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California Real Estate Practice Chapter 1

Terms in this set (117)

Agency law
The body of statutes and court decisions that govern agency relationships in a wide variety of contexts.

Ex. Agency law applies to the relationship between lawyer and client, or between trustee and beneficiary. It is also the legal basis for a real estate agent's relationship with her clients.
Agency Relationships
...
Agent
A person who has been authorized by a principal to represent the principal in dealings with third parties.

A person authorized to represent another (the principal) in dealings with third parties.
Principal
A real estate agent's principal may be a real estate seller, buyer, landlord, or tenant.

A real estate agent's principal may also be called his client.

"A person who grants another person (an agent) authority to represent her in dealings with third parties.
Customers
When a real estate agent negotiates with buyers or tenants on a client's (third parties) behalf.

Ex. Sullivan asks Broker Harris to find a buyer for her house. Harris shows Sullivan's house to Brown, who makes an offer to purchase the house. Sullivan is Harris's client, or principal; Harris is Sullivan's agent; and Brown is the customer or third party.
Real estate agent
Commonly used to refer to either a licensed real estate broker or a licensed real estate salesperson.

Technically, however, only a broker can be the agent of a member of the public (a seller, buyer, landlord, or tenant).

When a real estate salesperson works with a seller, for example, the salesperson does so as an agent of her broker, not as the agent of the seller.

The broker is legally responsible for the actions of the salesperson.

So even though the salesperson as well as the broker may be referred to as the seller's agent, strictly speaking only the broker is the seller's agent in the eyes of the law.

Although this technical distinction doesn't necessarily make much difference in the day-to-day work of a salesperson, it should be kept in mind.
Seller's agent
(Listing agent)

Residential sales transactions, one real estate licensee acts as the seller's agent.

Owes fiduciary duties only to the seller.
Listing agent
See Seller's agent
Buyer's agent
(Selling agent)

Residential sales transactions, another licensee acts as the buyer's agent.

Owes fiduciary duties only to the buyer.
Selling agent
See Listing agent
Dual agent
An agent who represents both parties to a transaction, as when a broker represents both the buyer and the seller.

A licensee may also act as a dual agent, representing both the seller and the buyer in the same transaction.

Owes fiduciary duties to bothg seller & buyer.

Must not disclose confidential information to either party.
Finder
(Middleman)

Someone who introduces a real estate buyer and seller, but does not help them negotiate their contract.

A finder is not the agent of either party and does not have to be licensed.

In some cases a licensee may prefer not to act as the agent of either party, choosing instead to act merely as a middleman or finder.

Introduces buyer to seller.

Owes fiduciary duties to neither party.
Middleman
See Finder
Third party
A person seeking to deal with a principal through an agent. Also referred to as a customer.

Persons who are not parties to a contract which affects an interest they have in the object of the contract.

An agency relationship has a number of very important legal implications.

For a third party, dealing with the agent can be the legal equivalent of dealing with the principal.

Ex. If an agent is authorized to do so, she can enter into a contract that will be legally binding on the principal.

And if the agent makes a mistake or commits fraud, the principal could be held liable to a third party who was injured by the agent's action.

Perhaps most importantly, an agent owes special legal duties to her principal that she doesn't owe to third parties.
Agent's Duties to the Principal
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Fiduciary duties
The duties that agents owe to their principals.

An agent owes the principal these five basic fiduciary duties:

-utmost care,
-obedience and good faith,
-accounting,
-loyalty, and
-disclosure of material facts

A real estate agent owes his client(s) these duties regardless of whether he is representing the seller, the buyer, or both parties.

Fiduciary duties are owed from the time the agency relationship begins until the transaction closes or the agency terminates for some other reason.
Fiduciary
A person who occupies a position of special trust in relation to another person.
Utmost Care
An agent owes her principal the duty of utmost care in carrying out the agency.

A real estate agent is required to act with the level of care and skill generally expected of a competent real estate agent.

If her performance fails to meet that standard, she may be found liable for any harm to the principal that results from her negligence.
Obedience and Good Faith
An agent must obey the principal's instructions and carry them out in good faith, with honesty and integrity.

The agent's actions must conform to the purpose and intent of the instructions.

If a real estate agent fails to obey the client's instructions, the agent (or the agent's broker) may be held liable for any loss to the client that results.
Accounting
Agents must be able to account to their clients for all funds (or other valuables) entrusted to their care.

These are referred to as trust funds.

California's Real Estate Law requires brokers to report to their clients on the status of all trust funds on a regular basis.

They must also avoid mixing, or commingling, trust funds with their own funds.
Trust funds
All funds (or other valuables) entrusted to the agents care.

Money or things of value received by an agent, not belonging to the agent but being held for the benefit of others.
Commingling
Mixing trust funds with their own funds.

Illegally mixing trust funds held on behalf of a client with personal funds.
Loyalty
The duty of loyalty means that agents must put the interests of their clients above their own interests and above the interests of any other party.

An agent must not make any secret profits from the agency.

Ex. It is a breach of agency duty for a broker to list a property for less than it is worth, secretly buy it from the principal through an intermediary, and then sell it for a profit.

One of the most important aspects of the duty of loyalty is the requirement of confidentiality.

An agent may not disclose any confidential information about the principal, even after the agency relationship terminates.
Confidentiality
Information is generally considered confidential if it was:

1. given to the agent by the principal in confidence, and/or

2. acquired by the agent during the course of or on account of the fiduciary relationship.

Confidential information cannot be disclosed to other parties or otherwise used in a manner that is detrimental to the principal.

Ex. A buyer privately tells her agent that she is independently wealthy and can easily afford the listing price, but would like to offer $5,000 less than the listing price as an opening offer.

The buyer's agent must keep this information confidential, since it was told to the agent in confidence, and revealing the information to the seller would not be in the buyer's best interest.

Of course, information is not confidential if it is already available to the general public.

Also, information is not confidential if the principal is required by law to disclose it.

Ex. The seller in a real estate transaction is required to make a number of disclosures to the buyer. One kind of information that must be disclosed is the presence of latent defects in the property. A latent defect is a problem that would not be discovered by ordinary inspection.

Information about latent defects must never be concealed on the grounds that the information is confidential.

Because the principal would be legally obligated to disclose a latent defect to buyers, by definition it is not confidential information.

