Section 4 Unit 1

Question 1

Agency relationship

Answer 1

The most primary of relationships in real estate brokerage is that between broker and client

Question 2

law of agency

Answer 2

defines and regulates the legal roles of this relationship (The parties to the relationship are the principal (a client), the agent (a broker), and the customer ( a third party).)

Question 3

In an agency relationship, a principal hires an agent as a fiduciary to perform a desired service on the principal’s behalf.

Answer 3

As a fiduciary, the agent has a legal obligation to fulfill specific fiduciary duties throughout the term of the relationship.

Question 4

The principal, or client, is the party who hires the agent.

Answer 4

The agent works for the client. The principal may be a seller, a buyer, a landlord, or a tenant.

Question 5

The agent is the fiduciary of the principal, hired to perform the authorized work and bound to fulfill fiduciary duties.

Answer 5

In real estate brokerage the agent must be a licensed broker.

Question 6

The customer or prospect is a third party in the transaction whom the agent does not represent.

Answer 6

The agent works with a customer in fulfilling the client’s objectives. A seller, buyer, landlord, or tenant may be a customer. A third party who is a potential customer is a prospect.

Question 7

According to the level of authority delegated to the agent, there are three types of agency:

Answer 7

universal, general, and special.

Question 8

Universal agency.

Answer 8

In a universal agency relationship, the principal empowers the agent to perform any and all actions that may be legally delegated to an agency representative. The instrument of authorization is the power of attorney.

Question 9

General agency.

Answer 9

In a general agency, the principal delegates to the agent ongoing tasks and duties within a particular business or enterprise. Such delegation may include the authority to enter into contracts.

Question 10

Special, or limited, agency.

Answer 10

Under a special agency agreement, the principal delegates authority to conduct a specific activity, after which the agency relationship terminates. In most cases, the special agent may not bind the principal to a contract.

Question 11

Written or oral listing agreement

Answer 11

The most common way of creating an agency relationship is by listing agreement, which may be oral or written. The agreement sets forth the various authorizations and duties, as well as requirements for compensation. A listing agreement establishes an agency for a specified transaction and has a stated expiration.

Question 12

Implied agency.

Answer 12

An agency relationship can arise by implication, intentionally or unintentionally. Implication means that the parties act as if there were an agreement. For example, if an agent promises a buyer to do everything possible to find a property at the lowest possible price, and the buyer accepts the proposition, there may be an implied agency relationship even though there is no specific agreement. Even if the agent does not wish to establish an agency relationship, the agent’s actions may be construed to imply a relationship.

Question 13

Full performance of all obligations by the parties terminates an agency relationship. In addition, the parties may terminate the relationship at any time by mutual agreement.

Answer 13

Thirdly, the agency relationship automatically terminates on the expiration date, whether the obligations were performed or not.

Question 14

An agency relationship may terminate contrary to the wishes of the parties by reason of:

Answer 14

death or incapacity of either party
abandonment by the agent
condemnation or destruction of the property
renunciation
breach
bankruptcy
revocation of the agent's license

Involuntary termination of the relationship may create legal and financial liability for a party who defaults or cancels. For example, a client may renounce an agreement but then be held liable for the agent’s expenses or commission.

Question 15

The agency relationship imposes fiduciary duties on the client and agent, but particularly on the agent.

Answer 15

An agent must also observe certain standards of conduct in dealing with customers and other outside parties. The agent is hired to do a job, and is therefore expected to do it with diligence and reasonable competence. Competence is generally defined as a level of real estate marketing skills and knowledge comparable to those of other practitioners in the area.

Question 16

Loyalty.

Answer 16

The duty of loyalty requires the agent to place the interests of the client above those of all others, particularly the agent’s own. This standard is particularly relevant whenever an agent discusses transaction terms with a prospect.

Question 17

Obedience.

Answer 17

An agent must comply with the client’s directions and instructions, provided they are legal. An agent who cannot obey a legal directive, for whatever reason, must withdraw from the relationship. If the directive is illegal, the agent must also immediately withdraw.

Question 18

Confidentiality.

