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Similar a LCAR Unit 15 - Agency in Real Estate - 14th Edition Revised(20)



LCAR Unit 15 - Agency in Real Estate - 14th Edition Revised

  1. The Real Estate School U N I T 1 5 AGENCY IN REAL ESTATE 1 Page 247
  3. THE POWER OF EQUITY BUILD-UP 3 2018 $150,000 - 5,250 $144,750 Sale Price Down Payment Mortgage (FHA) Bought a house in 2023 $150,000 68,100 $218,100 136,737 5,250 $76,113 Sale Price Appreciation (PA = 45.4%) Home Value Mortgage Payoff Less: Down Pymt. Equity SOLD the house in
  4. OVERVIEW • Agency – The special relationship between a real estate licensee and the parties represented in a real estate transaction 4 Page 247
  5. OVERVIEW • Agency is governed by two kinds of law: 1. Common Law – The rules of society established by tradition and court decisions 2. Statutory Law – Laws, rules, and regulations enacted by legislatures and other governing bodies 5 Page 247-248
  6. OVERVIEW • The principal-agent relationship evolved from the master-servant relationship under English common law 6 Page 248
  7. LANDMARK COURT CASE • So why is Agency such a serious issue? • Dismuke vs. Edina Realty (1993) and Bokusky vs. Edina Realty (1994) 7
  8. LANDMARK COURT CASE • Buyers sought $200 Million in earned commissions over a six year period involving over 6,000 transactions • Sellers sought $75 Million in damages claiming they were not represented 8
  9. LANDMARK COURT CASE 9 • Case revolved around the adequacy of Edina Realty’s Dual Agency Disclosure • OUTCOME: Although Edina’s agents provided the disclosure, the document and agents did not adequately explain the effects of dual agency
  10. AGENCY CONCEPTS • Law of Agency defines the rights and duties of the principal and the agent 10 Page 248
  11. AGENCY CONCEPTS • Definitions: • Agent – Individual authorized and consents to represent the interest of another • Subagent – Individual who has been delegated some authority or responsibility by another party • Principal – Individual who hires the agent and delegates responsibility of representing the principal 11 Page 248
  12. AGENCY CONCEPTS • Definitions: (cont’d) • Agency – The fiduciary relationship between the principal and agent wherein the agent is authorized to represent the principal in a transaction • Fiduciary Relationship – One in which the agent is placed in a position of special trust and confidence to the principal 12 Page 248
  13. AGENCY CONCEPTS • Definitions: (cont’d) • Client – Principal that receives advice and counsel (written agreement exists between the parties) • Customer – A non-represented consumer that receives some level of service (no written agreement exists between the parties) • Nonagent – Middleman between a buyer and a seller (transaction licensee) 13 Page 248
  14. AGENCY CONCEPTS • In Pennsylvania, a consumer is one who may engage a broker to provide services under a variety of working relationships • Buyer Agent, Designated Agent, Dual Agent, Seller Agent, Subagent, and Transaction Licensee 14 Page 249
  15. AGENCY CONCEPTS • Fiduciary Responsibilities – They are not just moral and ethical; they are the law 15 Page 249 • Care • Obedience • Accounting • Loyalty • Disclosure • Confidentiality Under Common Law of Agency, an Agent owes principal COALD+C
  16. AGENCY CONCEPTS • Figure 15.1 shows the obligations to the Buyer if they are a Customer or Client (principal) 16 Page 249-250
  17. AGENCY CONCEPTS • Fiduciary Responsibilities - Care • Agents must exercise a reasonable degree of care while transacting business entrusted to them • Agents are liable to the principal for any loss resulting from negligence • Errors & Omissions Insurance (E&O) covers liability for errors and negligence 17 Page 251
  18. AGENCY CONCEPTS • Fiduciary Responsibilities - Obedience • Agents must act in good faith obeying the principal’s instructions • Not obligated to obey instructions that are unlawful or unethical • Agent may be liable for any losses principal suffers if they exceed authority assigned 18 Page 251
  19. • Fiduciary Responsibilities - Accounting • Commingling – Mixing client monies with personal or general business funds is illegal • Conversion – The illegal use of entrusted money • Required to give copies of documents to all parties and retain for 3 years AGENCY CONCEPTS 19 Page 251
  20. • Fiduciary Responsibilities - Loyalty • Requires that agents place the principal’s interest above those of all others, including the agent’s own self-interest • Agents must disclose their interest when selling their own real estate and buying the real estate of their principal AGENCY CONCEPTS 20 Page 252
  21. • Fiduciary Responsibilities - Disclosure • Agent has duty to inform the principal of all facts that might affect the principal’s position in a transaction • Includes material facts that the agent knows or should have known • Seller must disclose latent defects which may not be discovered during inspection AGENCY CONCEPTS 21 Page 252