Ex. A seller tells Parker, his agent, that the roof of his house leaks during heavy rain, and asks her not to mention this information to prospective buyers. Although this was told to Parker in confidence, she is legally obligated to disclose it to buyers.

Confidential information about a principal must not be disclosed even after the transaction has ended.

This is particularly important if a person who once was an agent's principal is now represented by another agent.

Ex. Agent Vance helped Torino purchase an expensive house. While Vance was representing him, Torino told Vance a considerable amount of confidential information about his extensive financial holdings.
Over a year later, Vance is representing Cortez in the sale of an investment property. Torino, who is now represented by another agent, is interested in buying Cortez's property. Vance knows that Torino is extremely wealthy and can easily afford to pay the property's full listing price. But because this knowledge is based on confidential information he learned while he was acting as Torino's agent, Vance cannot disclose this to his current client, Cortez. This is true even though Vance's agency relationship with Torino ended a long time ago.
Disclosure of Material Facts
The agent is required to disclose all material facts that she is aware of to the principal.

For a real estate agent, a material fact is any information that affects the value or desirability of the property, or that could affect the principal's decision as to whether or not to enter into a transaction.
Material fact
An important fact; one that is likely to influence a decision.

Any information that affects the value or desirability of the property, or that could affect the principal's decision as to whether or not to enter into a transaction.

Material facts that must be disclosed to the principal include:

-all offers to purchase the property,
-the true value of the property, and
-any relationship between the agent and another party

A seller's agent must present all offers to the principal in a timely manner.

It's the seller, not the agent, who decides whether an offer is acceptable.

The duty to present all offers continues even after the property is subject to an existing contract.

Ex. Seller Sanders has just accepted an offer from Buyer Barton. Garcia, the listing agent, receives another written offer for the same property from Buyer Bell. Garcia has a duty to present Bell's offer to Sanders, even though Sanders has already accepted Barton's offer.

A seller's agent must also inform his principal of the property's true value.

Since sellers usually rely on their agent's advice in setting a listing price, an agent could arrange to collect a secret profit by telling the seller that the property is worth less than it actually is, and then arranging to purchase it at an unfairly low price.

This would be a breach of the agent's fiduciary duties.
Conflicts of interest
Any conflicts of interest must also be disclosed to the principal.

Ex. The seller's agent must inform the seller if there is any relationship between the agent and a prospective buyer. And this disclosure must be made before the principal decides whether to accept the buyer's offer.

If the buyer is a friend, relative, or business associate of the agent, or a company in which the agent has an interest, there may be a conflict of interest.

The principal has the right to have this information when making his decision.

An agent isn't merely expected to disclose material facts to the principal, but also to discuss the ramifications of the information in order to help the principal make sound decisions.

However, a real estate agent's advice should not exceed the agent's expertise.

Ex. A real estate agent must never offer legal advice; when appropriate, she should recommend that the principal consult with a real estate attorney.
Agent's Duties to Third Parties
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Reasonable Care and Skill
An agent owes the duty of utmost care to his principal, but he also owes the duty of reasonable care and skill to third parties.

Again, the standard that a real estate agent will be measured against is the degree of care and skill that would be expected of a reasonably competent real estate agent.

If an agent harms a third party because of carelessness or incompetence, he may be held liable to the third party for the harm caused by his negligence.
Good Faith and Fair Dealing
The duty of good faith and fair dealing requires a real estate agent to be honest with the third parties she deals with on behalf of the principal.

Making inaccurate statements or misrepresentations to customers would be a breach of this duty.

Even an unintentional misrepresentation may constitute fraud.

The party to whom the misrepresentation was made would have the right to rescind the transaction and/or sue for damages.

Not only the real estate agent has a duty of good faith and fair dealing: the principal does as well.

If a seller or a buyer makes misrepresentations to the other party, the other party can rescind the transaction and/or sue for damages.
Disclosure of material facts.2
It's the duty of good faith and fair dealing that requires seller's agents and sellers to disclose material facts to prospective buyers.

They must disclose any information that materially affects the value, desirability, or intended use of the property, unless the information should already be apparent to buyers.

Of course, this includes latent defects: problems with the property that wouldn't be obvious to a buyer during a casual inspection.

The seller and the seller's agent cannot conceal latent defects; they must disclose them even if the buyer doesn't specifically ask about them.

In most residential transactions, the seller is required to give the buyer a transfer disclosure statement.

This requirement applies to all sales of one- to four-unit residential properties, although there are exemptions for new homes in subdivisions being sold for the first time, and certain other types of transfers.

Note that you can usually be held liable for failure to disclose a material fact only if it is a fact that you are aware of, and only if the fact is not readily apparent or ascertainable by the other party.

Also, you aren't required to explain the ramifications of a material fact to a third party; you're only required to disclose the fact itself.

If it's unclear whether or not an observed condition is a latent defect, it is always best to err on the side of disclosure.

Even small problems should be disclosed, because they might indicate a much bigger problem when considered together.

Ex. The seller's agent notices that the house is built on a hillside that consists mostly of fill dirt, which can be unstable. There is netting further down the hill that was probably used to shore up slumping soil. Also, the surface of the garage floor is somewhat uneven.
The agent should consider these facts to be latent defects and disclose them. Although they do not conclusively show that the property is at risk for landslides, taken together they are red flags that suggest a possible geologic hazard.

The disclosure of latent defects cannot be waived by the buyer or the buyer's agent.

Even if there is an "as is" clause in the purchase agreement, the seller and the seller's agent must still reveal all known latent defects.
Investigation or inspection
An agent generally isn't required to search for and discover material facts that she doesn't already know.

For instance, an agent does not need to investigate a party's financial position, or to verify statements that come from a reliable source, such as a title insurance company.

One important exception is that California law requires real estate agents to perform a reasonably competent and diligent visual inspection of the property being sold, if it is a residential property with one to four units.

Any latent defects or other material facts discovered during the inspection must be reported to a prospective buyer.
What need not be disclosed
Certain types of information can stigmatize a property, even though they have no actual effect on the property's condition or title.

California law specifically provides that a seller or a seller's agent must not disclose to prospective buyers that the property was occupied by someone who had AIDS or was HIV-positive.

If a buyer asks whether anyone with AIDS lives or lived in the seller's house, you should explain that answering that question could violate fair housing laws.

The same response is appropriate for questions about race, creed, or color.

Under state law, agents don't need to disclose to buyers that someone died on the property more than three years ago, regardless of the cause of death.

