The Principal-Agent Relationship & Duties in Real Estate

Instructor: Kyle Aken

Kyle is a journalist and marketer that has taught writing to a number of different children and adults after graduating from college with a degree in Journalism. He has a passion for not just the written word, but for finding the universal truths of the world.

The principal-agent relationship in real estate is one built upon trust. In this lesson learn the legal duties an agent and a principal must carry out throughout the time they are engaged in business together.

Principles of Principal Relationships

We all know relationships are important. This is a truth that can also be applied to the relationships you develop in real estate. Like many businesses, real estate success hinges on a good network of individuals working together like a well-oiled machine. One relationship that is vital is the principal-agent relationship.

The principal-agent relationship is very important in matters of selling real estate. The principal is the individual who is selling the real estate property, while the agent is the licensed broker who has been contracted to represent the seller. In a complex market, it is a responsible choice for a seller to hire an agent to handle the intricate processes that come along with selling real estate.

However, due to the informational advantage of brokers, it is possible for an agent to act in their own interest as opposed to the best interest of the principal. For this reason, it is important for all principals and agents to understand the principal-agent relationship and to work in ways that are mutually beneficial. It is critical for agents or brokers to act ethically and make decisions that will benefit both parties.

Duties of the Agent

Fiduciary Duty: The real estate agent is also known as the fiduciary to the principal. This simply means that they have a fiduciary responsibility in the relationship. The agent is not to breach these responsibilities or they may be held accountable for the profit they have made. Even if the principal suffers no loss, the agent may be held responsible if their fiduciary duties have been neglected. These duties have been enacted so that the law may protect principals and they can feel secure in seeking out an agent to help with the complex process of selling real estate property. The following is a list of agent fiduciary duties as listed by the National Association of Realtors:

1. Duty of Loyalty - This is one of the most important responsibilities of the agent. This duty requires the broker to always act in the best interest of the principal. This includes all interests, even those of the agent themselves. This means that the agent is not to accept employment from any party whose interests may be in competition with those of the principal.

2. Obedience - This duty requires that the agent obey any and all lawful instructions from the principal. Any unlawful instructions made by the principal are not covered by this fiduciary duty.

3. Performance - The duty of performance involves some of the other judiciary duties that cover the overall performance of the agent. This includes acting as authorized by the principal, fulfilling contractual obligations, employing competence, care, and diligence, and providing important and pertinent information to the principal.

4. Confidentiality - This duty requires an agent to keep any confidential information just that - confidential. This can include any information that could weaken the principal's ability to bargain in the market. This can prevent the agent from informing a potential buyer that the seller is able to or must sell below asking price. This does not, however, include any information that the broker is legally required to disclose to any potential buyer of the property.

5. Disclosure - This requires the agent to disclose any and all pertinent information in regard to selling the principal's real estate property. This includes disclosing:

  • Any and all offers made on the property
  • Identity of potential buyers
  • Any information that may affect the selling price/value of property
  • Information that pertains to a potential buyer's ability to close or to provide a higher offer
  • Any relationship with a potential buyer
  • Any potential buyer's intention of reselling the property or subdividing it for profit
  • Any pertinent information that may enable the seller to list the property at a higher asking price

The buyer's agent is also under fiduciary duties of disclosure including the following:

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