August 2022 Edition - Fiduciary Responsibilities of Real Estate Professionals

Real estate professionals (licensees) enter various relationships with the parties to whom they contract with and to each other. These relationships are governed by a variety of laws, regulations, and customs. The body of law known as the “law of agency” constitutes the primary set of laws governing real estate brokerage relationships. The law of agency is derived from the “common law” which is case law that has evolved over hundreds of years in the courts. However, to the extent brokerage relationships are based on contractual agreements, they are also governed by “contract law”. Under the law of agency, “an agency relationship exists when two parties agree that one (the agent) will act on behalf of the other (the principal). The most basic duty of the agent is to represent the principal as their “fiduciary” in the transaction. A fiduciary is a person who acts for another in a relationship of trust and who is bound to act primarily for the benefit of the other in that relationship of trust. An agency relationship is a fiduciary relationship in which the agent is obligated to exhibit a high standard of loyalty to the principal that may influence the principal’s decision. In their fiduciary role the agent is held to the standard of doing what is in the best interest of the principal, even at their own expense. An agent’s fiduciary obligations to the principal preclude that agent from taking advantage of the principal in any manner during the agency relationship (North Carolina Real Estate Manual). 

REALTORS ® are also ethically committed to a “Code of Ethics and Standards of Practice” adopted by the National Association of REALTORS® in 1913. This Code of Ethics was one of the first codifications of ethical duties adopted by any business group. The Code ensures that consumers are served by requiring REALTORS® to cooperate with each other in furthering clients’ best interests. (National Association of REALTORS®). Per Article 1 of the Code of Ethics, “When representing a buyer, seller, landlord, tenant or other client as an agent, REALTORS® pledge themselves to protect and promote the interest of their client. This obligation to the client is primary, but it does not relieve REALTORS® of their obligation to treat all parties honestly (National Association of REALTOR® Code of Ethics and Standards of Practice). 

Kelsi Maree Borland, a freelance journalist and magazine writer based in Los Angeles, California recently had an article published on GlobeSt.com that brings up a question as to the fiduciary compliance of brokers and brokerage firms to their principals in their marketing of commercial investment sales brokerage. The article is reprinted below in its entirety for your review. 

Investment Brokerage Needs to Evolve to Better Serve Clients 

Investment sales brokerage is badly in need of modernization. According to data from CoStar, 80% of investment sales transactions above $2 million are double ended, meaning the listing broker also identifies and represents the buyer—and collects 100% of the commission. The common scheme is hampering asset values and ultimately hurting client returns. It’s a problem that needs to be addressed, says Kevin Maggiacomo, president and CEO of SVN Commercial Real Estate Advisors. 

“This quiet marketing strategy results in buyers being overlooked and properties trading for less than fair market value more often than not.” In a recent whitepaper, SVN encouraged brokerage firms to adopt cooperative policies that create better transparency and competition among listed assets, which ultimately leads to a higher price. 

Other industries are already operating on this type of cooperative structure, says Maggiacomo, pointing to stocks, residential real estate and even commercial leasing, all of which he calls “incredibly efficient” when it comes to transaction transparency. “Almost every industry is networked in a way where there is a centralized platform that provides total visibility of the marketplace,” he explains. “The fact that the leading industries in the economy, with the exception of the commercial real estate brokerage industry, are networked shows that the open and transparent nature of these markets provides for a fair and efficient way of selling products through the creation of organized competition. The result is the highest price that the market is willing to bear.” 

The current CRE commission structure is at the heart of the problem. Brokers know that they can limit the listing to their internal database of prospective buyers to augment their personal profits, never mind the client’s return. “The commission program in investment sales is broken and misaligned with seller’s goals and objectives. The model incents listing brokers to double-end deals to earn 100% of the commission,” says Maggiacomo. “The incentive is powerful.” 

It isn’t only the money. A broad marketing campaign is also more work. It means fielding more phone calls, emails and inquiries, and all of that work doesn’t return a higher profit for the broker. Still, even if brokers aren’t moving in this direction naturally, clients are beginning to demand it. There is more in this direction naturally, clients are beginning to demand it. There is more information and understanding about brokerage, and clients are no longer in the dark about what to expect. 

Don’t expect the change to come swiftly, though. “It is going to be tough for the industry to operate in a different way, although there are powerful forces that will pull them toward a transparent and cooperative marketplace in the end,” says Maggiacomo. Achieving the goals will require three steps. First, there has to be a 50-50 commission split; it has to be required by company policy; and finally, it has to be organizationally leveraged, meaning that everyone has to do it all of the time. 

Maggiacomo notes that SVN was founded on these principals, but the industry overall has been slow to adapt. He says that’s changing. “Brokers control relationships with buyers. The more brokers that are informed of the availability of a for-sale asset, and the more buyers that are reached means more offers and ultimately a higher sale price,” says Maggiacomo. “The broker of tomorrow is one that turns data that everyone has seen into information that no one else has. She is an advisor to the client.” 

Kelsi Maree Borland 

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more. 

“Just-In-Case You Missed It” is a monthly letter prepared for multifamily owners and prospective owners. It is a compilation of multiple articles from multiple sources or a reprint of an article from a specific source (source credit given). Its purpose is to present both facts and opinions that may influence our multifamily business in the Southeastern U.S. If you have any questions and/or would like to discuss any of the comments above, my conclusions or your multifamily business, please contact me at your convenience. I can be a valuable resource to you without adding expense to your budget. I look forward to speaking with you and having an opportunity to meet with you. I am always at your disposal to assist you with your multifamily business. If you would like to review previous editions of my monthly “Just-In-Case You Missed It” letter they are posted on my website, www.rickbakermultifamily.com. 

Respectfully, 

Rick 

G.F. Rick Baker, CCIM 

Multifamily Specialist/Investment Advisor 

www.RickBakerMultifamily.com 

2504 Tinderbox Ln.

Greensboro, NC 27455

Cell 336.549.6083 

Email rickbakermultifamily@gmail.com 

Per NC Real Estate Law, please review the "Working with Real Estate Agents" agency disclosure. We are available to discuss the contents of the disclosure after you have had an opportunity to review. 

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June 2022 Edition - The Next Ten Years in Central North Carolina