Q: What obligations does a Real Estate Broker have to their client versus their own financial or business interests?
A: Having spent close to 25 years as a real estate broker and attorney, the duties of professionals placed in highly entrusted positions, is something I am passionate about. While ethics rules generally prevent attorneys from having any conflict of interest with their clients, the regulations relating to real estate agents are less stringent. However, the main tenet of a broker-client relationship is that the broker is the client’s “fiduciary”- a position requiring them to act in the best interest of their clients, above all other interests, including their own. That fiduciary duty includes the duty of utmost care, integrity, honesty, and loyalty in all dealings with their client. It includes duties to disclose all material facts that might affect the client’s decision; to disclose all offers to buy the property; to refrain from conflicts of interest without full disclosure and informed consent of the client; and to refrain from obtaining any advantage over the client that arises from their position.
How does it apply to you as a buyer or seller of real estate? Let’s start at the beginning. Real estate brokers are paid on commission- your interests as a seller aren’t necessarily in conflict there, as you share the interest in getting the property sold at the highest price. If the broker does not succeed in selling the property, they don’t get paid. There are still some things to watch out for at this stage and they are significant. Each agent you interview will do whatever they can to get your listing. They will advise you on the value of your home, and accordingly, what price it should be listed for. An agent may be intentionally or unintentionally optimistic about your listing price- it is often the agent who claims they can obtain the highest price, whether realistic or not, that gets the listing. Once they have the signed listing contract and a few weeks have gone by without an offer, the agent may suggest you lower the price. The nature of competition inherent in getting those listing contracts does create its own conflict of interest- a good broker, and there are many out there, will not overpromise and will provide you with good advice on the market and your home value. Trust those that provide you with an honest assessment.
There are some newer potential conflicts of interest that have come into practice at this listing and pre-listing stage. There are all kinds of new and enticing services being offered by listing brokers. Some are offering to advance/ loan funds to Sellers to remodel or repair their home to prepare for sale; to pay your mortgage payments while the property is for sale; to stage (furnish & decorate) the property; or even to buy another property. These may be interest fee loans made in exchange for the sales listing with you agreeing to repay the loan with proceeds from your sale. Sounds great- what could go wrong, right? Well, quite a lot.
If the property does not sell, or sells at a price lower than projected, you still must repay that loan. You remodeled the kitchen or agreed to tens of thousands of dollars in staging fees based on the sales price you were anticipating. Who advised you regarding that potential sales price? Your realtor. The realtor who really wanted your listing. If the property is not selling, you have a very real conflict of interest. Not only is the broker not being paid a commission, but they can’t even get their money back until your home sells. If it doesn’t sell, your broker may now be your bill collector…
What about the broker who promises you that if they don’t sell your home, they will buy it from you at an agreed upon price? Conflicts abound here. Which scenario is more profitable for the broker? Can you be sure that the broker is making their best efforts to sell your property when they are also your potential buyer? Chances are good that the agreed upon price is one that is designed for the broker to resell it for a profit.
The longstanding practice referred to as “Dual Agency” (where the same broker represents the buyer and the seller in the same transaction) has always been an obvious conflict of interest and yes, it is legal as long as the agent discloses same in writing to both parties. Even the most ethical and well-meaning broker is physically unable to act in the best interest of the seller and the buyer at the same time, or to meet their duty of undivided loyalty to either. How can that broker negotiate the highest price for one client and the lowest price for their other client? They simply cannot. The agent can mediate between the two parties, but he/she can’t really advocate for either.
Sometimes these discussed services may be helpful to you. What is most important is that you are educated about the capacity in which your professional advisers are acting so that you may give proper weight to their advice. Consult with an attorney for best protection of your interests.
Disclaimer: This article is intended to be primarily for entertainment purposes, and is not to be considered legal advice.
ABOUT LISA PHILLIPS, ESQ./ CA Dept. of Real Estate Broker License #01189413
Lisa Phillips is a Realtor in the Los Angeles area, with close to 25 years as a real estate broker and attorney and is a Broker-Associate at Lotus Estate Properties in Marina del Rey. Lisa is a member of the National Association of Realtors “Green Resource Council” and achieved its “GREEN” Designation. In addition to her real estate and business savvy, Lisa is passionate about helping others, actively volunteering in the community and donating a percentage of all sales commissions to charity. For more information, please go to www.LisaPhillipsRealEstate.com