Washington Real Estate Practices Lesson 1: Real Estate Agency © 2013 Rockwell Publishing

Washington Real Estate Practices

Lesson 1:

Real Estate Agency

© 2013 Rockwell Publishing

IntroductionDefinitions

Real estate profession is driven by agency relationships.

Agent: Someone who has been authorized by another person to represent him in dealings with third parties.

Principal: Person represented by an agent.


Before Acting as Real Estate Agent

Before acting as a real estate agent, you must be licensed. Washington has two types of real estate licenses for individuals:

managing broker license broker license



A managing broker performs real estate brokerage services for brokerage, under supervision of designated broker.

Applicant for managing broker license must have been licensed broker for at least 3 of past 5 years.

Applicant must also have completed additional real estate coursework and pass managing broker’s license examination.



A broker performs brokerage services for real estate firm, under supervision of designated or managing broker.

Applicant for real estate broker license doesn’t need experience.

But brokers licensed less than two years must receive heightened supervision from their designated or managing broker.



Each real estate firm must also be licensed. Firms are managed by a designated

broker. Designated broker is a managing broker

who is responsible for all firm activities.



A firm can establish branch offices under firm’s name.

Each branch must have a managing broker to oversee branch activities.

Designated broker supervises branch manager.


Before Acting as Real Estate Agent Affiliation with firm

Factors to consider when choosing a firm: sizespecialtysupport servicescommission structure



Most real estate agents are considered independent contractors.

The IRS generally considers someone an independent contractor if:

she sets her own hours, and is paid by commission, not fixed salary



In a brokerage, most licensees are independent contractors. Non-licensed staff are usually employees.



Generally, independent contractors don’t receive employee benefits (health insurance, etc.), but the state does require brokerages to pay workers’ compensation insurance for all licensees.


Before Acting as Real Estate AgentPlanning and budgeting

Being a new agent can be financially draining. That first commission check can take a long time to arrive.

Careful planning will help smooth the start of your career.



Approach your new real estate career as if you’re starting a new business—which is exactly what you’re doing.

Since you will probably be an independent contractor paid by commission, you are essentially operating your own business under the umbrella of your brokerage.



You should prepare these materials long before making first cold call or listing presentation:

business planbudget plan for building financial reserveslist of start-up expenses


SummaryBefore Acting as Real Estate Agent

Broker Managing broker Designated broker Brokerage affiliation Budgeting and

planning


Real Estate Agency Law Agency disclosure

Agents must give both parties disclosure statement stating which party they represent.

Reduces:buyers’ confusiondanger of undisclosed, inadvertent dual

agency


Real Estate Agency LawAgent duties

Until 1997, real estate agency relationships were governed by general agency law.

Agents owed certain fiduciary duties to their principals.



Fiduciary: person who occupies position of special trust in relation to another person.

Fiduciary duties include: reasonable care and skill, obedience and good faith, accounting, loyalty, and disclosure of material facts.



In 1997, the Real Estate Brokerage Relationships Act of Washington went into effect.

Law replaced fiduciary duties with statutory duties.



Under the law, agents owe two types of statutory duties:

general duties owed to any party, andspecial duties owed only to agent’s

principal.


SummaryReal Estate Agency Law

Agent Principal Fiduciary Agency disclosure law


Real Estate Agency DutiesDuties owed to any party

Agent owes following statutory duties to any party (not just principal):

reasonable care and skillhonesty and good faithpresenting all written communicationsdisclosing material factsaccountingproviding pamphlet on agency lawdisclosing existing agency relationships


Duties to Any PartyReasonable care and skill

Agent owes duty of reasonable care and skill to all parties to transaction.

Agent who causes harm because of negligence may be held liable for damage.


Duties to Any PartyHonesty and good faith

Under duty of honesty and good faith, agent may not:

make inaccurate statements, ormisrepresent facts about property or

transaction.

Includes unintentional as well as intentional misrepresentation.


Duties to Any PartyPresenting written communications

Agent must present all written communications to or from either party in a timely manner.

Duty continues even after property is subject to an existing contract.


