An agency relationship is the legal relationship in which one person, the agent, is authorized to act on behalf of another person, the principal, in dealings with third parties. In real estate, it is the relationship between a brokerage and the buyer, seller, landlord or tenant it represents. The agency relationship decides whose side a licensee is on, what duties the licensee owes and to whom, and it is one of the most heavily tested topics on every state’s real estate exam.
This guide covers the parties to an agency relationship, the difference between a client and a customer, the three types of agents, the fiduciary duties, the main kinds of brokerage relationships, how agency begins and how it ends. At the end you will find practice questions, and you can keep going with our free real estate practice exam.
Table of Contents
What Is an Agency Relationship?
Agency is an old area of common law. Cornell Law School’s definition of agency describes it as a relationship in which a principal gives an agent authority to act on the principal’s behalf, and the principal is bound by what the agent does within that authority. In real estate, every state has added its own statutes and rules on top of that common law.
Three kinds of people are involved in a real estate agency relationship:
- The principal, the person who hires the agent. This is usually a seller, buyer, landlord or tenant.
- The agent, the person authorized to act for the principal. In real estate, the agent is the brokerage firm, acting through its licensed broker.
- Third parties, the people on the other side of the transaction, who are not represented by that agent.
An agency relationship is a fiduciary relationship. A fiduciary is someone in a position of trust who must act in another person’s best interest. Cornell’s entry on fiduciary duty explains that this is the highest standard of care the law imposes.
Who Is the Agent: the Broker or the Salesperson?
This is a frequent exam point. The listing or buyer agreement is a contract between the principal and the broker, not the individual salesperson. The salesperson works under the broker’s license and acts on the broker’s behalf. In everyday speech we call the salesperson “the agent,” but legally, the agency relationship runs from the client to the brokerage.
That is why a listing usually stays with the brokerage if the salesperson leaves the firm, and why the broker is responsible for supervising the salespeople who carry out the work. Our article on real estate broker vs agent covers the license levels.
Client vs Customer
The single most useful distinction in agency law is between a client and a customer.
- A client is the principal. The licensee represents the client in an agency relationship and owes the client full fiduciary duties: advocacy, loyalty and confidentiality.
- A customer is a third party the licensee works with but does not represent. The licensee owes a customer honesty, fair dealing and disclosure of known material facts, such as a known roof leak, but not advocacy.
Here is an example. A brokerage lists a seller’s home. The seller is the client. An unrepresented buyer who calls about the listing is a customer. The listing agent can answer questions, show the home and share facts, but should not advise the buyer on how low to offer, because that would be working against the client.
Mixing up the two is how many licensees get into trouble. A licensee who treats a customer like a client can accidentally create an agency relationship by conduct, which we cover in our guide to implied agency.
The Three Types of Agents
Agents are classified by how much authority they have. Expect at least one exam question that gives a situation and asks which type applies.
Universal Agent
A universal agent has broad authority to act for the principal in essentially all matters. This kind of authority is usually created through a broad general power of attorney. A person who holds a power of attorney is called an attorney-in-fact. Real estate licensees rarely act as universal agents.
General Agent
A general agent has authority to handle a range of matters for the principal in a particular business or area, usually on an ongoing basis. A property manager who collects rents, hires vendors and signs leases for an owner is the classic example. The relationship between a broker and the salespeople at the brokerage is also usually described as general agency.
Special Agent
A special agent is authorized to perform one specific task or transaction. Most real estate licensees are special agents. A listing broker hired to find a ready, willing and able buyer is a special agent: the broker can market the property and present offers but normally cannot sign a contract or accept an offer for the seller. Read more in our article on special agency.
Fiduciary Duties in an Agency Relationship
Once an agency relationship exists, the agent owes the principal a set of fiduciary duties. Most real estate courses teach them with the acronym OLDCAR.
Obedience
The agent must follow the principal’s lawful instructions. If the seller says to show the home only on weekends, the agent does that. Obedience does not extend to illegal or unethical instructions. A seller who tells the agent not to show the home to a family with children is asking the agent to break fair housing law, and the agent must refuse.
