Chapter 18

Georgia Real Estate An Introduction to the Profession Eighth Edition Chapter 18 The Principal-Broker Relationship: Agency

Key Terms agency agent boycotting commingling dual agency latent defect middleman ostensible authority patent defect price fixing principal puffing third parties © 2015 OnCourse Learning

Agency An agency is created when one person, the principal, delegates to another person, the agent, the right to act on the principal’s behalf. © 2015 OnCourse Learning

Agency In universal agency, the principal gives the agent legal power to transact matters of all types on the principal’s behalf on a continuing basis. © 2015 OnCourse Learning

Agency In general agency, the agent is given the power to bind the principal in a particular trade or business on a continuing basis. © 2015 OnCourse Learning

Agency A salesperson is a general agent of the sponsoring broker. A property manager is a general agent for the property owner. © 2015 OnCourse Learning

Agency In a special agency, the principal empowers the agent to perform a particular act or transaction with no continuity expected or agreed upon. © 2015 OnCourse Learning

Agency An example of a special agency is a real estate listing. © 2015 OnCourse Learning

Agency The principal can either be a natural person or a corporation. An agent can either be a natural person or a corporation. When a broker represents a buyer, the seller is a third party, also known as a customer. © 2015 OnCourse Learning

Establishing the Agent’s Authority An agency relationship can be established through an expressed contract or by acts of the parties, also known as implied. The written listing agreement outlines the broker’s authority to act on behalf of the principal and the principal’s obligations to the agent. © 2015 OnCourse Learning

Broker’s Obligation to the Principal When an agency is created, a fiduciary relationship is created. The agent must be faithful to the principal, exhibit trust and honesty, and exercise good business judgment. © 2015 OnCourse Learning

Broker’s Obligation to the Principal The broker must be loyal to the principal, obey legal instructions, maintain confidentiality, make full disclosure, be accountable for money, act with reasonable care and treat the client with honesty, fairness and integrity. © 2015 OnCourse Learning

Loyalty to the Principal The agent must be loyal to the principal. The broker is legally bound to keep the principal fully informed as to all matters that might affect the sale of the property and to promote and protect the principal’s interests. © 2015 OnCourse Learning

Loyalty to the Principal Penalties for breach of loyalty are stiff. The broker can be sued and their license can be suspended or revoked. © 2015 OnCourse Learning

Loyalty to the Principal If a licensee intends to purchase a property listed for sale by the licensee’s agency or through a cooperating broker, the licensee is under a legal obligation to make certain that the price paid is the fair market value and that the seller knows who the buyer is and that the buyer is a licensee. © 2015 OnCourse Learning

Faithful Performance Obedience means that the agent is to obey all legal instructions given by the principal. Performance as promised in the listing contract. © 2015 OnCourse Learning

Faithful Performance Obedience means not departing from the principal’s instructions. If the agent does so, it is at the agent’s own risk. If the principal suffers a loss, the agent is responsible for that loss. © 2015 OnCourse Learning

Faithful Performance Listing agreements usually include a statement that the listing broker is authorized to secure the cooperation of other brokers and pay them part of the commission from the sale. © 2015 OnCourse Learning

Treat Information Confidentially A client should feel free to discuss sensitive information with the agent, and the agent must not breach that trust. When negotiating a sale, the broker must continue to protect the principal’s financial interests. © 2015 OnCourse Learning

Treat Information Confidentially Georgia law requires that all offers be submitted to the owner, no matter what the offering price and terms. © 2015 OnCourse Learning

Full Disclosure An agent has a duty to tell the client everything. If you are not sure whether to disclose or not, disclose. © 2015 OnCourse Learning

Full Disclosure If you are not sure whether the client would want to know or not, disclose. A broker’s duty to disclose includes keeping the principal informed of changes in market conditions during the employment period. © 2015 OnCourse Learning

Full Disclosure If the broker does not keep the principal fully informed, the broker is not properly fulfilling the duties of an agent. © 2015 OnCourse Learning

