Agency in Real Estate: What You Need to Know
When you work with a real estate agent, you expect them to always act in your best interest. The legal framework that governs this relationship is referred to as agency. This means that your real estate agent has the responsibility to represent you with the highest level of care, honesty, integrity, and loyalty. This fiduciary duty is at the core of most real estate laws, ensuring that your agent works diligently on your behalf.
Agency Disclosure
Real estate agents are required by law to provide you with an agency disclosure, outlining their role and responsibilities before any agreement is signed. In California, two common sets of forms for purchase agreements and disclosures are:
CAR (California Association of Realtors)
PRDS (Peninsula Regional Data Services)
While both forms serve the same legal purpose, they have slight differences in default requirements. For example, the CAR agency disclosure specifies that an agent representing a buyer has "a fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the buyer." The same fiduciary duty applies to the seller's agent when representing the seller.
What Is Implied Agency?
Implied agency refers to an unintentional agency relationship that arises when an agent's actions lead a buyer or seller to believe that the agent is representing their interests, even if no formal agreement was signed. This can happen when a real estate agent provides advice or assistance that causes the buyer or seller to rely on the agent’s guidance, creating an agency obligation without an explicit agreement.
For example:
A homebuyer may assume that an agent is working on their behalf if the agent provides them with advice about the property, even if the buyer hasn’t signed a formal agreement.
A seller may believe that an agent is acting in their best interests if the agent helps with paperwork or answers questions, even if the agent hasn’t been formally hired.
Because implied agency can arise without a written agreement, agents must be cautious about giving advice or performing actions that could create this relationship. Only a licensed attorney can provide detailed advice about what constitutes implied agency in specific situations.
Problems and Risks with Implied Agency
Implied agency can create significant risks for both the agent and the buyer or seller. Here’s an example:
Seller Scenario: A homeowner tells a real estate agent they don’t want to hire an agent to sell their home but would be willing to pay a commission if the agent finds a buyer. If the agent helps the homeowner fill out forms, the seller might assume the agent is representing their best interests. This assumption could lead to a claim of implied agency, potentially resulting in legal action if the seller feels the agent did not secure the best outcome.
Buyer Scenario: A homebuyer might think they have an advantage by not using an agent, assuming the seller’s agent will lower the price or provide insider benefits. However, the seller’s agent may worry that implied agency could arise, creating a conflict of interest and risk to the agent’s legal standing.
These situations can be tricky, as implied agency may arise unintentionally during the many steps involved in making an offer, negotiating, and closing escrow. That’s why most agents prefer to work with clients who are formally represented by their own agent to avoid the risks and potential conflicts that come with implied agency.
Navigating Family and Friends’ Real Estate Transactions
When dealing with close relationships, such as family members or friends selling property to each other, it’s essential to avoid the pitfalls of implied agency. While it may seem easy to ask a real estate agent for advice, such as the estimated value of a property, this can unintentionally create an agency relationship.
For example:
If one family member is buying out another's share of an estate, asking a real estate agent for a home value estimate might seem straightforward. However, real estate agents typically provide price estimates as part of a broader marketing strategy, which could create expectations that the agent is working for the seller’s best interests.
In these situations, it’s often best to hire a professional appraiser. Appraisers are licensed, trained, and qualified to provide a rigorous market value estimate, and their involvement is based on an explicit agency agreement.
Using an appraiser can help avoid any unintentional implied agency and ensure that both parties receive a fair and impartial valuation.
Conclusion
Understanding the nuances of agency relationships in real estate is critical to avoiding legal complications. Whether through a formal agency agreement or an implied agency relationship, real estate agents are obligated to act in their clients' best interests. To protect yourself and avoid unintentional relationships, it’s essential to clearly define roles and responsibilities with your agent, whether you’re buying or selling a home.
If you find yourself in a situation involving family, friends, or informal arrangements, consider seeking professional advice or using licensed appraisers to avoid the risks associated with implied agency.