Loyalty
The agent must put the principal’s interests above everyone else’s, including the agent’s own. An agent may not secretly buy the client’s property, steer the client toward a deal because it pays the agent more, or favor the other party. Loyalty is the duty that makes representing both sides so difficult, which is why dual agency is restricted.
Disclosure
The agent must tell the principal all material facts the agent knows or should know that could affect the principal’s decisions. For a seller, that includes every offer received and any relationship between the agent and the buyer. For a buyer, it includes known problems with the property and information about the seller’s position that the agent learned lawfully and is not bound to keep confidential.
Confidentiality
The agent must keep the principal’s private information private. A listing agent may not tell a buyer that the seller is facing foreclosure or will accept less than the asking price. In many states, the duty of confidentiality continues after the agency relationship ends. Confidentiality never lets an agent hide known material defects from a buyer.
Accounting
The agent must account for all money and documents that belong to others. Earnest money and rents go into a trust or escrow account under state rules, and the agent may not mix those funds with the firm’s own money. Mixing them is called commingling. Using client funds for personal purposes is called conversion.
Reasonable Care and Diligence
The agent must act with the skill and care expected of a competent licensee. That includes pricing advice based on market data, meeting deadlines, and recommending experts such as inspectors and attorneys when a question goes beyond the agent’s expertise.
Some states have replaced the common-law duties with statutory duties or changed the duties owed in certain relationships. Learn OLDCAR for the national portion of the exam and your state’s list for the state portion.
Duties Owed to Customers
Third parties are not left unprotected. Even though there is no agency relationship with a customer, a licensee must:
- be honest and deal fairly,
- disclose known material defects in the property as required by state law,
- account for any money the customer hands over, such as earnest money,
- avoid misrepresentation and fraud.
Exaggerated opinions such as “this is the best view in town” are called puffing and are generally not fraud, but false statements of fact are. Our article on puffing in real estate covers the line between the two.
Common Types of Brokerage Relationships
States allow different kinds of brokerage relationships, and the names vary. These are the ones you are most likely to see on the exam.
Seller Agency
The brokerage represents the seller, usually under a listing agreement. Every licensee at the firm owes duties to the seller unless the state allows designated agency. A seller’s agent negotiates for the best price and terms for the seller.
Buyer Agency
The brokerage represents the buyer under a buyer representation agreement. Who pays the buyer’s broker is a matter for negotiation and the written agreement. Since August 17, 2024, the National Association of REALTORS has required MLS participants working with buyers to have a written agreement with the buyer before touring a home, which has made written buyer agreements far more common.
Subagency
A subagent is a licensee from another firm who works with a buyer but represents the seller, as an agent of the listing broker. Subagency was once the norm and is much less common today now that buyer agency is widespread. A subagent owes fiduciary duties to the seller, not the buyer.
Dual Agency
Dual agency exists when one brokerage represents both the buyer and the seller in the same transaction. Where it is allowed, it requires informed written consent from both parties, and the agent’s duties to each are limited. Some states do not allow it at all. Florida law, for example, says a licensee may not operate as a disclosed or nondisclosed dual agent. Our dual agency guide covers the rules in detail.
Designated Agency
In states that allow it, the managing broker designates one licensee to represent the seller and another licensee in the same firm to represent the buyer. Each designated agent gives full representation to their own client. Whether the broker is considered a dual agent in that setup depends on state law.
Transaction Broker or Facilitator
Some states allow a nonagency relationship, often called a transaction broker or facilitator. The licensee helps one or both parties complete the deal without representing either one as a fiduciary. A transaction broker still owes duties such as honesty, skill and care, and accounting for funds, but not full loyalty or advocacy. In Florida, licensees are presumed to be transaction brokers unless another relationship is set up in writing.
How an Agency Relationship Is Created
An agency relationship can begin in several ways:
- Express agreement: a written or oral agreement, such as a listing or buyer agreement. This is the most common and the clearest.
- Implied agency: the conduct of the principal and agent shows they are acting as principal and agent.
- Ratification: the principal approves, after the fact, an act someone performed without authority. See agency by ratification.
- Estoppel: the principal leads a third party to believe someone is the principal’s agent and cannot later deny it. See agency by estoppel.
Two other points are often tested. First, consideration is not required to create an agency relationship. A person can be an agent without being paid, although the right to a commission is a separate question that usually depends on a written agreement. Second, the principal must have legal capacity, meaning legal age and sound mind, to hire an agent.
