Everyone has heard that there are specific fiduciary responsibilities for a Realtor. What is very interesting is that these same responsibilities carry over if you are on a board or in an executive management role, with a few differences depending on the state of the business. In this article, I will review one of the parts of the test and drill into the Fiduciary Responsibilities of a Real Estate Agent.
From the National Association of Realtors
The National Association of Realtors (NAR) uses the acronym OLDCAR to explain the duties real estate professionals owe:
- Duty of Obedience – the professional must follow their client’s instructions
- Duty of Loyalty – the professional must act in the client’s best interests
- Duty of Disclosure – the professional must disclose material facts in any transaction
- Duty of Confidentiality – the professional must keep their client’s information confidential
- Duty of Accounting – the professional must keep accurate records
- Duty of Reasonable Care – the professional must use reasonable care when representing the client
In addition, the Texas Real Estate Commission (TREC) provides regulations for real estate agents and brokers. Under TREC’s Canons of Professional Conduct and Ethics, Texas real estate professionals owe fidelity when they act as an agent, including:
- Representing the interests of the client;
- Ensuring all parties to a transaction understand to whom the professional owes a duty;
- Treating all parties fairly, regardless of client relationship;
- Being “faithful and observant” to their role;
- Being “scrupulous and meticulous” in performing their role; and
- Placing “no personal interest above that of the client.”
Real estate professionals also must always act with integrity. They must be prudent and cautious to avoid affirmative misrepresentation and misrepresentation by omission.
WHEN DOES A REALTOR HAVE A FIDUCIARY DUTY?
Realtors and brokers must treat every party to a transaction fairly. But when does their fiduciary duty kick in? TREC is clear when the duty exists—when the professional acts as an agent. So, when does the professional become the person’s agent? Under basic principles of agency law, which apply to Texas real estate professionals, an agent acts on behalf of another. Thus, a realtor is an agent when they are acting on behalf of another in a professional capacity. The realtor who listed a home for sale is not a fiduciary to potential buyers, but they are a fiduciary to the seller. Similarly, a realtor who negotiates the terms of purchase with the seller’s realtor is an agent acting on behalf of the buyer. A broker is an agent who represents someone in a transaction or lists real estate for sale under an exclusive agreement.
What does this all mean exactly?
Real Estate Agents have a detail-oriented service business, and trust is critical.
Let’s review starting with the O in OLDCAR
The duty of obedience
The duty of obedience requires an agent to act according to the client’s instructions. However, the agent should not follow any unlawful instructions. For instance, if the client asks to discriminate in the sale or rental of housing or to misrepresent the property’s condition, the agent must refuse to comply. Following such instructions could breach the agent’s duty of loyalty.
Sometimes, the client may ask for something that the agent disagrees with or does not find beneficial for the client. Although the agent must provide their best advice in the client’s best interest, they cannot think or decide for the client. In such cases, the agent may need to take an apparently unreasonable position on behalf of the client, which is required under the duty of obedience.
For example, if a client asks you to submit an offer for a property twenty thousand less than the list price, and there are already multiple offers on the property, and the deadline is in an hour, you should still submit the offer as per the client’s instructions.
The duty of loyalty
The duty of loyalty is one of the primary responsibilities that an agent owes to their principal. This fiduciary duty obligates the agent to act solely in the best interests of their principal, and not to consider any other interests, including their own, or those of third parties, such as brokers or other clients. Failure to adhere to this duty can lead to lawsuits against real estate agents for breach of duty, as clients rely on their agents’ expertise to act in their best interests.
For example, if a real estate broker purchases a property listed with their firm and immediately resells it at a profit, this may seem appropriate and lawful. However, a fiduciary would be deemed to have breached their duty of loyalty by “stealing” a profit opportunity that rightfully belongs to their principal.
The duty of disclosure
As an agent, it is your legal obligation to disclose any known material facts about the property or the transaction to your clients. Material facts are those facts that could reasonably impact the value or desirability of the property. For instance, if you know that the property’s foundation has a problem, you must disclose it to your clients, even if it may affect the sale negatively. Similarly, if you know that the seller is under financial stress and is motivated to sell the property quickly, you must inform your clients.
The duty of disclosure is essential because it guarantees that clients are fully informed about the property and the transaction, enabling them to make informed decisions about whether to proceed with the purchase. It also helps to build trust and establish a positive relationship between agents and their clients.
In some states, agents must submit a written disclosure statement to their clients outlining any known material facts about the property. Agents should familiarize themselves with the specific disclosure requirements in their state.
The duty of confidentiality
The duty of confidentiality requires agents to keep confidential any information that may weaken their principal’s bargaining position if it were revealed. This includes any personal or financial information provided by the client, as well as any information obtained during the transaction.
There are certain situations where a breach of confidentiality may occur unintentionally, such as casually sharing prior sale price or fall-through information with colleagues, unnecessarily revealing seller or buyer motivation, discussing the client’s financial situation or negotiating philosophy, revealing things such as “the seller is anxious” or “the buyer just has to have this house” without the client’s express permission, divulging unauthorized information, even when this is intended to help the client, telling a buyer the lowest price the seller would be willing to accept, or disclosing any price other than the list price if not instructed by the seller to do so.
However, it should be noted that this duty of confidentiality does not include any obligation on a broker representing a seller to withhold known material facts concerning the condition of the seller’s property or to misrepresent the condition of the property. To do so would constitute misrepresentation and would impose liability on both the broker and the seller.
Confidentiality as a facilitator: Confidentiality is the only applicable fiduciary duty in a facilitator relationship.
The duty of accounting
Real estate agents have a duty to account for all money or property belonging to their clients that are entrusted to them. This includes safeguarding any money, deeds, or other documents related to their client’s transactions or affairs. For instance, when an agent is holding a deposit for a property on behalf of their client, they must keep accurate records of the deposit and account for it properly when it is time to close the transaction. This duty also applies to earnest money funds, rents collected, or any expenses paid on behalf of a client.
The duty of reasonable care
Real estate agents have a duty to act with reasonable care, skill, and diligence in their dealings. As they possess a license, they are required to have more expertise and skill than an average person in real estate matters. When representing clients, agents must use their superior knowledge to benefit their client’s affairs. It is important for agents to honestly portray the limits of their expertise and remain compliant with all applicable statutes and regulations, such as fair housing and civil rights statutes. These fiduciary duties may vary from state to state and are not exhaustive. Therefore, it is essential for real estate agents to understand the specific fiduciary duties that apply in their state to avoid legal liability and gain the trust and confidence of their clients.