Accountability for Actions and Funds Received A broker is accountable for money that they receive on the client’s behalf. The earnest money that accompanies an offer does not belong to the broker. © 2015 OnCourse Learning

Accountability for Actions and Funds Received Georgia laws require a broker to maintain a trust account. All money received by a broker as an agent for the principal is to be promptly deposited in this account or in the trust account of an attorney. © 2015 OnCourse Learning

Accountability for Actions and Funds Received The broker’s trust account must be separate from any personal bank account. The broker is required by law to properly account for all funds received into and paid out of the trust account. © 2015 OnCourse Learning

Accountability for Actions and Funds Received Failure to comply with trust fund requirements can result in the loss of one’s real estate license. © 2015 OnCourse Learning

Accountability for Actions and Funds Received If a broker places money belonging to a client or customer in a personal account, it is called commingling and is grounds for suspension or revocation of the broker’s real estate license. © 2015 OnCourse Learning

Accountability for Actions and Funds Received Conversion is the agent’s personal use of money belonging to others. Client’s and customers’ money placed in a personal bank account can be attached by a court to pay personal claims against the broker. © 2015 OnCourse Learning

Accountability for Actions and Funds Received If a broker receives a check for earnest money with instructions that it remain uncashed, the broker may comply with the request as long as the seller is informed of this fact when the offer is presented. © 2015 OnCourse Learning

Accountability for Actions and Funds Received Earnest money can take any form. The objective is to disclose to the seller all material facts that might influence the decision to accept or reject the offer. © 2015 OnCourse Learning

Reasonable Care Reasonable care implies competence and expertise on the part of the broker. It is the broker’s responsibility to disclose all knowledge and material facts concerning a property to the principal. © 2015 OnCourse Learning

Reasonable Care A broker must not become a party to any fraud or misrepresentation likely to affect the sound judgment of the principal. Giving legal interpretations of documents involved in a transaction can be construed as practicing law without a license. © 2015 OnCourse Learning

Reasonable Care The duty of reasonable care also requires an agent to take proper care of property entrusted to the agent by the principal. © 2015 OnCourse Learning

Honesty, Fairness and Integrity We should be compelled to tell the truth. Speak to the client in such a way that the words cannot be misrepresented. © 2015 OnCourse Learning

Honesty, Fairness and Integrity Fairness requires that we not take advantage. Treat people with integrity. Treat others the way you would want to be treated. © 2015 OnCourse Learning

Broker’s Obligations to Third Parties A broker’s primary and fiduciary obligations are to the principal. We owe customers honesty, integrity, care, accountability and fair business dealing. © 2015 OnCourse Learning

Broker’s Obligations to Third Parties Misrepresenting a property by omitting vital information is as wrong as giving false information. Everything a broker owes a customer, they also owe the client. © 2015 OnCourse Learning

Broker’s Obligations to Third Parties The broker owes the client loyalty, obedience, confidentiality and full disclosure, not the customer. A broker must be careful not to make statements not known to be true. © 2015 OnCourse Learning

Broker’s Obligations to Third Parties When a broker must rely on information supplied by the seller, it is best to have it in writing and verify its accuracy. Ignorance results from not knowing all pertinent facts about a property. © 2015 OnCourse Learning

Broker’s Obligations to Third Parties The brokers needs to take the time to check the facts. This is called “what the agent should have known.” © 2015 OnCourse Learning

Lead-Based Paint HUD requires FHA buyers to be notified and advised about the possibility of lead- based paint in homes built prior to © 2015 OnCourse Learning

Red Flags A red flag is something that would warn a reasonably observant agent that there may be an underlying problem. The agent is responsible for disclosing this to the seller and any prospective buyers. © 2015 OnCourse Learning

Red Flags It is suggested that a broker recommend to the their client that a specialist be hired to determine whether or not there is an underlying problem. The broker may also want to have the seller purchase a home warranty for the buyer. © 2015 OnCourse Learning

Owner Disclosure Statement Seller disclosure forms have become common in transactions. Refusal to fill out the form does not relieve the seller of disclosing their knowledge of a latent defect. © 2015 OnCourse Learning

