What is an Agency Relationship in real estate?
Before we begin to answer this in detail, let’s first describe what an agent is. An agent is a term commonly associated with the broker or a real estate representative designed to represent the interests of their client in a real estate transaction. With this understanding, agency relationships is a fiduciary relationship between a broker or agent and a principal based upon trust and is solidified with a contract.
When studying for your real estate exam, do not make this harder than it needs to be! You do not need to know everything in this article word for word. For the real estate exam, you only need to know the following.
- The difference between a customer and a client – customer is not represented by a broker, but a client is. Only the client has an agency relationship.
- Dual Agency – Agent/Broker is representing both parties (This is very rare as most States do not allow this)
- Special Agent – hired to perform a specific task for a client. An example is selling a house. Once the act of selling the house is complete, the relationship is over.
- General Agent – can perform any and all tasks. An example is a property manager. Someone with an ongoing relationship.
- Universal Agent – Basically complete authority. Normally set up with a power of attorney. They can sign legal documents, purchase and sell property that they don’t own. I have never seen this type of agent relationship in my life, but it exists and is on the exam.
Not studying for the exam and want more information? Let’s continue….
How are agency relationships created?
The relationship is created when two parties agree in terms and in principle on how one would be represented in a real estate transaction. Remembering that the relationship is built upon trust, fiduciary trust that is.
There are three basic principles that establish this relationship which are:
- When there is an agreement between the principal and the broker or agent whether expressed or implied.
- Competency of principal – this means that there must be a person of legal age and of sound mind according to state law who may employ an agent or broker to work on their behalf for the purposes of their estate transaction.
- Consideration– It is not necessary to provide consideration when establishing this relationship.
How Agency Relationships Impact You
One of the most difficult tasks when pursuing a real estate purchase is not only establishing a relationship with a particular agency but also establishing a relationship with an agent. But how valuable is this relationship? Or, is it just somebody that you just talk to just to get some idea as to what the proper value of a home is or does the relationship go much deeper?
When I began looking for house, based on research, it was very important that I actually establish a trusting relationship with an agent who I felt would be looking out for my best interest. Based on discussions with homeowners that I become acquainted with, I had no idea how important his relationship was. There are some agents who are only trying to make a quick buck. They can care less whether your deal is a good one or not.
No matter which way I turned, I was always told to establish a solid relationship with a strongly branded agency. After doing some research, I consistently ran across these two words, agency relationship. So I had to ask myself, what is an agency relationship?
Types of agency relationships
• Seller’s agent – this relationship is established when a seller hires a broker to represent their interests in the process of selling their real estate. All fiduciary duties are geared toward the seller and is confirmed by way of a contract. Once the property is listed, the agent can attempt to sell the property or can influence the seller to allow another licensed agent to assist in the process of the sale of the aforementioned real estate. The selling agent has a responsibility of negotiating the best possible price and terms for the seller.
• Buyer’s agent – an agent has a fiduciary responsibility to the buyer. With this relationship, the buying agent has an obligation to negotiate the best possible price and terms for a purchase on behalf of the buyer. Although it is negotiated, the buying agent’s fee can be paid either by the buyer or the seller of the real estate in question.
• Subagent – this agent works for the listing broker to work out the best possible terms and price on a real estate purchase but also works with the buyer but does not work for the buyer. The fiduciary responsibilities are geared toward the listing broker and seller. Although the subagent cannot work in the best interest of the buyer, this agent has a responsibility to be honest.
• Disclosed dual agent – this agent works with the buyer and the seller concerning the same real estate deal. These agents have limited fiduciary duties with both clients which mainly focuses on negotiations and confidentiality. In general, a contract should be signed by both parties acknowledging dual representation.
• Designated agent – this type of relationship is synonymous with appointed agency. This is a practice that allows the managing broker to decide upon which licensees in their firm will act as agents for the seller and for the buyer without either licensee being considered a dual agent. These agents give their clients full representation and fiduciary duties. To use this type of agency, it must be permitted in the state in which you reside. State laws vary.
• Nonagency relationship – this relationship is synonymous with being called a transaction broker and in some cases a facilitator. Some states do permit this type of nonagency relationship, however, they do vary dependent upon the state in which the relationship is applicable. In general, when this relationship is established, the fiduciary duties are less than complete, but most states do allow this type of relationship to exist although the licensee does owe all of their fiduciary duties to the customer.
• Agency by ratification – this type of relationship is made by accepting conditions that were created after the fact whether oral or written. This probably was created when the seller ratifies what an agent has been doing by accepting the terms. We use “probably” because, in general, an agent wants a fee for services and may end up having to go to court to collect from a seller. If going to court is necessary, then the courts will decide what type of agency relationship was created if any. The term ratification is either expressed or implied and is an approval of a previously authorized unofficial contract by an agent.
• Express agency – this is created when the agency relationship of an agreement in which both the principal and the agent outlined their intentions to enter into such a relationship in which the agent represents the principal. Their intentions were made either orally or in writing. The oral agreement establishes an agency relationship and is binding dependent upon the state in which it is formed. Keep in mind, the oral agreement may not be enforceable by the agent when attempting to collect a fee. Written agreements are easy for both parties to understand the financial terms and are best in creating a binding relationship.
Can an agency relationship be created by estoppel?
First, an agency by estoppel is an agency relationship that is created when the principal does not prevent an agent from going are acting beyond the normal duties of an agent which gives the impression that the traditional agency relationship has been established.
For example, if you own a residence and you tell your agent to show the house to a possible renter, and the agent negotiates a lease even though you do not give complete authorization to do so, the potential tenant assumed that the agent had the authority to do so and then the agency by estoppel has been created.
When are agency relationships used?
Agency relationships are used in the formation of conducting official business during a real estate “transactional” process. It is very important to establish which type of agency relationship that is established. It reduces confusion in and type of misunderstandings whether buyer, seller, or agent.
Agency relationships makes it very clear whose interest is being protected. The agent should be very clear from the outset as to identify to whom the fiduciary responsibilities lie, therefore, a seller or a buyer will not be confused and this will reduce the need for all parties to not consider any type of unfairness throughout the buying or selling process