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California Real Estate Practice Chapter 1

Terms in this set (117)

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.
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.
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.
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.
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.
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.
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.
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.