Owner Disclosure Statement A latent defect is one that is concealed, hidden or could only be recognized by a trained eye. A seller is always required to disclose if they have knowledge of a latent defect. © 2015 OnCourse Learning

Owner Disclosure Statement A patent defect is one that is in the open and would not take training or specific expertise to recognize the problem. When in doubt, treat defects as latent and disclose. © 2015 OnCourse Learning

Owner Disclosure Statement Seller disclosure statements are a detailed disclosure of property defects. The seller fills out the form which is made available to the buyer. A real estate licensee should NEVER complete the seller disclosure form for the seller! © 2015 OnCourse Learning

Owner Disclosure Statement Failure to disclose results in misrepresentation on the part of the seller because of negligence or perhaps because of innocently overlooking defects. © 2015 OnCourse Learning

Owner Disclosure Statement In the worst case scenario, the seller may intentionally misrepresent a defect in order to induce a buyer to purchase. © 2015 OnCourse Learning

Owner Disclosure Statement The seller’s disclosure form informs the buyer as to which defects exist; provides a basis for the buyer to conduct further investigation on the property; allows the buyer to make an informed decision and may provide a basis for litigation if the seller filled out the form incorrectly or failed to disclose a defect the seller knew was material. © 2015 OnCourse Learning

As Is Knowing there is a defect allows the broker to market the property “as is,” disclosing the defects and limiting liability. © 2015 OnCourse Learning

As Is “As is” means the seller is not going to make repairs. It does not excuse the broker from failing to disclose material information. “As is” means no warranty or guarantee. It does not relieve the seller or broker from liability to disclose a latent defect. © 2015 OnCourse Learning

As Is Most “as is” provisions will not protect the seller if the seller has engaged in fraud, misrepresentation or deception. The buyer must be given ample opportunity to inspect the property prior to agreeing to assume liability as part of the agreement. © 2015 OnCourse Learning

Puffing Puffing refers to statements that are merely an opinion or extravagant statements that a reasonable person would recognize as exaggeration. The line between puffing and misrepresentation is subjective. © 2015 OnCourse Learning

Buyer Agency Buyer’s brokerage gives the buyer representation. The buyer’s broker’s focus is to help the buyer make informed decisions and obtain the desired product at a fair price. © 2015 OnCourse Learning

Buyer Agency The buyer’s broker is more concerned with a satisfactory purchase of the buyer, not just making the sale. © 2015 OnCourse Learning

Buyer Agency Most buyers who hire a buyer’s broker want advice. The buyer’s broker is expected to be more protective of the buyer than on effecting the sale. © 2015 OnCourse Learning

Principal’s Obligations The principal has certain obligations to the agent. The principal’s primary obligation is compensation. © 2015 OnCourse Learning

Principal’s Obligations The agent is also eligible for reimbursement for expenses not related to the sale itself. An agent is entitled to indemnification upon suffering a loss through no personal fault. For example, when a misrepresentation by the principal to the agent was passed on in good faith to the buyer. © 2015 OnCourse Learning

Broker’s Sales Staff A broker’s sales associates are general agents of the broker. A sales associate owes the broker the duties of competence, obedience, accounting, loyalty and full disclosure. © 2015 OnCourse Learning

Broker’s Sales Staff The broker’s obligations to the sales associate are compensation, reimbursement, indemnification and performance. The sales associate owes customers honesty, integrity and fair business dealings. © 2015 OnCourse Learning

The Complicating Issues The broker must make full disclosure of every known item concerning the real estate and the agency relationship. © 2015 OnCourse Learning

Middleman Principal When the broker represents neither party, they are operating as a transaction broker or middleman. Neither party expects the broker’s loyalty. © 2015 OnCourse Learning

Dual Agency When the same broker represents two or more principals in the same transaction, it is a dual agency and a conflict of interest results. © 2015 OnCourse Learning

Dual Agency If a broker represents more than one principal and does not obtain their informed consent, the broker cannot claim a commission. The broker’s real estate license may be suspended or revoked. © 2015 OnCourse Learning