However, if there has been a death on the property within the last three years, and the death could affect the desirability of the property, you should disclose it.

In addition, if the buyer asks you about the subject directly, you must answer truthfully.

Ex. Agent Kipling is showing Buyer Green a house. Green has three children and wants a safe family home to live in. Kipling knows that the property he's showing Green was the site of a brutal murder-suicide ten years ago. This information does not have to be disclosed to Green, because the deaths occurred more than three years ago.
Note, however, that if Green asks Kipling whether any crimes have occurred on the property, Kipling will have to answer honestly.
Fiduciary duties owed only to the principal
-Utmost care
-Obedience & Good faith
-Accounting
-Loyalty & confidentiality
-Disclosure of material facts
Duties owed to third parties
-Reasonable care & skill
-Good faith & fail dealing
-Visual property inspection & disclosure of latent defects and other material facts
Other Legal Effects of Agency Relationships
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Legal implications
An agency relationship has other significant legal implications beyond the issue of agency duties.

For a third party, dealing with an agent can be the legal equivalent of dealing with the principal.

When an authorized agent signs a document or makes a promise, it's as if the principal signed or promised.

The principal is bound by the agent's actions if they are within the actual or apparent scope of the agency.

Third parties are expected to inquire into the actual scope of the agent's authority, however.

If they fail to do so, the principal will usually not be liable for actions that exceeded the agent's authority.
Imputed knowledge rule
Communication to an agent is the legal equivalent of communication to the principal.

If a third party gives the agent information about a certain problem or requirement, the principal is deemed to have been informed of it—even if the agent never actually passed the information on to the principal.

This is called the imputed knowledge rule; the agent's knowledge is imputed to the principal.
Vicarious liability
A legal doctrine holding that a principal can be held liable for harm to third parties resulting from an agent's actions.

Under certain circumstances, if an agent does something wrong, the principal may be held liable to third parties for harm resulting from the agent's actions.

This is called vicarious liability.

Vicarious liability may apply whether or not the principal approved or knew of the agent's acts, either before or after the fact.

Ex. Broker Burroughs is representing Sawyer in the sale of her property. While inspecting the property, Burroughs notices indications of previous flooding. Sawyer doesn't know about the flooding, and Burroughs doesn't tell either Sawyer or prospective buyers about the problem.
Hassan purchases Sawyer's property, and soon afterward it floods again. Hassan must pay a repair bill of $5,000. Hassan can sue both Burroughs and Sawyer. Sawyer may be held vicariously liable for her agent's failure to disclose a material fact to the buyer.
Joint and several liability
A form of liability in which two or more persons are responsible for a debt both individually and as a group.

If the third party prevails in a lawsuit based on vicarious liability, the agent and principal will usually be jointly liable for the full amount of the damages.

In other words, either of them can be required to pay the full amount if the other does not pay his or her share. This is called joint and several liability.

However, if the principal did nothing wrong, the principal may turn around and sue the agent for the amount the principal had to pay to the injured party.

Ex. Continuing with the previous example, the court awards Hassan $5,000 in damages. To prevent a judgment lien from attaching to the property she currently owns, Sawyer (the seller) pays the full $5,000 to Hassan. But since Sawyer actually did nothing wrong herself and wasn't aware that Burroughs was withholding information, she may now sue Burroughs (her agent) for the $5,000 that she had to pay to Hassan.

It isn't always easy to collect a judgment from the defendant in a lawsuit, and these liability rules address that problem.

In a situation like the one in the example, the problem of collecting money from the broker has effectively been transferred from the buyer (the third party) to the seller—the agent's principal.

This creates an incentive for someone who hires an agent to pay attention to how the agency is being carried out, instead of purposefully remaining ignorant of the agent's misconduct.

Note that when it's a real estate salesperson rather than a broker whose action harms a third party, both the salesperson's broker and the client (the seller or buyer) could be held liable.

The broker would be vicariously liable as the salesperson's principal, and the client would be vicariously liable as the broker's principal.

To summarize, you can see how important it is to know which party you are representing in a real estate transaction. The existence of an agency relationship has an effect on all of the following concerns:

-the extent of the duties you owe to a particular party in the transaction;
-whether your actions will be binding on a party;
-whether information communicated to you is deemed to have been communicated to a party; and
-whether, under some circumstances, a party may be held liable for your actions.
How an Agency is Created and Terminated
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Creating an Agency
Agency duties arise when an agency relationship begins and last until it ends.

The key requirement for the creation of an agency relationship is very simple:
the consent of both parties.

There are three different ways to establish an agency:

1. Express agreement
2. Ratification
3. Estoppel
Express agreement
The principal appoints someone to act as an agent, and the agent accepts the appointment.

The vast majority of real estate agency relationships are created by express agreement, either with a listing agreement, a buyer representation agreement, or a property management agreement.
Ratification
The principal gives approval after the fact to acts performed by a person who was without authority to act for the principal.
Estoppel
When it would be unfair to a third party to deny an agent's authority, because the principal allowed the third party to believe there was an agency relationship.
Power of Attorney
A power of attorney is another way of creating an agency by express agreement; real estate agents do not ordinarily have power of attorney for their clients, however.
Agency by implication
(Inadvertent agreement)

A real estate agency relationship may also be created inadvertently.

This can happen if the seller's agent acts as if she's representing the buyer, leading the buyer to believe that the agent represents him instead of the seller.

This is known as an agency by implication, because the agent's actions imply that she's the buyer's agent.
Inadvertent agreement
See Agency by implication
Inadvertent dual agency
To avoid unfairness to the buyer, the agent cannot deny the existence of this agency relationship.

But since the agent is already representing the seller, this creates an inadvertent dual agency.

Ex. Salesperson Phillips has been working with the Glenn family for a few weeks, showing them a number of houses that they might want to buy and providing them with a lot of information and advice. Phillips doesn't have a signed buyer representation agreement with the Glenns, and in fact he is acting as the sellers' agent in connection with all of these properties. But he doesn't explain that to the Glenns, and they develop the impression that Phillips is acting as their agent.
Under these circumstances, a court could hold that Phillips has become the Glenns' agent by implication. As a result, since Phillips was already acting as the sellers' agent, he has created an inadvertent dual agency.
When the Glenns find a house that they really like, they tell Phillips that they're willing to pay the full listing price but would like to begin by offering $15,000 less. This puts Phillips in a very awkward position. He would be breaching his fiduciary duties to the sellers if he didn't tell them what the Glenns said about the price. However, the Glenns disclosed that information to him because they believed he was their agent and would keep it confidential. So if Phillips does repeat the Glenns' remarks to the sellers, he would be breaching his fiduciary duties to the Glenns.

