December 2020 Edition - A Review of Real Estate Agency Relationships

As a real estate investor, it is important that you understand the ethical and legal obligations of real estate professionals.  I have found that while agency relationships and proper representations are vital to the process, a broker’s role is frequently misunderstood and misused to the disadvantage of the investor.

Relating this to a sports analogy, in a game you generally have two competing teams.  While both teams must play by the rules, the individual members are committed to the success of their team.  To accomplish this, each team develops their own strategies and keeps their private information confidential.

Real estate transactions work in the same way but within a legal and ethical framework.  In real estate sales transactions, you have a Seller’s team and a Buyer’s team.  These teams have an obligation to work with each other in a fair, honest and ethical manner.  Each team also has a fiduciary responsibility to work in the best interest of their client.  Thus, it is the seller’s agent (listing agent) responsibility to get the best terms possible for the seller and it is the buyer’s agent responsibility to get the best terms of deal possible for the buyer.  If you are looking to purchase real estate, not having a buyer’s agent puts you at a disadvantage.  It is like going to divorce court and using your spouse’s attorney.

History:

Prior to the 1960’s, brokerage firms that listed a property for sale kept the information on the property to themselves and did not work with brokers outside of their firm.  Beginning in the 1960’s, brokerage firms began to share information about their property listings using a multiple listing service and to cooperate with other brokerage firms to sell properties.  Unfortunately, confusion quickly arose over whom the brokers represented in these cooperative co-brokered transactions.  With two different brokerage firms involved in a sale, the assumption was that the brokerage that had the listing represented the seller and that the brokerage who brought the buyer to the deal represented the buyer.  However, this was not the case.  By law, both brokerage firms actually represented the seller and owed all loyalty to the seller and no duties other than honesty and fairness to the buyer. Buyers in general did not know or understand this and were thus at a significant disadvantage.

Misunderstandings ultimately led buyers to question exactly how their interests were being protected.  This produced a growing trend in which buyers began to demand that their rights be protected so that they could make informed decisions.  It was not until the mid/late 1980s that laws were passed to establish buyer agency and that required agents to disclose who they were representing in the transaction.  The Law of Agency is a common-law concept where law comes from the judgements and decrees of courts as opposed to the legislature.  Brokers must now disclose whether they will represent the seller, the buyer or both in a sale or lease transaction.

The job of a real estate professional is commonly referred to as that of a real estate “agent”.  Legally, the term “agent” refers to a strictly defined legal relationship.  By definition, an “agent” is an individual who is authorized and consents to represent the interest of another person and has a “fiduciary relationship” with that person.  The “fiduciary relationship” is one of the most important concepts in legal representation.  In a fiduciary relationship, “One party places special trust, confidence and reliance in and is influenced by another who has a fiduciary duty to act for the benefit of the party” (Merriam-Webster’s Dictionary of Law @1996).

Since brokers can now represent either the seller, the buyer or both, state regulatory agencies (the North Carolina Real Estate Commission, the South Carolina Real Estate Commission and the Virginia Real Estate Board) have developed Agency Disclosure documents which must be presented to all prospective buyers and sellers by the agent no later than first substantial contact between the agent and the buyer or seller.  A copy of the North Carolina Working with Real Estate Agents disclosure is attached for your review.  This disclosure became effective on July 1, 2001 and begins by stating that, “In every real estate sales transaction, a real estate agent shall, at first substantial contact directly with a prospective buyer or seller, provide the prospective buyer or seller with the following information (NC Real Estate Commission Rule 21 NCAC 58A.01049c)).”  The disclosure goes on to describe and define a “seller’s agent” and their Duties to the Seller, a “buyer’s agent” and their Duties to the Buyer and a “dual agent” who essentially is a transactional agent who must treat both buyers and sellers fairly and equally while not divulging certain confidential information about one party to the other party.

You need to know and understand who is on your team when working on a real estate transaction.  In you are interested in purchasing a property, making direct contact with the listing agent is not in your best interest.  As a buyer, you should always retain your own agent to represent you and your best interest.  Doing such will assure you the care, loyalty, disclosure, obedience and accounting you need to get the best outcome.  Your buyer’s agent is working for you and not the competition (the seller).  This is what I do.  I am a buyer’s agent and very seldom list a property.  Please let me know if I can be of service to you.  The cost to you will likely be minimal and will provide you with the services of an expert in multifamily real estate transactions.

Hopefully, this review has helped you to clarify who is representing your interest in a real estate sales transaction.  If you would like to further discuss this topic, please contact me at your convenience.

“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 any 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.