Real Estate Agent Liability

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 What Is A Real Estate Agent?

A real estate agent is authorized to conduct real estate business in a specific state as a licensed professional who is educated in real estate matters. Additionally, real estate agents have passed a state board exam. In many states, there are significant distinctions between the terms “agent”, “salesperson”, “broker”, etc. Generally speaking, when a person uses the term “agent”, they are referring to a salesperson as opposed to a broker. A broker generally handles higher-level real estate issues.

To further explain, in some states, an “agent” is referred to as a “real estate broker”, while the broker is known as a “qualifying broker.” In some states, such as Colorado, all licensed real estate professionals are considered to be brokers.

The tasks that a real estate agent may perform depend largely on their education, licensing, and certification. Some common examples of such tasks include, but may not be limited to:

  • Handling standard client forms and questionnaires;
  • Answering basic questions that buyer or seller clients may have;
  • Reviewing all real estate contracts;
  • Engaging in negotiation of prices, up to the closing of a deal;
  • Showcasing property by guiding clients in walk-throughs and open houses; and/or
  • Providing clients with specific information, up to a certain level of knowledge and expertise.

It is important to note that real estate agents, or salespersons, are frequently limited in their actual work capacity. An example of this would be how they sometimes need to obtain confirmation from a supervising broker in terms of more important transaction decisions.

For most home buyers, this distinction does not have much effect on them; however, for more experienced investors and commercial investors, a broker may be more preferable over a sales agent.

What Is Real Estate Agency Liability?

Real estate agent liability refers to instances in which a real estate agent has violated either the law, or real estate professional conduct guidelines. Under these circumstances, it could be considerably difficult to determine which parties are liable to a seller or buyer client. This is largely due to the fact that in any real estate transaction, there may be multiple people and parties involved.

An example of this would be how involved parties may include:

  • The real estate agent, or the salesperson directly working with the buyer;
  • A real estate broker, or the person who manages and supervises the salesperson;
  • Home inspectors and appraisers;
  • Mortgage and loan companies; and/or
  • Lawyers and other professionals.

Real estate agents can become legally responsible if they breach a duty that is owed to their client. This can happen in a variety of ways but is most commonly associated with fraud, or through a breach of contract.

What Is An Agency Relationship?

Very simply put, an agent is someone who agrees to represent another person. The person the agent is representing is referred to as a principal, and an agency relationship is generally formed by an agreement between the two parties. An agent can only act on behalf of a principal for specific issues, depending on their agreement.

An agent essentially serves as an employee, the difference being that the agent works with the principal by representing the principal in specific transactions and situations. Additionally, the agent is given different types of power and authority in order to act on behalf of another person (or a group of people) in a business setting. The principal has the right to completely control the agent’s conduct as it is associated with the duties given to the agent by the principal.

Real estate agent liability for client’s losses is generally dependent upon what type of relationship they have with their client. Generally speaking, the agent becomes liable if they owe the client certain duties under law, or under a real estate contract. As such, these duties form once the agent forms a formal “agency relationship” with their client.

An agency relationship may create the following duties for the agent:

  • Placing listings in a home listing service;
  • Finding potential buyers and/or sellers;
  • Reviewing relevant real estate and legal documents;
  • Placing any money from the client into a separate account, which implies a fiduciary duty to the client; and
  • Informing the client of any changes associated with offers and/or negotiations.

Violations of these duties could lead to a lawsuit involving monetary damages awards for the plaintiff’s losses.

It is important to note that a non-formal relationship between an agent and a seller, or buyer, does not create the same obligations. An example of this would be how if the agent is simply providing general tips or pointers to a person, and has not formed a working contract agreement with that person, they are not generally under the same duties. While they are obligated to make proper representations and give accurate information, they might not be required to seek out listings and the like.

What Is The Scope Of An Agency Relationship?

To reiterate, principal-agent relationships are important because agents can enter into binding contracts on behalf of the principal. However, even when a principal-agent relationship exists, the agent must have authority to enter into such contracts for the principal. As such, the agent must be acting within the scope of an agent’s authority.

In order for the contract to be binding, the agent must have at least one of the following types of authority:

  • Express Authority: Express terms may be specifically stated in a written contract between the principal and agent. An example of this would be how the principal may state in the contract, “I authorize ________ to sign all documents associated with sales transaction #34.” Additionally, they may also expressly limit the agent’s authority in the contract;
  • Implied Authority: Implied authority can result from the agent’s conduct and actions. Implied authority can also exist if the agent is engaging in conduct that is generally identified as authorized by the principal, either traditionally or through custom. An example of this would be how an agent who is expressly authorized to repair computers may be implicitly authorized to purchase the computer parts that are necessary to repair those computers;
  • Apparent Authority: Apparent authority is granted when a third party believes that the agent has authority to act for the principal. Under apparent authority, the focus is on whether the third party believes that the agent has authority to act on behalf of the principal. An example of this would be how if the agent is performing a specific task at the time specified for that task, while wearing an ID badge and uniform issued by the principal, it may be implied that they are acting on the principal’s authority; or
  • Ratification: The principal does not know and did not authorize the agent to enter into the contract; however, the principal accepts the benefits of the contract upon discovering the agreement. An example of this would be if an agent buys a keg of beer, and the keg of beer shows up at the principal’s door. If the principal accepts the shipment or begins to drink the beer, the principal cannot argue that they never approved of the shipment.

Do I Need An Attorney For Issues Associated With Real Estate Agent Liability?

If you are involved in a real estate transaction, you should consider working with an experienced and local real estate lawyer. An attorney will be best suited to helping you understand your rights and legal options under your state’s specific real estate laws.

Additionally, your real estate attorney will also be able to represent you in court, as needed, should any legal issues arise.

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