  22. • Fiduciary Responsibilities – Disclosure of Environmental Hazards • Agent should ensure that their clients are aware of potential issues with environmental health hazards • Examples: Seller Property Disclosure Statement, Lead-based Paint Disclosure AGENCY CONCEPTS 22 Page 253 Environmental Hazards
  23. • Fiduciary Responsibilities – Confidentiality • Agent may not disclose the principal’s financial condition • Confidentiality does not extend to material facts about the condition of the property • Anything learned about a client must remain confidential forever AGENCY CONCEPTS 23 Page 253
  24. AGENCY CONCEPTS • Client versus Customer Service: • The Client is who the agent gives advice and counsel • Agent works FOR the client (principal) • The Customer is entitled to factual information and fair and honest dealings • Agent works WITH the customer 24 Page 253-254
  25. CREATION & TERMINATION OF AGENCY • The relationship must be consensual and is formed when the principal delegates authority and the agent consents to act 25 Page 255
  26. CREATION & TERMINATION OF AGENCY • Agency Relationships may be created in two ways: 1. Express Agency – The parties formally express their intention to establish an agency relationship and state its terms and conditions 26 Page 255 Written Oral - or -
  27. CREATION & TERMINATION OF AGENCY • Agency Relationships may be created in two ways: 1. Express Agency (cont’d) • In Pennsylvania, all exclusive contracts of employment must be in writing 27 Page 255 Listing Agreement Buyer Agency Agreement
  28. CREATION & TERMINATION OF AGENCY • Agency Relationships may be created in two ways: 2. Implied Agency – Occurs when the actions of the parties indicate that they have mutually consented to an agency agreement • Licensee may create an agency relationship unintentionally, inadvertently, or accidently by their actions 28 Page 255-256
  29. CREATION & TERMINATION OF AGENCY • Agency Coupled With an Interest – Relationship in which the agent is given an interest in the subject of the agency (i.e. the property being sold) 29 Page 256
  30. CREATION & TERMINATION OF AGENCY • The source of compensation does not determine agency • An agent does not necessarily represent the person who pays the agent’s commission • Written agency agreement should state how the agent is being compensated and explain alternatives 30 Page 256
  31. • Termination of Agency • Completion, performance, or fulfillment of the purpose • Death or incapacity of either party • Destruction or condemnation of property • Expiration of the terms • Mutual agreement • Breach by one of the parties • Operation of law (i.e. bankruptcy) CREATION & TERMINATION OF AGENCY 31 Page 256
  32. • An agent’s empowerment to represent the principal depends solely on the authorization to do so • Universal Agent – Empowered to do anything the principal could do • General Agent – Represent the principal in a broad range of matters related to a particular business • Special Agent – Authorized to represent the principal in one specific act or transaction TYPES OF AGENCY RELATIONSHIPS 32 Page 257
  33. • Real Estate Licensing and Registration Act (RELRA) permits (but does not require) broker to act as: • Agent of Buyer (or Tenant) • Agent of Seller (or Landlord) • Dual Agent – Represent both parties in the same transaction • Transaction Licensee – Nonagent TYPES OF AGENCY RELATIONSHIPS 33 Page 257
  34. • Single Agency – Agent represents only one party in a single transaction TYPES OF AGENCY RELATIONSHIPS 34 Page 258
  35. • Single Agency (Figure 15.2) TYPES OF AGENCY RELATIONSHIPS 35 Page 303 Agent (ABC Realty) Client Customer Written Listing Agreement No Written Agreement
  36. • Single Agency (cont’d) • Seller as Principal – Seller enters a listing agreement with a broker to market the seller’s real estate TYPES OF AGENCY RELATIONSHIPS 36 Page 258
  37. • Single Agency (cont’d) • Buyer as Principal – A Buyer who contracts with a broker to locate property and represent the buyer’s interests in a transaction TYPES OF AGENCY RELATIONSHIPS 37 Page 258
  38. • Single Agency (cont’d) • Landlord as Principal – An owner who employs a broker to market, lease, maintain, or manage the owner’s property TYPES OF AGENCY RELATIONSHIPS 38 Page 259
  39. • Single Agency (cont’d) • Tenant as Principal – A tenant who contracts with a broker to locate property suitable for the tenant’s specific purposes TYPES OF AGENCY RELATIONSHIPS 39 Page 259
  40. • Single Agency (cont’d) • Subagency – Created when one broker appoints another broker to help perform client-based functions on the principal’s behalf TYPES OF AGENCY RELATIONSHIPS 40 Page 259
  41. • Subagency (Figure 15.3) TYPES OF AGENCY RELATIONSHIPS 41 Page 304 Agent (ABC Realty) Subagent (XYZ Realty) Client (Seller) Customer (Buyer) Written Listing Agreement No Written Agreement
  42. • Dual Agency – Agent represents two principals in the same transaction • Must fulfill fiduciary responsibilities to one principal without compromising the interests of the other • Disclosed Dual Agency – Pennsylvania licensees may act for more than one party in a transaction only with the knowledge and written consent of all parties TYPES OF AGENCY RELATIONSHIPS 42 Page 259-260