Answer 18

An agent must hold in confidence any personal or business information received from the client during the term of employment. An agent may not disclose any information that would harm the client’s interests or bargaining position, or anything else the client wishes to keep secret.

The confidentiality standard is one of the duties that extends beyond the termination of the listing: at no time in the future may the agent disclose confidential information.

An agent must exercise care in fulfilling this duty: if confidentiality conflicts with the agent’s legal requirements to disclose material facts, the agent must inform the client of this obligation and make the required disclosures. If such a conflict cannot be resolved, the agent must withdraw from the relationship.

Question 19

Accounting

Answer 19

An agent must safeguard and account for all monies, documents, and other property received from a client or customer. State license laws regulate the broker’s accounting obligations and escrow practices.

Question 20

Full disclosure.

Answer 20

An agent has the duty to inform the client of all material facts, reports, and rumors that might affect the client’s interests in the property transaction.

Question 21

Critical material facts for disclosure include:

Answer 21

the agent’s opinion of the property’s condition
information about the buyer’s motivations and financial qualifications

discussions between agent and buyer regarding the possibility of the agent’s representing the buyer in another transaction.

adverse material facts, including property condition, title defects, environmental hazards, and property defects

Question 22

The traditional notion of caveat emptor—let the buyer beware—no longer applies unequivocally to real estate transactions.

Answer 22

Agents do have certain obligations to customers, even though they do not represent them. In general, they owe a third party:

honesty and fair dealing
reasonable care and skill
proper disclosure

Question 23

“Reasonable care and skill”

Answer 23

agent will be held to the standards of knowledge, expertise, and ethics that are commonly maintained by other agents in the area.

Question 24

Intentional misrepresentation.

Answer 24

An agent may intentionally or unintentionally defraud a buyer by misrepresenting or concealing facts. While it is acceptable to promote the features of a property to a buyer or the virtues of a buyer to a seller, it is a fine line that divides promotion from misrepresentation. Silent misrepresentation, which is intentionally failing to reveal a material fact, is just as fraudulent as a false statement.

Question 25

Negligent misrepresentation.

Answer 25

An agent can be held liable for failure to disclose facts the agent was not aware of if it can be demonstrated that the agent should have known such facts. For example, if it is a common standard that agents inspect property, then an agent can be held liable for failing to disclose a leaky roof that was not inspected.

Question 26

Misrepresentation of expertise.

Answer 26

An agent should not act or speak outside the agent’s area of expertise. A customer may rely on anything an agent says, and the agent will be held accountable. For example, an agent represents that a property will appreciate. The buyer interprets this as expert investment advice and buys the property. If the property does not appreciate, the buyer may hold the agent liable.

Question 27

Availability.

Answer 27

In a special agency, the power and decision-making authority of the agent are limited. Therefore, the principal must be available for consultation, direction, and decision-making. Otherwise the agent cannot complete the job.

Question 28

Information.

Answer 28

The principal must provide the agent with a sufficient amount of information to complete the desired activity. This may include property data, financial data, and the client’s timing requirements.

Question 29

Compensation.

Answer 29

If an agreement includes a provision for compensating the agent and the agent performs in accordance with the agreement, the client is obligated to compensate the agent. As indicated earlier, however, the agency relationship does not necessarily include compensation.

Question 30

An agent is liable for a breach of duty to client or customer. Since clients and customers rely on the expertise and actions of agents performing within the scope of their authority, regulatory agencies and courts aggressively enforce agency laws, standards, and regulations.

A breach of duty may result in:

Answer 30

rescission of the listing agreement (causing a loss of a potential commission)

forfeiture of any compensation that may have already been earned

disciplinary action by state license law authorities, including license suspension or revocation

suit for damages in court

Question 31

The primary forms of agency relationship between brokers and principals are:

Answer 31

single agency, dual agency, and subagency. In a fourth kind of relationship, referred to as transaction brokerage, no agency relationship exists in the transaction. Finally, some states are beginning to disallow subagency altogether. Students are advised to ascertain which agency relationships are allowed and practiced in their particular state

Question 32

Seller agency.