How an Agency Relationship Ends
An agency relationship can end by the acts of the parties or by operation of law. Common ways include:
- Performance: the job is done, for example the property sells and closes.
- Expiration: the agreement reaches its end date.
- Mutual agreement: both parties agree to cancel.
- Revocation or renunciation: the principal revokes the agent’s authority, or the agent renounces the agency. Either party may be liable for damages if this breaks the contract.
- Death or incapacity of either the principal or the agent, in the usual common-law rule.
- Destruction or condemnation of the property.
- Bankruptcy of either party, in many cases, or a change in law that makes the purpose illegal.
The duty of confidentiality may continue in many states after the agency ends, so a former listing agent still may not reveal the seller’s private information.
How the Agency Relationship Shows Up on the Exam
Most agency questions describe a situation and ask who the client is, which duty was breached, or which type of agent is involved. Watch for these patterns:
- The person the brokerage represents: client. The person on the other side: customer.
- Listing broker hired to find a buyer: special agent. Property manager: general agent. Broad power of attorney: universal agent.
- Agent tells the buyer the seller’s lowest price: breach of confidentiality and loyalty.
- Agent puts earnest money in a personal account: commingling, a breach of accounting.
- Agent refuses a seller’s discriminatory instruction: correct, because obedience covers only lawful instructions.
- Listing contract with the brokerage, not the individual salesperson: the broker is the agent.
Agency Relationship Practice Questions
Try each question before you read the answer below it.
1. A seller signs an exclusive right-to-sell listing with a brokerage. Who is the principal, and who is the agent?
Answer: The seller is the principal, and the brokerage (acting through its broker) is the agent. The salesperson works on the broker’s behalf.
2. A licensee manages an apartment building for an owner, collecting rent, hiring repair contractors and signing leases. What type of agent is the licensee?
Answer: A general agent, because the licensee handles a range of ongoing tasks in one area of the owner’s business.
3. A listing agent tells a buyer, “The seller is in a hurry and will take $20,000 less.” Which fiduciary duty did the agent breach?
Answer: Confidentiality, and also loyalty. The agent revealed the client’s private information to the other side.
4. Is consideration required to create an agency relationship?
Answer: No. An agency relationship can exist without payment, although a broker usually needs a written agreement to enforce a commission.
5. A licensee deposits a buyer’s earnest money check into the brokerage’s operating account. What is this called?
Answer: Commingling, which violates the duty of accounting and state trust account rules.
6. A buyer calls about a listed property and has no agent of their own. What does the listing agent owe the buyer?
Answer: The buyer is a customer, so the agent owes honesty, fair dealing and disclosure of known material facts, but not loyalty or advocacy.
Frequently Asked Questions
What are the 6 fiduciary duties in an agency relationship?
Obedience, loyalty, disclosure, confidentiality, accounting and reasonable care. The acronym OLDCAR is an easy way to remember them. Some states use their own statutory list.
Is a real estate salesperson the agent of the client?
Legally, the brokerage is the agent. The salesperson acts on the broker’s behalf under the broker’s license, so the agency relationship runs between the client and the brokerage.
Does a buyer always have an agent?
No. A buyer may choose not to be represented. In that case, the buyer is a customer of any licensee they work with, unless the licensee and buyer create an agency, in writing or by conduct.
Is dual agency legal?
It depends on the state. Many states allow it with informed written consent from both parties, some limit it, and others, such as Florida, prohibit licensees from acting as dual agents.
Key Takeaways
- An agency relationship is a fiduciary relationship in which the agent acts for the principal.
- In real estate, the brokerage is the agent; salespeople act on the broker’s behalf.
- Clients get full fiduciary duties; customers get honesty and fair dealing.
- Agents are universal, general or special. Most licensees are special agents.
- Fiduciary duties: obedience, loyalty, disclosure, confidentiality, accounting, reasonable care (OLDCAR).
- Agency can be created by express agreement, conduct, ratification or estoppel, and ends by performance, expiration, agreement or operation of law.
- Brokerage relationship rules, including dual agency, vary by state.
Ready to practice? Take a free practice exam and see how many agency relationship questions you get right.