The following article was written by GBAR member and Past President of MAR, Peter Casey.
Why is protecting your real estate interests so important to home buyers and sellers? For many folks, their home is their single largest asset and entrusting its purchase or sale to a real estate agent is a serious decision worthy of careful thought. As REALTORS® we are on the front line of homeownership. Choosing the right “agent” for your particular circumstances, and ensuring that agent understands his or her responsibilities, may prove critical to a satisfactory outcome.
“Agent” or “Agency” is an ancient legal concept bringing with it specific duties and responsibilities attributable to both the Agent and a Principal. Fully understanding these duties and responsibilities, and properly applying them in the everyday conduct our business, is a legal requirement. Failing to do so could result in the loss of our license to practice, or worse!
Let’s begin with the definition of “Agency”. “Agency is defined as a fiduciary relationship between two parties in which one (the 'agent') is under the control of (is obligated to) the other (the 'principal'). The agent is authorized by the principal to perform certain acts, for and on behalf of the principal. The principal is bound by the acts of the agent, performed in carrying out entrusted duties and within the scope of agent's authority. An agency can be created by (1) express agreement, whether oral or written, (2) implication, based on the custom or practice of the trade, or (3) conduct of the principal. Under the legal doctrine of estoppel, the principal is prohibited from denying the existence of a properly constituted agency.” (Read more at: http://www.businessdictionary.com/definition/agency.html)
Twelve years ago, the Massachusetts Legislature and the Board of Registration of Real Estate Brokers and Salespersons modified the standards of practice for real estate professionals to require that they disclose the types of “agency relationships” available to consumers seeking to buy or sell a home (“Mandatory Licensee Consumer Relationship Disclosure”) and by expanding the possibilities for brokerage companies to represent both buyers and sellers. Fully informing our clients in advance about the relationships available to them will clarify expectations and help insure a successful transaction.
All residential real estate transactions in Massachusetts must begin, at the first in-person meeting with a consumer to discuss a real estate transaction, with a full discussion of the types of agency relationships available to consumers as described in the “Mandatory Licensee Consumer Relationship Disclosure” form. This is not a contract; it is a formal disclosure which you will ask consumers to sign, acknowledging that you have made the disclosure. They may refuse to do sign, without consequence to them, but you should note their refusal if they do not sign.
You and your client will choose, from among the several Licensee/Consumer relationships available, the one suitable to the transaction contemplated. The simplest of these is defined either as Seller Agency, a relationship between a homeowner (principal) and a broker/agent hired to sell his or her home, or as Buyer Agency, the relationship between a buyer and the broker/agent hired to represent him or her to accomplish that task. In either case, you owe your clients the duties of a fiduciary, that is: honesty, accountability, undivided loyalty, obedience and reasonable care and diligence to the principal. (More on the meaning of these duties in another article.) In other words, you must always act in your clients’ best interest. Easy to say, but not always easy to do in practice.
But there is more and it gets more complicated! Massachusetts and other states have defined other relationships which you or your broker might choose to employ. You know, I am sure, that the agency relationship you and your client choose is with your broker in charge (“designated broker”), not with you, personally. Clients pay the broker, not the agent; agents cannot accept direct compensation. The broker with whom you are affiliated shares the compensation paid to him or her with you according to your company’s policies. Some of you may be licensed brokers, as opposed to licensed salespersons, and choose to be affiliated with a designated or managing broker for convenience. Even if you are a licensed broker, so long as you affiliate with a managing or designated broker, you may not receive compensation directly, it must come through your designated broker.
Designated brokers typically represent both buyers and sellers through their agents and, as a result, could theoretically have conflicts when, for example, a buyer client wishes to purchase a home offered for sale by that same broker. It is impossible for any broker to fully discharge his or her fiduciary duties while representing both sides of the transaction! In fairness, it is important to note that some brokers choose to represent only buyers (buyer’s brokers) or only sellers (listing brokers). Those firms who choose to represent both buyers and sellers likely adopt a business model called “designated agency”. Here the broker “designates” one agent to represent the buyer and another to represent the seller thus allowing each agent the ability to provide the full fiduciary duties required. An invisible barrier must exist between the agents to protect the confidentiality of both buyers and sellers. Brokers choose to operate with different business models and with different business practices; be sure you understand exactly how your company has chosen to operate.
Ok, but what happens if you are working with a buyer and a seller interested in the same property? Well, the Massachusetts solution is a relationship called “dual agency”. This allows you to represent both parties to the transaction. To do so you must obtain the informed written consent of both parties after providing notice to both that the situation exists. The law says: “The dual agent shall be neutral with regard to any conflicting interest of the seller and buyer. Consequently, a dual agent cannot satisfy fully the duties of loyalty, full disclosure, obedience to lawful instructions, which is required of a seller or buyer agent. A dual agent does, however, still owe a duty of confidentially of material information and accounting for funds.”
That’s the law but, in my personal experience, this relationship can be difficult and confusing to both agents and consumers. I prefer to avoid this relationship but recognize that others may be very comfortable as dual agents. In fact, some companies use a business model that purports to be dual agency only. In the final analysis, even if you and your company choose to practice dual agency, the choice is always up to the consumer!
Finally, Massachusetts allows for “Non-Agent Facilitators”. This relationship requires that the “non-agent facilitator” assist a seller and/or buyer in reaching an agreement but does not represent either the buyer or the seller in the transaction. The facilitator, and the broker with whom the facilitator is affiliated, both owe the buyer and seller a duty to present all real property honestly and accurately by disclosing known defects and owes a duty to account for funds. Unless otherwise agreed, the facilitator has no duty to keep information received from a seller or buyer confidential.”
At some point in a facilitator transaction, a consumer may wish to have an agency relationship with you. You may accommodate that consumer, however, before becoming his or her agent, I strongly advise full disclosure of the circumstances to the other party to the transaction and a full explanation of how the change will affect your duties and responsibilities to each party. Keep in mind that the party you do not represent may then choose another form of representation, maybe a dual agency relationship, or they may seek to work with another agent. Our actions have consequences.
It is important to note that brokerages may choose from many different business models and/or office practices. All must comply with the law regardless of which model or business practices they use. Knowing exactly how your company operates will help you avoid conflicts with your designated broker. One more thing to consider, the Massachusetts Statute of Frauds requires that all real estate transactions must be in writing to be enforceable. Although much work has been done either by the Commonwealth or by various Realtor® associations to provided generally accepted forms to accomplish this, it is always advisable for consumers to hire an attorney, familiar with real estate law and experienced with transactions, to represent their interests. In my twenty-five plus years in the business,
I have never seen a standard form agreement that was not modified by attorneys to protect a client’s specific interests. Attorneys hired by a mortgage provider represent the mortgage company, not the consumer. Remember, if you are not a licensed attorney, do not attempt to give legal advice or modify contract language! Instead, advise your client to hire a competent attorney.