Inadvertent dual agency was once a common problem. But as we'll discuss shortly, agency disclosure laws have done much to prevent it.
Terminating an Agency
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Termination by the Parties
An agency relationship may be terminated either by the actions of the parties or through the operation of law.

Once an agency has been terminated, the agent is no longer authorized to represent the principal.

Since agency requires the consent of both the principal and the agent, they can end the agency relationship at any time.

This may occur by:

-mutual agreement,
-revocation, or
-renunciation.
Mutual agreement
The principal and the agent simply agree to end the agency.

If the agency was originally established with a written document, it's advisable to formally terminate it in writing, too.
Revocation
A principal may revoke an agent's authority at any time.

Under some circumstances, however, the revocation may be a breach of contract.

In that case, the principal may be liable to the agent for damages resulting from the breach of contract.

Ex. Davidson decides she distrusts and dislikes the broker she listed her house with, but their exclusive listing won't expire for another two months. Even though Davidson could terminate the listing unilaterally, revoking the broker's authority to represent her, it would be much better if she could get the broker to agree to the termination instead. A unilateral revocation would be a breach of the listing agreement, and the broker could sue Davidson for his commission.
Renunciation
An agent also has the right to terminate the agency relationship unilaterally, without the principal's consent.

This is called renouncing the agency.

Like revocation, renunciation may be a breach of contract, and the agent could end up owing the principal damages for the breach.

But damages are usually not an issue when a real estate broker renounces an agency.
Renouncing the agency
An agent also has the right to terminate the agency relationship unilaterally, without the principal's consent.
Termination by Operation of Law
An agency relationship can also terminate by operation of law, without any action on the part of the principal or agent.

This can happen as a result of:

-the expiration of the agency,
-fulfillment of purpose,
-death or incapacity, or
-the extinction of the subject matter.
Expiration
If an agency agreement has a termination date, the agent's authority to represent the principal terminates automatically when the expiration date arrives. If there is no termination date, the agency will be deemed to expire within a reasonable time. How long a period is considered reasonable will depend on the circumstances and may be decided by a court.
Note that an agency agreement without a termination date can usually be ended by either party without liability for damages; unilateral termination does not represent a breach of the agreement. In some situations, the other party could ask for reimbursement of expenses incurred in the course of the agency.
Agency relationships can be created by:
-Express agreement
-Ratification
-Estoppel
-Implication (Many lead to inadvertent dual agency)
Agency relationships can be terminated by:
-Mutual agreement
-Revocation by the principal
-Renunication by the agent
-Expiration of the agency team
-Fulfillment of purpose
-Death or incapacity of the principal or the agent
-Extinction of the subject matter
Fulfillment of purpose
An agency relationship terminates automatically (before its expiration date) when its purpose has been fulfilled.

A listing agreement, for example, is fulfilled when the sale of the listed property closes.

The real estate agent's services are no longer needed.
Death or incapacity
An agency also terminates before it expires if either the principal or the agent dies or becomes legally incapacitated (mentally incompetent).

As a general rule, the agent's authority to act on behalf of the principal ends at the moment the principal dies or is declared incompetent by a court, even if the agent is not informed of the event until later on.
Extinction of subject matter
If the subject matter of an agency is destroyed or otherwise ceases to exist, the agency terminates.

Ex. The subject matter of a property management agreement is the principal's property. If the principal sells the property, the agent's authority terminates.
Agency Disclosure
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Agency Representation Disclosure
Example of what can happen to a real estate agent when there is confusion concerning the agency relationships in a transaction:

-loss of the commission, a lawsuit (perhaps even more than one), and
-disciplinary action.

The best way to prevent confusion is with proper agency disclosure.

Agency disclosure, which is required by state law, should make it clear to all parties who is representing whom.
Historical Background
At one time, most listing agreement forms published by multiple listing services had a provision called the "unilateral offer of subagency."

Under this provision not only the listing broker, but all of the agents involved in a sale, represented the seller.

Agents from the MLS who showed the seller's property to prospective buyers, including the selling agent (the one who ultimately found the buyer for the property), were considered agents of the listing broker and subagents of the seller.

Even though in most transactions all of the agents were representing the seller, many buyers believed that the agent showing them homes was their agent, not the seller's.

This was understandable, since the agent was often working so closely with the buyers.

This situation could give rise to an inadvertent dual agency and cause some serious problems.

The buyers might disclose confidential information to the agent showing them a home, and the agent—as a subagent of the seller—was duty bound to pass the information on to the seller.

This came as an unpleasant surprise to the buyers.

As it became more widely understood that buyers weren't being represented by the selling agent, more and more buyers wanted to have agents of their own.

Multiple listing services changed the language in their listing agreements to make it easier for MLS members to establish buyer agency relationships.

In most listing agreements, the unilateral offer of subagency was replaced with a "cooperation and compensation" clause."

In spite of this change in listing agreements, most cooperating agents still acted as the seller's agent, and many buyers were still confused.

To address this problem directly, a number of state legislatures, including California's, passed agency disclosure laws.

These laws require real estate agents to disclose which party they are representing in a transaction.

The agency disclosure laws have done much to reduce buyers' confusion over who (if anyone) is representing them.

As a result, inadvertent dual agency is now a much less common problem.
Unilateral offer of subagency.
Provision listing agreement forms published by multiple listing services
Subagents
The agent of an agent.

The principal may be bound by and liable for the actions of an authorized subagent.
Cooperation & Compensation Clause
Under this clause, other members of an MLS who attempted to find a buyer for a property were authorized to act as cooperating agents and share in the listing broker's compensation.

This did not necessarily create an agency relationship between the seller and the cooperating agents; instead, a cooperating agent could choose whether he would represent the buyer or the seller in a particular transaction.
Agency Disclosure Requirements
...
California's agency disclosure law
Adopted in 1988, applies to transactions involving residential property with one to four dwelling units.

It requires the real estate agents to disclose their agency status to the parties and give them two different written disclosures:

1. an agency disclosure form and

2. an agency confirmation statement
Agency Disclosure Form
The agency disclosure form is essentially a consumer information form for real estate sellers and buyers.