  43. • Dual Agency (Figure 15.4) TYPES OF AGENCY RELATIONSHIPS 43 Page 304 Agent (ABC Realty) Client (Seller) Written Listing Agreement w/Dual Agency Clause Written Buyer Agency Agreement w/Dual Agency Clause Client (Buyer)
  44. • Dual Agency (cont’d) • Designated Agency – In Pennsylvania, a process that accommodates an in-house sale in which two different affiliated licensees are involved • The Broker is a dual agent • Written disclosure of this status is required TYPES OF AGENCY RELATIONSHIPS 44 Page 260
  45. • Dual Agency with Designated Agency TYPES OF AGENCY RELATIONSHIPS 45 Broker (ABC Realty) Client (Seller) Written Listing Agreement w/Dual Agency Clause Written Buyer Agency Agreement w/Dual Agency Clause Client (Buyer) Agent B (ABC Realty) Agent A (ABC Realty) Designated Agent for Seller Designated Agent for Buyer Dual Agent
  46. • Dual Agency (cont’d) • Undisclosed Dual Agency – It might occur unintentionally or inadvertently by agent’s words and actions • Violation of license law • Can result in rescission of contract, forfeiture of commission, lawsuit for damages, and license issues TYPES OF AGENCY RELATIONSHIPS 46 Page 260-261
  47. • Transaction Licensee (Nonagency) – Not an agent of either party • Licensee helps buyer and seller with paperwork • Buyer and seller negotiate sale without representation TYPES OF AGENCY RELATIONSHIPS 47 Page 261
  48. • Disclosure of Agency – Mandatory that real estate licensees disclose who they represent • Pennsylvania Consumer Notice – Disclosure summary for the purchase, sale, or lease of residential or commercial real estate CONSUMER NOTICE 48 Page 262 Figure 15.5
  49. • Major Provisions of Consumer Notice: • Statement advising parties that they are not represented unless they sign a written agreement • General duties owed to all parties • Description of business relationships allowed in PA • Contractual terms that must be in agreements • Statement about the Real Estate Recovery Fund CONSUMER NOTICE 49 Page 262
  50. • Licensees must discuss the Consumer Notice at the initial interview or the first substantive discussion between a licensee and consumer about the consumer’s needs CONSUMER NOTICE 50 Page 262
  51. • If initial meeting is via phone or e-mail, licensees are required to make the following disclosure to consumer: “The real estate law requires that I provide you with a written consumer notice that describes the various business relationship choices that you may have with a real estate licensee. Since we are discussing real estate without you having the benefit of the Consumer Notice, I have the duty to advise you that any information you give me at this time is not considered to be confidential, and nay information you give me will not be considered confidential unless and until you and I enter into a business relationship. At our first meeting I will provide you with a written Consumer Notice which explains those business relationships and my corresponding duties to you.” CONSUMER NOTICE 51 Page 262
  52. • Make sure consumer is aware that this document is not a contract • It is only a disclosure CONSUMER NOTICE 52 Page 264
  53. • States that agents are REQUIRED to provide this document to consumer Question: What should you do if the consumer refuses to sign? CONSUMER NOTICE 53 Page 264
  54. • The document describes the various agency relationships that the licensee may enter into with the consumer CONSUMER NOTICE 54 Page 264 Seller Agent Buyer Agent Dual Agent Designated Agent Transaction Licensee
  55. • Describes the duties that agents owe all consumers regardless of representation status CONSUMER NOTICE 55 Page 264 • Disclose conflicts of interests and financial interests • Provide assistance with document preparation • Advise consumer to seek expert advice beyond licensee’s expertise • Keep consumer informed • Disclose financial interest in a service at the time service is recommended
  56. • Describes the duties that agents owe all consumers regardless of representation status (cont’d) CONSUMER NOTICE 56 Page 264 • Exercise reasonable professional skill and care • Deal honestly and in good faith • Present all documents associated with transaction as soon as possible • Comply with the Real Estate Seller Disclosure Law • Account for escrow and deposit funds
  57. • Indicates terms that are negotiable between the consumer and licensee CONSUMER NOTICE 57 Page 264 • Duration of licensee’s employment • Licensee’s fees • Scope of licensees activities • Broker’s cooperation with sharing of fees with other brokers
  58. Before you disclose any financial information to a licensee, be advised that unless you select a business relationship by signing a written agreement, the licensee in NOT representing you. A business relationship is NOT presumed. CONSUMER NOTICE 58 Page 264 • The last statement on the notice is: