Unit 7: Real Estate Brokerage and the Law of Agency 1 Explain - - PDF document

9/2/2019 1 Unit 7:

Real Estate Brokerage and the Law of Agency

• Define Common Law of Agency
• Creation/Termination of Agency

Relationships

• Duties Owed to a Principal
• Misrepresentation & Disclosure Rules
• Liabilities/Consequences of Agent’s

Breach of Duties Explain the History of Brokerage

History of Real Estate Brokerage

caveat emptor state

1950s Rep Seller 1960s MLS Created mid 1990s Agency Choice Seller SubAgency

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• Agency
• Subagency
• Principal/Client
• Fiduciary

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• Agent
• Subagent
• Customer/3rd

Party

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Transactional Broker – legally neutral 3rd party that offers real estate services to buyers and sellers NOT AN AGENCY RELATIONSHIP Not Allowed in NC Agents work: FOR the Client & WITH the Customer

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Duties & Liabilities of Agents to Principal: Obedience Loyalty Disclosure Confidentiality Accounting Reasonable skill and care

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OLD CAR

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Obedience

• In accordance with

the contract

• Not absolute
• Lawful & ethical

Loyalty

• Be sensitive to possible conflicts
• f interest
• Do not act out of self-interest

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Facts that could affect principal’s decision

• Any bonuses for broker
• Agent’s relationship to buyers
• Property disclosure documents
• All Offers
• Identify of Prospective Purchasers

Disclosure

• Ability of Purchaser to

Complete Transaction

• Any agreements broker may have

with buyer (ie property management)

• Buyer’s intention to resell the

property

• Any agreements broker may

have with buyer (ie property management)

• Buyer’s intention to resell the

property

Disclosure

Failure to Disclose: Liable for Damages

Three Mandatory Documents

• 1. Residential Property Disclosure
• 2. Mineral, Oil and Gas Disclosure
• 3. Lead Based Paint Disclosure (prior to ‘78)

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• Financial condition
• Motivation
• Acceptable terms

(without permission) Confidentiality Agent shall not disclose principle’s:

• All funds from or for

principle

• Deposit immediately
• NC Keep copies for 3

years

• No commingling

Accounting Reasonable Skill and Care

• Be competent at in all

aspects of real estate profession.

• Be diligent in performing

duties

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Duties & Liabilities of Agents to 3rd Parties

• “Customers” or “Prospects”
• Honesty and Fairness
• Comply with NC Real Estate License

Law and NCREC rules regarding disclosure of material facts

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Puffing: exaggerating a property’s benefits – Don’t Over Do It Fraud: Intentional misrepresentation

• f a material fact that might harm
• r take advantage of another person

Material Facts

• Facts about the property itself
• Facts relating directly to the property
• Facts relating directly to the ability of

the agent’s principal to complete the transaction

• Facts known to be of specific

importance to a party

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Specific Material Facts:

• Synthetic stucco (aka EIFs:

exterior insulating and finishing system)

• If a property ever had leaking

polybutylene pipes

• If the property was ever used as a

meth lab

Must be disclosed forever!

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Who needs to know Material Facts? All transactional parties

• Buyers and sellers
• Landlords and tenants
• Lenders

Even if specific questions are not asked Prohibited Conduct

• Willful misrepresentation
• Negligent misrepresentation
• Willful omission
• Negligent omission

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Willful Misrepresentation

• Intentional
• Licensee has "Actual knowledge" of

a material fact, but misinforms Negligent Misrepresentation

• Licensee unintentionally misinforms a

principal of a material fact because:

• he did not have actual knowledge
• had incorrect information
• or because licensee made a mistake
• Broker may be guilty even if he acted

in good faith

• But reasonably prudent agent "should

have known"

Willful Omission

License has actual knowledge but deliberately fails to disclose the fact

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Negligent Omission

• Licensee does NOT have actual

knowledge

• Does not disclose because
• f lack of knowledge
• But reasonably prudent

agent "should have known" What Do You Think? NEGLIGENT

• Misrepresentation
• Omission

WILLFUL

• Misrepresentation
• Omission

VS Stigmatized Properties

• Properties branded

as undesirable

• Site of criminal

activity, death of

• ccupant, reputation of being

haunted

• Not a material fact by North

Carolina law

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Sex Offender Disclosure

• By state law, presence
• f a sex offender not a

material fact

• Licensee may

voluntarily disclose or advise consumer to visit registry http://sexoffender.ncsbi.gov Duties to Principal: Commission Rules

• Avoid any willful or negligent

misrepresentation of material facts

• Avoid making false promises to the

principal

• Avoid undisclosed conflict of interest
• Properly account for funds
• Act competently in services provided

Duties to Principal: Commission Rules

• Avoid improper conduct be honest

in ALL dealings

• Deliver copy of contracts within 3

days

• Disclose all commissions, referral

fees, kickbacks & payments from third parties

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Commission Disciplinary Authority

• Reprimand
• Censure
• License Suspension
• License Revocation

Liabilities & Consequences of Breach of Duty

• Disciplinary action by NCREC
• Civil action brought by injured

party

• Criminal prosecution brought by

district attorney

• Civil action for reimbursement

Duties & Liabilities of PRINCIPALS

• Duties to agents
• To act in good faith
• To pay compensation
• Duties to third parties
• Liabilities and consequences of breach
• f duty
• Unfair/Deceptive Trade Practices Act

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Classification of Agency Relationships

• Universal Agent
• General Agent
• Special Agent

Brokerage Defined

A broker is one who is licensed to:

• List
• Lease
• Buy
• Exchange
• Auction
• Negotiate
• Sell

real property for others for compensation. A provisional broker works on behalf of the broker.