Answer 32

In the traditional situation, a seller or landlord is the agent’s client. A buyer or tenant is the customer.

Question 33

Buyer agency.

Answer 33

Recently, it has become common for an agent to represent a buyer or tenant. In this relationship, the property buyer or tenant is the client and the property owner is the customer.

Question 34

The agent represents one party in a transaction. The client may be either seller or buyer.

Answer 34

Real estate vernacular calls an agent of the seller or owner the listing broker. An agent who works for the listing broker and who obtained the listing is the listing agent. A broker who represents a buyer is the buyer’s broker. One who does this as a specialization is a buyer broker. A broker or salesperson who represents tenants is a tenant representative.

Question 35

subagency,

Answer 35

a broker or licensed salesperson works as the agent of a broker who is the agent of a client. Subagents might include a cooperating licensed broker, that broker’s licensed salespeople, and the listing broker’s licensed salespeople, all of whom agree to work for the listing broker on behalf of the client. In effect, a subagent is an agent of the broker who is agent of the client. The subagent owes the same duties to the agent as the agent owes to the client. By extension, a subagent owes all the fiduciary duties to the client.

Question 36

Outside “co-brokers” and agents.

Answer 36

It is common practice for brokers and salespersons to “cooperate” with a listing broker in finding buyers or tenants. A listing broker, in return, agrees to share the commission with a cooperating broker.

It is cooperating brokers who form multiple listing services to facilitate the process of bringing together buyers and sellers.

Question 37

The broker’s salespersons.

Answer 37

All of the listing broker’s salespeople who have agreed to work for the broker to find a customer are subagents of the listing broker and owe the fiduciary duties to the broker and, by extension, to the broker’s client.

Question 38

Dual agency

Answer 38

representing both principal parties to a transaction. The agent represents both buyer and seller or tenant and owner. For instance, if a salesperson completes a buyer agency agreement with a party on behalf of a broker, and the party then becomes interested in a property listed by the broker, the broker becomes a dual agent.

Dual agency has become increasingly prevalent with the advent of buyer and tenant representation. Dual agency may arise from voluntary, specific agreement between the principal parties or from the parties’ actions, much like implied single agency.

Question 39

Conflict of interest.

Answer 39

Dual agency contains an inherent conflict of interest. Since many of an agent’s fiduciary duties can only be rendered to one party, dual agency is, by definition, difficult, if not impossible.

Question 40

Written, informed consent.

Answer 40

In states that permit dual agency, the agent must meet strict disclosure requirements, and principals must agree in writing to proceed with the dual agency relationship.

Question 41

Disclosed (voluntary) dual agency.

Answer 41

The parties to a transaction may create a dual agency by giving written consent in disclosure forms, confirmation forms, and sale contract forms. For example, an agent represents a buyer who becomes interested in a property that the agent has listed with the seller. The agent then discloses the relationship with the principals to both principals, and the principals agree in writing to move ahead. A disclosed dual agency is thus voluntarily created.

Question 42

Implied and undisclosed dual agency.

Answer 42

If a broker or agent acts in any way that leads a customer to believe that the agent is representing the customer, a dual agency has potentially been created. For example, a buyer makes confidential disclosures to the agent who works for the seller and exhorts the agent to keep them confidential. The buyer wants the house but knows he is going to lose his job in a month and probably will not qualify for financing. If the agent agrees to keep the information confidential, the agent has not only created an agency relationship with the buyer, but is now in a dual agency situation. Moreover, if the agent fails to disclose the buyer’s confidence to the seller, the agent has violated fiduciary duty to the seller.

Question 43

Duties of a disclosed dual agent.

Answer 43

A dual agent’s first duty is to disclose the agency relationship to both principal parties or to withdraw from one side of the duality. After disclosing, the agent must obtain the written consent of both parties.

If both parties accept the dual agency, the agent owes all the fiduciary duties to both parties except full disclosure, undivided loyalty, and exclusive representation of one principal’s interests.

