How Do Professional Ethics Come Into Play in the Real Estate Deal?
When you sign a contract to have an agent represent you in a real estate transaction, your agent agrees to a set of fiduciary duties. Essentially this means the agent you hire must act in your best interest.
This is only the case if you and the agent signed an agency agreement, naming you as the agent’s client. It’s vital that you know if your broker is also your agent. Check your contract. Note, too, that the agent’s fiduciary duties must be followed, as long as you are the client — whether or not they are fully laid out in your agency contract.
The key specifics of a agent’s duties to the client appear in your state’s real estate statute. But in general, fiduciary duties are the highest of legal standards. Think of trustees, guardians, and personal representatives. To act on another’s behalf requires an unwavering sense of ethics and care.
The following are the fiduciary duties an agent must model.
Client First: The Duty of Loyalty
In representing you, your agent may not put their interests ahead of yours. Whether you’re the seller or the buyer, your agent steps into your shoes when negotiating and leveraging opportunities.
For example, your agent cannot rise to a meet competing offer just because that means a higher commission. Another example of disloyalty involves the agent who buys your property, then flips it for a higher price. House-flipping is fine and legal when the parties aren’t connected, but a fiduciary who flips your house is stealing your opportunity.
Following Through: The Duty of Obedience
A closely related fiduciary duty is obedience. As long as you adhere to the limits of your contract with your agent, and you aren’t asking that anything be done unethically, your agent must carry out your instructions.
Can an agent agree to a lower price than you said you’re willing to pay? No. The agent can advise you to be more flexible about the price, but cannot negotiate outside your set limits unless you agree to change your mind.
Can a seller’s agent refuse to lie for the seller about a recurring flood problem in the basement? Yes. Should a buyer’s agent let the potential buyer know if the agent spots evidence of sinkholes on the property? Yes.
If an agent is wondering whether some issue with the home should be disclosed to the buyer, the right action is always disclosure. It might just be a minor thing, but the buyer should have the opportunity to decide. There are other things that should be disclosed, too…
Transparency Matters: The Duty to Disclose
Are you putting your home on the market? Your real estate agent has to tell you the facts that could impact your sale price, and also must tell you about:
- All offers and who’s making them, and whether they are firm or negotiable.
- Any relationship the agent might have with a potential buyer.
- A buyer’s likely intent to flip or subdivide the property.
Are you buying a home? Then your agent needs to tell you about the history of a given home on the market and if there are competing offers. The agent must also tell you:
- Whether you’d be likely to successfully negotiate the price.
- Facts that impact a property’s worth, including anything notable the agent learns about why the seller isn’t keeping a given property.
- Any relationship the agent might have with the seller of a home you might buy.
Generally, knowledge that could help you understand the property’s real value and help you get your best possible deal is something your agent should communicate to you.
Loose Lips Sink Deals: The Duty of Confidentiality
You are going to tell your agent some personal things about your life and financial situation. You can expect your agent to keep your personal information private. Also, your agent should not divulge any knowledge that undermines your bargaining position. This means, for example, if you’re a seller, and your agent knows you will take a lower price than what’s listed, the agent should keep that under wraps until you’re ready and willing to negotiate. If you’re a buyer and are prepared to pay more than your bid, a parallel rule applies.
Important note: The duty of confidentiality does not mean an agent may knowingly mislead a buyer about the condition of the seller’s property.
Mindfulness Exercises: The Duty to Apply Reasonable Care and Diligence
“Reasonable” might seem subjective. But it means an agent must apply the standard of care expected in the industry of a competent professional.
Licensed agents should have acquired a particular skill set. Their duty is to use their skills appropriately and diligently to pursue the goals of the client. As with a lawyer or doctor, the real estate expert has an obligation to learn about and understand the client’s specific situation and needs.
What about information and support that’s outside the scope of an agent’s expertise but relevant to the deal? When additional expertise is needed, an agent should know how to refer the right experts to the client.
Following the Money: The Duty of Accounting
It’s an agent’s duty to understand the elements of the financial transaction and to attend to them in a professional manner. An agent who is asked to handle money, property, or deeds has a duty to safeguard them and to avoid commingling the agent’s and the client’s money.
An agent may receive money for an escrow account. If so, it must be deposited in the account.
A seller’s agent should keep track of all potential buyers, and keep the home locked and secure when leaving a showing.
Different Standards? The Transaction Brokers Who Aren’t Agents
Let’s get back to the point about actually hiring an agent with fiduciary duties. Today, in several states, buyers and sellers can hire transaction brokers. There is a difference between a broker and an agent. An agent’s role is to represent, negotiate for, and be an advocate for one of the parties — not simply facilitate the paperwork and act as a neutral broker of the deal.
Transaction brokers are not agents. They do not advocate for one side. They may prepare purchase contracts, present purchase offers, and keep the parties on a timeline. They are usually less expensive to hire than agents. In some states this arrangement is the norm, while in other states, it’s not allowed. In Florida, it’s normal, and some people aren’t happy about it. Transaction brokers are also common in Colorado.
Transaction brokers do not have to adhere to the set of fiduciary responsibilities we’ve listed above. And this means they might have no liability if a problem crops up. That said, a transaction broker must, under the law, behave honestly and fairly, apply due diligence, and bring professional skill into a transaction. State law typically also directs all real estate brokers, whether or not they are classified as agents, to disclose any material facts bearing on the parties’ decision to carry out their transactions.
A big issue here is that many people assume their real estate professional is working for them, when state law and custom might tell another story. If their state uses brokers as the default relationship, does the client know? Does the client fully understand the ramifications? Add to this potential confusion the fact that states can and do modify their statutes. Real estate brokers’ responsibilities and roles can change.
So, when going into a transaction, understand whether your broker is your agent. Know why having an agent on your side truly means hiring an advocate.
Photo credit: Gabrielle Henderson, via Unsplash.