract)
3. Legally competent parties.
4. A legal purpose.
5. Valuable compensation


Contract considered Formed...

When the buyer and seller have agreed upon all terms assuming all the parts of the contract are valid.


Bilateral contracts

Has at least 2 parties involved and each make promises to the other party. A real estate purchase agreement is a bilateral contract.