It explains the legal duties of a seller's agent, a buyer's agent, and a dual agent.

The back of the form sets forth the provisions of the agency disclosure law.

A listing agent is required to provide a copy of this general disclosure form to a seller before the seller signs a listing agreement.

A selling agent must give the form to a buyer as soon as practical, and before the buyer signs an offer to purchase.

The selling agent must also give the form to the seller as soon as practical before presenting the buyer's offer to the seller.

(If the selling agent isn't dealing directly with the seller, the selling agent can deliver the form to the seller through the listing agent or by certified mail.)

Each disclosure form must be signed by the party who receives it, to acknowledge receipt.

The agent who furnished the form must also sign it and keep a copy for her transaction records.

Notice that the agency disclosure form does not indicate which party the agent who provides the form is representing in this particular transaction.

That specific disclosure is made in the agency confirmation statement.
Agency Confirmation Statement
As soon as it's practical to do so, a real estate agent is required to disclose to each party in a particular transaction which party or parties he is representing in the transaction.

The initial disclosure may be spoken rather than written, but each party must sign a written agency confirmation statement before signing a purchase agreement form (a deposit receipt).

This confirmation statement may be included in the purchase agreement form, as long as it's clearly presented in a separate agency disclosure paragraph.

Alternatively, the confirmation statement may be a separate document.

The parties' signatures on the purchase agreement or the separate agency confirmation document indicate that they understand and accept the stated agency relationships.

This would be used if the purchase agreement form didn't have an agency confirmation provision.

Each agent checks off which party he or she represents and signs the document.

Both the seller and the buyer also sign it to acknowledge receipt of a copy.
Acting in Accordance with the Disclosures
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Mandated disclosures
The disclosures mandated by state law are fairly straightforward.

However, once the disclosures have been made, a real estate agent also must act in accordance with them.

This can be more difficult than it sounds.

Ex. Carville is the listing agent for Sharp's house; he represents only the seller. Carville discloses this fact, in writing, to Blaine, a potential buyer.
But Carville and Blaine get along well, and over the course of a few days he acts more and more like Blaine's agent. He gives Blaine a lot of advice about making an offer and negotiating the best terms. Blaine begins to rely on Carville's advice, and by the time Blaine is ready to make an offer on Sharp's house, he feels confident that Carville is working in his (Blaine's) best interests.
In this case, even though Carville properly disclosed his status as the seller's agent, his actions may have implied an agency relationship with Blaine and created an inadvertent dual agency. If Blaine or Sharp later became dissatisfied with the transaction, either of them could accuse Carville of breaching his agency duties.

The agency disclosure law has not completely eliminated the problem of inadvertent dual agency.

If a real estate agent's conduct is not consistent with her agency disclosure, she may be subject to disciplinary action by the Bureau of Real Estate, and the following sanctions may be imposed:

-suspension or revocation of her real estate license, and/or

-a fine of up to $10,000
Licensee Acting as a Principal
...
Acting Principal
As a real estate agent, when you're selling or buying property for yourself, you should make some special disclosures to the other party.

You should disclose that you are a licensed real estate agent and that you are selling or buying the property for your own benefit.

If you're buying property in order to fix it up and resell it, inform the seller that you plan to make a profit on it.

If you're selling property that you have a direct or indirect ownership interest in, you must disclose the extent of your interest to the buyer.

Make all of these disclosures in writing.

It's also a good idea to recommend that the other party seek independent legal advice and an independent appraisal.

Don't try to act as the other party's agent.

Disclose your licensed status, but avoid using your business cards, brokerage stationery, or other items that may create the impression that you're acting in your capacity as a real estate licensee.

In certain situations, you might change your role from agent to principal.

Ex. This would happen if you decided to buy one of your own listings.

Then it would be especially important to explain your conflict of interest to the seller and strongly advise her to consult a lawyer about the transaction.

If you are planning to resell the property at a profit, disclose the amount of profit you expect to make and obtain the seller's consent.

Again, do all of this in writing.

Your broker may have specific office policies about buying or selling your own property.

If so, you should become familiar with them and follow them.

Ask your broker to review any contracts involved before you make or accept an offer.



Now let's examine more closely the three basic types of real estate agency relationships: [...]"

Excerpt From: Kathryn Haupt. "California Real Estate Practice." iBooks.
Types of Real Estate Agency Relationships
...
Three +1 basic types of real estate agency relationships
-seller agency,
-buyer agency, and
-dual agency
-finder
Seller Agency
Ordinarily established with a listing agreement, is the traditional type of real estate agency.

At one time all of the agents involved in a typical residential transaction were representing the seller.

-the listing agent,
-the selling agent, and
-any other cooperating "agents

It was relatively uncommon for residential buyers to be represented by an agent.

Now the "cooperation and compensation" clause is a standard provision in listing agreements, and many licensees choose to represent buyers.

However, a property's listing agent still always represents the property's seller.

And unless a licensee specifically enters into an agency agreement with a buyer, he still may be presumed to be acting as the seller's agent.
Seller's Agent's Duties to Seller
A licensee acting as a seller's agent owes fiduciary duties to the seller.

During the agency, she must use her best efforts to promote the seller's interests.

While marketing the property, she must use utmost care and obey the seller's instructions.

She must not disclose any confidential information obtained from the seller to third parties.
Services to Buyers
A seller's agent must always treat a prospective buyer fairly and in good faith.

But the agent must not act as if she is representing the buyer.

While the seller's agent must fully disclose all material facts and answer the buyer's questions honestly, the agent should not give the buyer advice.

Ex. It would obviously be inappropriate for the seller's agent to suggest to the buyer how much to offer for the listed property.

Even so, there are many services that a seller's agent can provide to a buyer without violating his fiduciary duties to the seller.

These services actually promote the interests of the seller, because they increase the chances of a sale and then enable the sales transaction to close smoothly.

The services a seller's agent can offer a buyer include:

-discussing the buyer's housing needs;

-showing the property to the buyer;

-answering questions about the property and the neighborhood;

-discussing financing alternatives;

-furnishing copies of documents that affect the property (such as CC&Rs and easements);

-filling out the purchase agreement form;

-explaining the process of presenting the offer, negotiation, and closing the transaction; and

-referring the buyer to other professionals, if necessary
Pre-existing Relationships
A seller's agent can provide all of these services without creating an agency relationship with the buyer.