Dual Agency An agent cannot maintain their duty of full disclosure and also maintain their duty of confidentiality. Most brokerage companies do not allow dual agency because of this conflict. © 2015 OnCourse Learning

Designated Agency In designated agency, there are two clients and one broker, there are two salespeople designated by the broker to represent the individual interest of each client. This is not a dual agency. © 2015 OnCourse Learning

Agency Disclosure All parties to the transaction must understand who is representing whom. Georgia law requires that disclosure be made as soon as reasonably possible in the transaction. © 2015 OnCourse Learning

Agency Disclosure The law does not require written disclosure until the time of an offer being made. If unsure, disclose. © 2015 OnCourse Learning

Agency Disclosure Dual agency in Georgia is legal. It is up to the principal to decide whether or not dual agency is acceptable. The principals must understand the conflict of interest that dual agency creates. © 2015 OnCourse Learning

Agency Disclosure Georgia allows dual agency with informed written consent. The broker must be sure that the parties understand who that broker represents and the nature of that confidential relationship. © 2015 OnCourse Learning

Termination of Agency An agency relationship may be terminated in several ways: © 2015 OnCourse Learning

Death An agency is not binding upon the estate of the deceased. © 2015 OnCourse Learning

Expiration The agent is appointed for a specific period of time. Once the time has expired, the agency expires. The agency may also expire because of performance. © 2015 OnCourse Learning

Agreement The parties to the agency may agree to a cancellation. © 2015 OnCourse Learning

Revocation or Renunciation Revocation refers to the unilateral cancellation by the principal. Renunciation refers to the unilateral cancellation by the agent. Either may cancel the agency at any time. © 2015 OnCourse Learning

Incapacity If one of the parties to the agency were unable to continue, the agency would terminate. © 2015 OnCourse Learning

Extinction of the Subject Matter If the reason the agency was created no longer exists, the agency would terminate. © 2015 OnCourse Learning

Interstate Land Sales Disclosure Statements HUD enacted legislation aimed at protecting purchasers of property in new subdivisions. This applies primarily to lots located in one state and sold to residents of another state. © 2015 OnCourse Learning

Interstate Land Sales Disclosure Statements The purpose of this legislation is to require that developers give prospective purchasers extensive disclosures regarding the lots in the form of a property report. © 2015 OnCourse Learning

Property Report A property report prepared according to HUD specifications is now required to eliminate the problem that buyers were receiving inaccurate or inadequate information. © 2015 OnCourse Learning

Property Report The property report must be given to each buyer before a contract is signed. Failure to do so gives the buyer the right to cancel any contract. © 2015 OnCourse Learning

Not an Approval The property report is NOT an approval of the subdivision. It is a disclosure of certain facts. HUD allows the buyer a cooling-off period of seven days for the buyer to be able to cancel the contract and receive all money back. © 2015 OnCourse Learning

Antitrust Laws The purpose of federal antitrust laws is to promote competition in an open marketplace and regulate any activities that would endanger that competition. All real estate brokerage fees are a result of negotiation between the broker and the owner. © 2015 OnCourse Learning

Price Fixing Price fixing is illegal. Price fixing between brokers can result in both civil and criminal penalties. Brokers are advised never to discuss their fees, except with the owner of the property. © 2015 OnCourse Learning

Boycotting Boycotting other brokers in the marketplace is a violation of the Sherman Antitrust Act. © 2015 OnCourse Learning

Boycotting No membership requirements of trade associations, can be established that may arbitrarily exclude licensed real estate brokers from participation. © 2015 OnCourse Learning

Tie-in Agreement A tie-in agreement is when one contract is tied to another. © 2015 OnCourse Learning

Penalties The penalty for violating the Sherman Antitrust Act is up to 10 years in prison and up to a $1 million fine for an individual. For a corporation, the penalty is a fine up to $100 million. © 2015 OnCourse Learning

Errors and Omission Insurance Errors and Omission insurance (E&O) will defend the broker and pay legal costs and judgments. E&O does not cover intentional acts of a broker to deceive. © 2015 OnCourse Learning