Question 44

In recent years, the brokerage industry has striven to clear up the question of who works for whom, and who owes fiduciary duties to whom.

Answer 44

A recent solution allows a broker to represent no one in a transaction. That is, the broker acts as a transaction broker, or facilitator, and is not an agent of either the buyer or seller. In this relationship, the facilitator does not advocate the interests of either party.

Question 45

Duties of the transaction broker, or facilitator. In the role of transaction broker, the broker’s duties and standards of conduct are to:

Answer 45

account for all money and property received or handled
exercise reasonable skill and care
provide honesty and fair dealing
present all offers in a timely fashion
assist the parties in closing the transaction
keep the parties fully informed
advise the parties to obtain expert advice or counsel
disclose to both parties in residential sale transactions all material facts affecting the property’s value
protect the confidences of both parties in matters that would materially disadvantage one party over the other.

Question 46

Duties not imposed on the transaction broker.

Answer 46

Since there are no fiduciary duties binding the transaction broker, the broker is held to standards for dealing with customers as opposed to clients. These include honesty, fair dealing, and reasonable care. The transaction broker is under no obligation to inspect the property for the benefit of a party or verify the accuracy of statements made by a party.

As state regulatory authorities formalize the facilitator role, it is expected that brokers will have to obtain written consent from the principal parties, just as in the case of dual agency.

Question 47

No subagency

Answer 47

As another response to the problem of ‘who works for whom,’ some states have recently moved in the direction of disallowing subagency. In this scenario, subagency is replaced by buyer agency and seller agency only. In other words, an agent either represents the buyer directly, or the seller directly. An agent who shows a buyer a property either represents the buyer, or is in fact the listing agent. Note that this arrangement need not change traditional compensation structures: an agent may represent a buyer and still receive a portion of the commission paid by the seller.

Question 48

Disclosure removes confusion about who an agent is working for. It may obviate complaints arising from customers and clients who feel they have been deceived.

Specifically, the requirement to disclose aims to:

Answer 48

notify clients and customers about whom the agent represents

inform clients and customers of the fiduciary duties and standards of care the agent owes them

inform prospective clients and customers that they have a choice in how they are represented

obtain acknowledgement and acceptance of the disclosure from the principal parties

Question 49

Client disclosure.

Answer 49

Depending on state regulations, an agent who intends to represent a seller or owner must disclose the import of the proposed agency relationship in writing before the listing agreement is executed. The agent must inform the seller or landlord in writing that the agent will be representing the client’s interests as a fiduciary, and will not be representing the interests of any potential buyer. Any subsequent sale or lease contract with a customer should confirm this disclosure.

Question 50

Customer disclosure.

Answer 50

A listing agent must disclose in writing to a buyer or tenant that the agent represents the owner in the transaction. This disclosure must occur before or at the first “substantive contact” with the customer prospect. The disclosure must also be confirmed in any subsequent sale or lease contract.

Question 51

Substantive contact.

Answer 51

Subject to variations in state regulation, “substantive contact” between listing agent and customer occurs whenever the agent is:

showing the prospect a property
eliciting confidential information from a prospect regarding needs, motivation, or financial qualification
executing a contractual offer to sell or lease

Question 52

Exclusions.

Answer 52

Interaction between a seller’s agent and a customer is not always substantive. Possible instances that might be excluded from the requirement of disclosure are:

attendance at, or supervision of, an open house, providing the agent does not engage in any of the contacts described above
preliminary “small talk” concerning price ranges, locations, and architectural styles
responding to questions of fact regarding advertised properties

Question 53

Oral disclosure.

Answer 53

If an agent becomes involved in a substantive contact over the phone or in a such way that it is not feasible to make written disclosure, the agent must make the disclosure orally and follow up with a written disclosure at the first face-to-face meeting.

Question 54

Client disclosure.

Answer 54

An agent who plans to represent a buyer or tenant must disclose the import of the proposed agency relationship in writing before the representation agreement is executed.

Question 55

Customer disclosure.

Answer 55

A buyer agent must disclose the agency relationship to the seller or seller’s agent on first contact. Substantive contact is assumed.