However, sometimes the seller's agent has had a previous relationship with the buyer.

In this situation, it may be difficult for the agent to represent the seller's interests without feeling some loyalty to the buyer as well.

Ex. Agent Jensen helped Sterling sell her home. Sterling was so pleased with Jensen's work, she wants him to help her find her next home. Jensen selects a suitable property that he has listed and shows it to Sterling.
Under the circumstances, it would be easy for Sterling to assume that Jensen is acting as her agent. But unless otherwise agreed, Jensen is only the seller's agent, and he should emphasize this fact to Sterling. Jensen should disclose his agency relationship with the seller to Sterling, remind Sterling that he is obligated to tell the seller any material information Sterling reveals to him, and emphasize to Sterling that he will be representing the seller in all negotiations.

Remember, however, that an agent must keep information learned from a prior client confidential even after the agency relationship has terminated.

So even though Jensen currently represents the seller, he cannot disclose confidential information that he learned when Sterling was his principal, even if that information would benefit Jensen's current seller.
Buyer Agency
...
Buyer Agency advantages
Became increasingly popular over the last few decades, as buyers grew familiar with the advantages of agency representation.

Some buyers want more than the services a seller's agent can provide to a customer.

They want advice on how much to offer for a particular home and someone to help them negotiate the terms of the sale.

When represented by their own agent, buyers can relax and divulge key information about their housing needs and financial condition, knowing their agent must keep these matters confidential.
Benefits of Buyer Agency
The benefits of a buyer agency relationship can be broken down into four categories:

-agency duties,
-objective advice,
-help with negotiations, and
-access to more properties
Agency duties
A buyer's agent owes fiduciary duties to the buyer rather than to the seller.

For many buyers, the loyalty their agent owes them is the most important benefit of a buyer agency relationship.

A buyer's agent must put the buyer's interests ahead of anyone else's, and any private information the buyer discloses to the agent must be kept confidential.

Ex. Ashworth is a first-time home buyer. Broker Donnelly is helping him find a home. Donnelly shows him a home he's very interested in. Its listing price is $359,000 and Ashworth could easily afford a home that costs $30,000 more. Donnelly must put Ashworth's interests before her own, so she encourages him to make an offer on the home, even though she would receive a larger commission if he purchased a more expensive property.
Ashworth is eager to buy the home and suggests making a full price offer. Donnelly is pretty sure Ashworth can get the property for less than the listing price, so she advises him to start by offering $354,000. Even though Donnelly knows Ashworth is willing to pay the full listing price, she is obligated to keep that information confidential. If she had been the seller's agent, she would have been required to disclose this information to the seller.
Objective advice
Seller's agents develop expert sales techniques that are designed to convince the buyer to sign on the dotted line. Buyer's agents, on the other hand, are free to advise the buyer on the pros and cons of purchasing any given home.

Ex. The Whittiers looked very seriously at two homes before they purchased a third one. Their agent, Smith, gave them invaluable advice throughout the house-hunting process.
The Whittiers responded emotionally to the beautiful landscaping and lovely interior of the first home, and they were immediately ready to make a full price offer. Then Smith helped them look into the property taxes, heating costs, and upkeep, and the Whittiers realized that the house would cost too much to maintain.
The second home they were interested in was much more affordable, but Smith made sure they got all the pertinent information about the structural condition of the house. Once they realized how much it would cost to replace the roof and what three previous termite infestations meant, they quickly decided against the purchase.
The third home seemed ideal, even after Smith helped them evaluate all the information about it. Because Smith was familiar with the housing market, he advised the Whittiers to offer $8,000 less than the listing price. Their offer was accepted and the transaction closed without a hitch. If it weren't for Smith's objective advice, they might have ended up with a property that wasn't right for them.
Help with negotiations
While some buyers are happiest when they're dickering over a sales price, many buyers are decidedly uncomfortable negotiating for a home they want.

They are afraid to offer full price, because they don't want to pay too much for the home.

On the other hand, they are afraid to make an offer that's too low, for fear of offending the seller and ruining any chance of reaching an agreement.

A buyer's agent is extremely useful during the negotiation phase.

The agent can use her knowledge of the real estate market to help the buyer get the property on the best possible terms.

Ex. The Browns are first-time buyers. They have decided to make an offer on a starter home, but they are unsure about how much to offer. Their agent, Cohen, knows the going price for similar homes and suggests an amount for a strategic opening offer. She also discusses other important terms of the offer, such as the amount of the good faith deposit, the closing date, and how the parties will divide the closing costs. With her help, the Browns are able to purchase the home on very favorable terms.
Access to more properties
A buyer's agent who enters into a written representation agreement with the buyer will usually be compensated if the buyer purchases any home, even one that isn't listed with a broker.

So a buyer's agent may pursue less traditional means of searching for properties, considering properties that are for sale by owner, properties with open listings, and properties in foreclosure or probate proceedings.

Ex. McHugh has very specific housing requirements. Among other things, he wants lake frontage, a boat ramp, an outbuilding to use as a shop, and fruit trees. A property with these features in McHugh's price range simply can't be found through the multiple listing service.
McHugh enters into a buyer representation agreement with Morris and agrees to pay a commission if Morris finds him a property that is not listed with the MLS. Morris scours legal notices for foreclosure, bankruptcy, and estate sales. He also carefully reviews "for sale by owner" (FSBO) ads in the local and regional papers. Finally, after driving through several lakeshore neighborhoods, he spots a FSBO that meets most of McHugh's requirements.
McHugh makes an offer on the house and the seller accepts it. McHugh is overjoyed to have found the home he wants, and he's glad to pay Morris's commission.
Buyer Representation Agreements
If a buyer and a broker choose to create a buyer agency relationship, they should enter into a written representation agreement that establishes the rights and duties of both parties.

The agreement will set forth the agent's duty to use his professional expertise to locate a property for the buyer and negotiate the terms of the sale, and also the circumstances in which the buyer will be required to compensate the agent.

Most buyer representation agreements contain other important provisions as well.

These may include:

-the term of the agreement;
-the general characteristics of the property the buyer wants;
-a price range for the property;
-any warranties or representations made by the agent; and
-how the buyer agency relationship will affect the agent's relationship with other property buyers and sellers

A buyer representation agreement form authorizes the broker to:

-locate properties and show them to the buyer,
-present offers on the buyer's behalf,
-assist in the negotiation process, and
-assist the buyer in obtaining financing, inspections, and escrow services

Unless the buyer checks a "Single Agency Only" provision, this agreement provides that the broker may act as a dual agent if necessary or appropriate.