L L B E A N S

Creation of Agency

• Listing contract
• Buyer agency contract
• Dual agency contract
• Property management contract
• Tenant Representation Contract
• In-house brokerage employment contract
• Implied agency (by conduct)

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Scope of Authority

• Express agreement (written or oral)
• Written buyer agency agreement

must be in place prior to writing an offer

• Implied agreement – act as if

agency relationship exists

• Illegal in NC

Scope of Authority

• Ratification (apparent authority) - no

express agreement but customer accepts conduct of agent

• Compensation does not determine

agency

• Written buyer agency agreement

required for broker to be paid (NC)

Compensation

• Is mutually agreed upon in the agency

contract (listing agreement and buyer agency agreement

• Loyalty goes to the person who

employs the agent, not necessarily the person who pays the agent

• Agency agreements must be in writing

for the broker to get paid

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Termination of Agency

• Fulfillment of purpose
• Expiration of terms
• Mutual agreement
• Breach by a party

Termination of Agency

• Operation of law
• Destruction or

condemnation of property

• Death or incapacity of either party

Agency Relationships

• In NC, every agreement for

brokerage services must be in writing Types of Agency Relationships

• Exclusive Seller Agency
• Exclusive Buyer Agency

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Types of Agency Relationships

• Single Agency
• Dual and designated agency
• Undisclosed dual agency
• Disclosed dual agency
• Designated dual agency

Agency Relationships Exclusive Seller Agency Broker exclusively represents the seller in a transaction FSBO Agency Relationships Exclusive Buyer Agency Broker exclusively represents the buyer in a transaction

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Co-Brokered or Cooperative Sale

2 Firms Agency Relationships Buyer agency Broker exclusively represents the buyer in a transaction vs. Seller subagency Broker exclusively represents the seller in a transaction Agency Relationships Dual agency

Broker equally represents both the buyer and the seller in the same transaction with permission without compromising either principal

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Agency Relationships

Undisclosed dual agency

• Violates licensing law
• Jeopardizes interests of both

parties

• Can result in rescission of contract,

forfeit of commission, or lawsuit

Agency Relationships Disclosed dual agency

• Intentionally created
• In-house transactions only
• Informed consent of both

parties, written prior to presentation of first offer Dual Agent No-Nos

• Willingness to accept any terms of sale
• ther than those offered
• Motivation for participating in the

transaction unless required by statute

• Any confidential information unless

disclosure is mandated by statute Unless you have the parties’ permission you may NOT reveal:

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Designated Dual Agency aka Designated Agency

• One broker feels it would be too

difficult to fairly represent both sides

• The broker or BIC appoints another

agent to take care of the buyer Designated Dual Agency (Cont.)

• Must have prior expressed approval
• f both parties
• The firm stays a dual agent, the

brokers do not

• Benefit: both sides receive a fuller

and direct representation from respective designated agent. Designated Dual Agency (Cont.)

Remember, a BIC should never act as a designated agent with a provisional broker on the other side. The BIC loses his or her ability to supervise or assist a provisional broker in such a situation.

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Agency Relationships Can NOT be designated if:

• Agent has received confidential

info on opposite party

• Provisional broker would be

designated opposite their BIC Agency Relationships in Rentals

• Between management firm

(broker) & owner

• Must be in writing at beginning
• Duties to 3rd parties regulated

by Real Estate law, Fair Housing laws (20) and Landlord/tenant laws (11)

Additional Points on Dual and Designated Agencies

• Firm has to have a relationship with

Buyer and Seller

• There can be no designated agency if

there is no dual agency

• Dual agents need to remain neutral,

but designated agents owe their fiduciary duties exclusively to one party

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Additional Points on Dual and Designated Agencies

• Designated Dual Agency is optional,

but both clients receive better representation

• The firm’s policy must authorize dual

and designated agency and both parties must give written consent Difficulties with Dual/Designated Agency

• Hard to practice in a small firm. Firms

with one agent have no way to practice designated dual agency

• How would you split the commission?
• Which client would an agent give up if he

knows both parties?

• What if the clients do not agree how they

have been split up

Agency Disclosure

• Status must be revealed to

potential clients at the first substantial contact, but no later than 3 calendar days from then.

• Presenting the bulletin is not

enough … you MUST review it with potential clients

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Disclosure in Auction Sales

• Seller’s agents do not need to review

the brochure with everyone bidding at an auction.

• Agents working for buyers must have

reviewed WWREA and have a written agency agreement before submitting any bids.

Disclosure in Auction Sales, Cont

• Buyer’s agent must identify herself to

the seller before the execution of a written agreement verifying buyer’s purchase contract

Buyers Working With Real Estate Agents

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Agency Disclosure

• Mandatory
• Agent keeps acknowledgment

panel for 3 years

• Agency decision must be

made prior to delivery of services

• It is NOT a contract; it’s an educational

tool

Oral Buyer Agency

• Non-exclusive buyer agency option
• Cannot restrict consumer in use of

agent or length of agreement

• Must be reduced to writing prior to

presentation of first offer

Nature of the Brokerage Business

BIC Provisional

• Broker-in-charge/licensed

associate relationship

• Provisional broker performs

duties in broker’s name

• Provisional broker must be payed only

through BIC

• Nonprovisional broker has more

autonomy, but generally still under BIC

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You do not have to work with every customer.

If they are: Rude or Angry Creepy or Noncommittal … Pass them on and get a referral fee Provisional Brokers

• Is licensed to perform R.E. activities on

behalf of a licensed firm

• The broker-in-charge is fully responsible

for every person in the firm and their activities

• Can only receive compensation from

their BIC

• No authority on their own to make

contracts

Independent Contractor vs. Employee

Contractor:

• Form 1099
• Must report

income and paying estimated taxes Employee

• W-2
• Taxes & Social

Security withheld

• Possible benefits

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