Question 56

Informed written consent.

Answer 56

An agent who desires to operate in a dual agency capacity must obtain the informed written consent of all parties. Subsequent contracts should confirm the disclosure. “Informed written consent” means both parties have read, understood, and signed an acceptable disclosure form.

Question 57

Prohibited disclosures.

Answer 57

State regulations prohibit a dual agent from making certain disclosures. For instance, a dual agent, unless expressly instructed by the relevant party, usually cannot disclose:

to the buyer that the seller will accept less than the listed price
to the seller that the buyer will pay more than the price submitted in a written offer to the seller
the motivation of any party concerning the transaction
that a seller or buyer will agree to financing terms other than those offered

Question 58

Facilitator disclosures

Answer 58

Rules for disclosing a transaction broker’s status of non-agency are similar to those of dual agency. The agent must provide written notice to all parties or their agents on first becoming a transaction broker or on the first substantive contact, whichever comes first.

Question 59

An agent owes customers several duties. These may be best described as

Answer 59

Fairness, care, and honesty.

Question 60

An owner’s agent is showing a buyer an apartment building. The buyer notices water stains on the ceiling, and informs the agent. The agent’s best course of action is to

Answer 60

Inform the seller.

Question 61

A principal empowers an agent to conduct the ongoing activities of one of her business enterprises. This is an example of

Answer 61

General agency.

Question 62

A tenant representative should disclose his or her agency relationship to the owner’s agent

Answer 62

Upon initial contact.

Question 63

The duties of an agent acting as a facilitator are most similar to those of a

Answer 63

Dual agent.

Question 64

An agency relationship may be involuntarily terminated for which of the following reasons?

Answer 64

Death or incapacity of the agent.

Question 65

Owner agents must disclose their agency relationship to tenants or buyers

Answer 65

Whenever substantive contact is made.

Question 66

A transaction broker should disclose his or her agency relationship to the transaction principals

Answer 66

Upon first substantive contact.

Question 67

An outside broker locates a seller for a buyer representative’s client. In this instance, the outside broker is acting as

Answer 67

A sub agent.

Question 68

The essence of the agency relationship between an agent and a principal can best be described as a relationship of

Answer 68

Trust, confidence, and good faith.

Question 69

The meaning and import of the agency relationship should be disclosed to the client

Answer 69

Prior to completing a listing agreement.

Question 70

A principal discloses that she would sell a property for $150,000. During the listing period, the house is marketed for $180,000. No offers come in, and the listing expires. Two weeks later, the agent grumbles to a customer that the seller would have sold for less than the listed price. Which of the following is true?

Answer 70

The agent has violated the duty of confidentiality.

Question 71

A principal instructs an agent to market a property only to families on the north side of town. The agent refuses to comply. In this case,

Answer 71

the agent has not violated fiduciary duty.

Question 72

. A property seller empowers an agent to market and sell a property on his behalf. This is an example of

Answer 72

Special agency.

Question 73

Implied agency arises when

Answer 73

A party creates an agency relationship outside of an express agreement.

Question 74

An agent is operating as a disclosed dual agent on a transaction. In this case, the agent

Answer 74

May not represent one party’s interests to the detriment of the other.

Question 75

In an agency relationship, the principal is required to

Answer 75

Provide sufficient information for the agent to complete the agent’s tasks.

Question 76

An agent fails to discover flood marks on the walls in the basement of a property. The agent sells the property, and the buyer later sues the agent for failing to mention the problem. In this case, the agent

Answer 76

Has an exposure to a charge of negligent misrepresentation.

Question 77

Agent Bob, who works for Broker Bill, obtains an owner listing to lease a building. Bill’s other agent, Sue, locates a tenant for Bob’s listing. In the absence of any arrangement to the contrary, Broker Bill in this instance is

Answer 77

A dual agent.

Question 78

An agent informs a buyer that a clause in a contract is standard language. After explaining the clause, the agent assures the buyer that the clause does not mean anything significant. If something goes wrong with the transaction, the agent could be liable for

Answer 78

Practicing law without a license.