If the broker shows the buyer a property that he listed, the broker will be a dual agent in respect to that property.

The dual agency must immediately be disclosed to the buyer, and the broker cannot reveal either party's negotiating position to the other party.

In this agreement, the buyer also acknowledges that salespersons affiliated with the broker may represent different buyers in competing transactions involving the same property.

Warranties are another issue that's often addressed in a buyer representation agreement.

In most cases, the buyer's agent does not make any warranties or representations regarding the value of any property or its suitability for the buyer's purposes.

Investigating the physical condition and legal status of a property is the buyer's responsibility.
Buyer's Agent's Compensation
Naturally, real estate agents are concerned about how they will be compensated for their time and effort.

The way a seller's agent is compensated is well established: the seller agrees to pay the listing broker a percentage of the sales price when the property is sold.

If another brokerage is involved in bringing the sale about, the listing broker and the selling broker will split the commission.

The arrangements for paying a buyer's agent's fee are not so clear-cut.

There are three common methods of compensating a buyer's agent:

-a seller-paid fee,
-a buyer-paid fee, and
-a retainer.

The buyer and the buyer's agent may agree to one of these methods, or a combination of two or more methods.
Seller-paid fee
Under the terms of most listing agreements, the buyer's agent will be paid by the seller, as a result of a commission split.

The seller pays the commission to the listing agent, and the listing agent then splits the commission with the buyer's agent.

This arrangement is based on a provision found in most listing agreements that entitles any cooperating agent who procures a buyer to receive the selling broker's portion of the commission, regardless of which party that cooperating agent represents.

(The source of the commission does not determine the identity of the agent's principal.)

Ex. Seller Forbes lists his property with Broker Winston. He agrees to pay Winston a commission of 7% of the sales price. The listing agreement includes a clause that entitles any cooperating broker who procures a buyer to be paid the selling broker's portion of the commission.
Broker Lopez is representing Buyer Brown. Brown offers $200,000 for Forbes's house and Forbes accepts the offer. When the transaction closes, the $14,000 commission paid by Forbes is split between Winston and Lopez. Accepting a share of the commission paid by the seller does not affect Lopez's agency relationship with the buyer.

Since the commission split arrangement does not change the amount of the commission the seller is obligated to pay, sellers rarely object to paying the buyer's agent's fee in this way.

Most buyer representation agreements provide that the buyer's agent will be paid by a commission split if the buyer purchases a home that is listed through a multiple listing service.
Buyer-paid fee
Buyer representation agreements may also provide for a buyer-paid fee.

The fee may be based on an hourly rate, an arrangement that turns the agent into a consultant.

Alternatively, a buyer's agent may charge a percentage fee, requiring the buyer to pay the agent a percentage of the purchase price of the property as a commission.

A third possibility is a flat fee—a specified sum that is payable if the buyer purchases a property found by the broker.

Many buyer representation agreements provide that the buyer's agent will accept a commission split if one is available, but that the buyer will pay the fee if the purchased property was unlisted (for example, if the property was for sale by owner).

In some situations, a buyer promises to pay a flat fee to a broker but then purchases a property that is subject to a commission split.

If the commission split only covers a part of that fee, the buyer will need to pay the broker the difference.
Buyer's agent percentage fee
Requiring the buyer to pay the agent a percentage of the purchase price of the property as a commission.
Buyer's agent flat fee
A specified sum that is payable if the buyer purchases a property found by the broker.
Retainer
Some agents insist on a retainer—a fee paid up front—before agreeing to a buyer agency relationship.

The retainer is usually nonrefundable, but will be credited against any fee or commission that the buyer's agent becomes entitled to.
Dual Agency
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Dual agency relationship
Exists when an agent represents both the seller and the buyer in the same transaction.

A dual agent owes fiduciary duties to both principals.

However, because the interests of the buyer and the seller nearly always conflict, it is difficult to represent them both without being disloyal to one or the other.

Ex. Woodman represents both the buyer and the seller in a real estate transaction. The seller informs Woodman that she is in a big hurry to sell and will accept any reasonable offer. The buyer tells Woodman that he is very interested in the house and is willing to pay the full listing price. Should Woodman tell the buyer about the seller's eagerness to sell? Should Woodman tell the seller about the buyer's willingness to pay full price?

It is really impossible for a dual agent to fully represent both parties.

Thus, a dual agent should explain to both of her principals that neither of them will receive full representation.

Certain facts must necessarily be withheld from each party; the dual agent cannot divulge confidential information about one party to the other.

California law specifically provides that a dual agent can not tell the buyer that the seller is willing to sell for less than the listing price unless the seller consents to the disclosure in writing.

Nor can the dual agent tell the seller that the buyer is willing to pay more than the offered price without the buyer's written consent.
In-house Transactions
A sale in which the buyer and the seller are brought together by salespersons working for the same broker.

Sometimes a dual agency arises in connection with an in-house transaction.

An in-house transaction exists when the listing agent and the selling agent both work for the same broker.

The listing agent represents the seller, so if the selling agent is representing the buyer, then their broker becomes a dual agent.

Ex. Salesperson Werner, who works for Broker Black, is acting as Buyer Miller's agent. They've looked at many houses. Finally, Miller decides to make an offer on a house listed by Salesperson Nagano, who also works for Broker Black. Since the salesperson representing the seller (the listing agent, Nagano) and the salesperson representing the buyer (the selling agent, Werner), both work for Broker Black, Broker Black is a dual agent in this transaction. As a result, both Nagano and Werner are now considered dual agents. Although Nagano may continue to work exclusively with the seller and Werner may continue to work exclusively with the buyer, both agents owe fiduciary duties to both parties.
Dual Agency Disclosure
Before acting as a dual agent, a broker must have the informed written consent of both parties to the transaction.

Acting as a dual agent without full disclosure and written consent is a violation of California's Real Estate Law, and may lead to disciplinary action.

Real estate licensees should be especially careful about their agency disclosures in this context.

Buyers and sellers, eager to get on with the business of buying and selling a home, may agree to a dual agency without really understanding what it means.

They may accept the agent's explanation at face value and sign an agency confirmation statement without question.

Later, one party may feel that his or her interests were neglected and that agency duties were breached.