Duties to Any PartyDisclosure of material facts

Agent must disclose a material fact to a party if:

licensee knows about it, andit is not apparent or readily ascertainable

by the party.



Material fact: information that has substantial negative impact on value of property, on party’s ability to perform, or on purpose of the transaction.

Law specifically excludes certain facts from this definition.



An agent does not have duty to disclose that property (or a neighboring property) was site of:

violent crimesuicide or other deathdrug- or gang-related activitypolitical or religious activityother occurrence that doesn’t affect property

condition or title to property



Criminal activity is material fact if it affects the physical condition of the property.

Example: illegal drug lab may leave dangerous chemical residues. If lab has been cleaned up and declared safe by qualified personnel, no disclosure required.



In most cases, a material fact requiring disclosure would be a latent defect in the property.

Latent defect: a problem that would not be discovered by ordinary inspection.



Unlike other states, agents in Washington have no duty to:

inspect the propertyinvestigate either party’s financial

positionindependently verify statements made by

either party or any reasonable source


Duties to Any PartyAccounting

Licensees must report to clients on a regular basis on the status of all entrusted funds.

Trust funds: funds given to licensee by client for safe-keeping.


Duties to Any PartyAgency law pamphlet

Each party served by agent must receive pamphlet covering the Real Estate Brokerage Relationships Act.


Duties to Any PartyAgency law pamphlet

Party must receive pamphlet before:signing an agency agreement,signing an offer,consenting to dual agency, orwaiving any agency rights, whichever

comes first.


Duties to Any PartyAgency disclosure

Licensee must disclose in writing which party he represents in real estate transaction.

Disclosure must be made before party signs offer.


SummaryDuties to Any Party

Reasonable care and skill Honesty and good faith Written communications Material facts Real estate agency law

pamphlet Agency disclosure


Real Estate Agency Duties Duties owed to principal

Agent owes principal five statutory duties:loyaltydisclosing conflicts of interestconfidentialityadvising principal to seek expert advicegood faith and continuous effort


Duties to PrincipalLoyalty

Duty of loyalty is modified for dual agents.Dual agent must take no action that is

harmful to either party’s interest. Dual agent cannot disclose one party’s

negotiating position to the other party.


Duties to PrincipalConflicts of interest

Agent must disclose any conflicts of interest.If agent represents seller, any relationship

between agent and buyer must be disclosed.


Duties to PrincipalConflicts of interest

The agent must disclose if buyer is:friend relativebusiness associate of agentcompany in which agent has an interest


Duties to PrincipalConfidentiality

If principal gives agent confidential information, agent may not disclose that information to other parties.



Confidential information: information from or concerning principal that:

was acquired by licensee during agency relationship,

principal reasonably expects to be kept confidential,

principal has not disclosed,



would be detrimental to principal if disclosed, and

principal is not personally obligated to disclose to other party.



Information given in confidence may be shared if it is:

already matter of general knowledge, ormaterial fact, such as latent defect of

property.



Confidential information about principal cannot be disclosed even after agency relationship terminates.


Duties to PrincipalExpert advice

Agent must advise principal to seek expert advice in matters beyond agent’s expertise.

For example, agent must advise principal to contact inspector to evaluate home’s structural soundness.


Duties to PrincipalGood faith and continuous effort

Agent has duty to make good faith effort to fulfill terms of agency agreement.

Seller’s agent must try to find buyer.Buyer’s agent must try to find suitable

property.


Duties to PrincipalGood faith and continuous effort

Once sales contract has been signed,seller’s agent doesn’t have to seek

additional offersbuyer’s agent doesn’t have to look for other

properties

Dual agent doesn’t have to show a property if there is no written commission agreement.


SummaryDuties to Principal

Loyalty Conflicts of interest Confidential information Expert advice Good faith and continuous effort


Legal Effects of Agency

For third party, dealing with agent may be legal equivalent of dealing with principal.

If principal authorizes agent to sign document or make promise, principal will be bound by agent’s signature or promise.


Legal Effects of AgencyVicarious liability

Harm caused to third party by agent’s actions may create liability for principal.