This kind of disappointment often leads to legal action.
Finder or Middleman
It's possible for a real estate licensee to be involved in a transaction without forming an agency relationship with either party.

This happens when a licensee acts as a finder or middleman.

In order to be considered a finder rather than an agent, the licensee can have no involvement in the transaction beyond arranging an introduction between the seller and a prospective buyer.

A licensee acting as a finder DOES NOT owe fiduciary duties to either party.

Any activity aside from a mere introduction, such as participating in the negotiations, will create an agency relationship.

Forming an agency relationship without the proper disclosure can lead to disciplinary action and the loss of the finder's fee.

Note that it is not necessary to be a real estate licensee to act as a finder and collect a finder's fee.

Again, however, the finder must do nothing more than introduce the parties.

If an unlicensed person did anything beyond that, she would be acting as a real estate licensee without a license and could face penalties from the Real Estate Commissioner.
Client
A person who employs a real estate agent.

A real estate broker's client can be the seller, the buyer, or both.
Fiduciary relationship
A relationship of trust and confidence, where one party owes the other (or both parties owe each other) loyalty and a higher standard of good faith than is owed to third parties.

Ex. An agent is a fiduciary in relation to the principal; husband and wife are fiduciaries in relation to one another.
Secret profit
A financial benefit that an agent takes from a transaction without informing the principal."
Latent defects
Defects that are not visible or apparent (as opposed to patent defects).
Imputed knowledge
A legal doctrine stating that a principal is considered to have notice of information that the agent has, even if the agent never told the principal.
Subagent
A person to whom an agent has delegated authority, so that the subagent can assist in carrying out the principal's orders; the agent of an agent.
The listing agent knows that a suicide took place in the house four years ago. A buyer specifically asks the agent if he knows about any deaths that have occurred on the property. The agent says he's not aware of any. What duty has the agent breached?

A. The duty to disclose material facts
B. The duty of reasonable care and skill
C. The duty of good faith and fair dealing
D. None; the agent acted properly
C. The duty of good faith and fair dealing

The agent was not required to disclose the suicide as a material fact, because it took place more than three years ago. But by responding untruthfully to a specific question, the agent breached the duty of good faith and fair dealing that he owes to potential buyers.
Under California law, which of the following must not be disclosed?

A. The agent found indications of flooding in the basement during a visual inspection
B. A person diagnosed with AIDS lived on the property until last year
C. The property was the site of an illegal drug lab, and chemical residues may linger
D. The roof of the house leaks during heavy rains
B. A person diagnosed with AIDS lived on the property until last year

An agent may not disclose that a property was occupied by a person who had AIDS or was HIV-positive. Other problems that may affect the value or desirability of the property are material facts and must be disclosed as latent defects.
The duty of accounting does not include which of the following responsibilities?

A. To disclose the terms of the listing salesperson's share of the commission
B. To be able to account for all funds or valuables entrusted to the broker
C. To avoid commingling trust funds with the broker's own funds
D. To report to clients on the status of all trust funds regularly
A. To disclose the terms of the listing salesperson's share of the commission

The duty of accounting requires a broker to account for all trust funds she holds. The broker must keep the client updated as to the status of the funds. She must also avoid commingling them with her personal or general business funds. (The listing salesperson's share of the brokerage commission does not have to be disclosed to the client.)
A buyer's agent is most commonly compensated with a/an:

A. hourly rate
B. seller-paid commission split
C. retainer
D. flat fee
B. seller-paid commission split

Unless the property was unlisted, a buyer's agent is ordinarily compensated with a portion of the commission paid by the seller to the listing agent.
Which of the following situations clearly DOES NOT involve dual agency?

A. A listing agent gives advice to prospective buyers about how much to offer for the property
B. A licensee introduces a seller to a prospective buyer without providing further representation
C. A buyer and a seller consent in writing to be represented by the same broker
D. A broker employs both the selling agent, who is representing the buyer in this transaction, and the listing agent, who represents the seller
B. A licensee introduces a seller to a prospective buyer without providing further representation

A finder can avoid creating an agency relationship with either party by providing no services beyond introducing them to one another. A dual agency can be created through express agreement or inadvertently. In an in-house transaction, the broker becomes a dual agent (but the listing agent continues to represent only the seller and the selling agent continues to represent only the buyer).
The seller's agent DOES NOT have to:

A. present an offer that is below the listing price
B. present an offer if the seller already has a higher offer for the same property
C. seek additional offers when the property is subject to an existing sales contract
D. disclose material facts she learns after the sales contract has been signed
C. seek additional offers when the property is subject to an existing sales contract

The seller's agent is not required to seek additional offers once the seller has entered into a purchase agreement.
Whether or not you have an agency relationship with a particular party in a transaction does not affect:

A. whether that party may be held liable for your actions
B. the extent of the duties you owe to that party
C. whether your actions will be binding on that party
D. whether you are required to answer that party's questions in good faith
D. whether you are required to answer that party's questions in good faith

An agency relationship with one of the parties in a transaction does not allow you to give false or misleading information to third parties, even on your principal's orders.
Proper agency confirmation may be made:

A. anywhere in the purchase agreement
B. in a separate document
C. in a separate paragraph in the purchase agreement
D. Both b and c
D. Both b and c

B. in a separate document
C. in a separate paragraph in the purchase agreement

The agency confirmation statement may be included in the purchase agreement or provided in a separate document. If it is incorporated into the purchase agreement, it must be in a separate paragraph.
Which of the following is NOT one of the basic types of real estate agency relationships in California?

A. Net agency
B. Seller agency
C. ual agency
D. Buyer agency
A. Net agency

The basic types of real estate agency relationships in California are seller agency, buyer agency, and dual agency.
Which of the following situations involves a change from one type of agency relationship to another?

A. A finder explains to the seller and the buyer that she is acting only as a facilitator in the transaction
B. The buyer's agent receives the selling broker's share of the commission, even though the commission was paid by the seller
C. A real estate agent representing a buyer shows the buyer one of her own listings
D. A buyer representation agreement provides that the buyer's agent will accept a commission split if available, but otherwise the buyer will pay the agent's fee
C. A real estate agent representing a buyer shows the buyer one of her own listings

A listing agent always represents the seller. So when a buyer's agent shows the buyer one of her own listings, a dual agency is created. The agent must disclose this to both parties and obtain their written consent.
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