Vicarious liability:Injured person may sue principal as well

as agent.If injured party prevails, both agent and

principal will be liable for damages.


Vicarious LiabilityReal estate agency relationships

Under Washington’s real estate agency law, seller or buyer generally can’t be held vicariously liable for harm caused by agent.


Vicarious LiabilityExceptions

There are exceptions to this general rule. Principal may be liable for agent’s actions if principal:

authorized real estate agent’s actions, orapproved them after the fact.


Vicarious Liability

Under license law, designated brokers and managing brokers playing a supervisory role can be held vicariously liable for harm caused by licensees working under them.


Creating Agency Relationships

Before 1997, real estate agency relationships could be formed in one of three ways:

express agreementratificationestoppel

Real Estate Brokerage Relationships Act changed the way agency relationships are created.


Creating Agency RelationshipsExpress agreement

Most agency relationships are created by written express agreement.

Written listing agreement creates agency between brokerage and seller.


Creating Agency RelationshipsPerforming brokerage services

Under new law, agent who performs real estate brokerage services for buyer automatically becomes buyer’s agent.

Brokerage services include showing buyer available properties, etc.


Creating Agency RelationshipsPerforming brokerage services

Automatic buyer agency doesn’t apply if agent has written agreement to the contrary, such as a:

listing agreement with sellerdual agency agreement with both partiessubagency agreement with sellernon-agency agreement


Terminating Agency Relationships

Once agency has been terminated, agent no longer represents principal.

Agency relationship may be terminated by:actions of the parties, or operation of law.


Terminating Agency RelationshipsTermination by parties

Since agency requires consent of both principal and agent, parties can end agency relationship at any time.


Terminating Agency RelationshipsTermination by parties

Termination by the parties may occur by:mutual agreementrevocationrenunciation


Terminating Agency RelationshipsTermination by operation of law

An agency relationship can also terminate by operation of law, without any action by principal or agent.


Terminating Agency RelationshipsTermination by operation of law

Termination by operation of law may occur through:

expirationfulfillment of purposedeath or incapacityextinction of subject matter


Agency Disclosure

Once agency relationship has been created, agent must disclose to each party which party she represents.


Agency DisclosureWhen disclosure required

Disclosure must be made to buyer before buyer signs offer to purchase.

Disclosure must be made to seller before seller signs offer to accept it.


Agency DisclosureForm of disclosure

Washington law requires making the agency disclosure in writing. Most purchase and sale agreement forms contain necessary language.

A nonstandard form may not (such as bank’s form for sale of bank-owned property). In this case, use a separate agency disclosure form.


Agency DisclosureActing in accordance with disclosure

Agent must act in accordance with disclosures made.

If agent is seller’s agent, agent may not act like buyer’s agent.



If agent’s conduct is not consistent with disclosure, he may be subject to disciplinary action by DOL.



DOL disciplinary sanctions include:license suspension or revocationrestriction and/or monitoring of activitiesfine of up to $5,000 per violationprobationcompletion of relevant real estate coursecensure or reprimand


Agency DisclosureActing as a principal

Agent acting as principal in transaction must disclose that he is:

licensed in WA as a real estate agent,purchasing/selling property for agent’s

benefit, andintending to make a profit.


Agency DisclosureActing as a principal

Agent acting as principal should not act as agent for other party.

Agent should recommend that other party seek independent legal advice and appraisal.


SummaryAgency Relationships/Agency Disclosure

Vicarious liability Creation of agency Termination of agency Inadvertent dual agency Agency disclosure requirements


Types of Agency Relationships

Four types of real estate agency relationships in Washington:

seller agencybuyer agencydual agencynon-agency


Types of Agency RelationshipsSeller agency

Before 1997, the majority of real estate agents in Washington acted as sellers’ agents.

Under old rules, the agent who found a buyer automatically represented the seller.

Selling agent was subagent of principal (seller).


Types of Agency RelationshipsSeller agency

Under current agency law, agent only represents seller if agent is listing agent.


Seller AgencyDuties owed to seller

Listing agent in transaction represents the seller.

Seller’s agent owes seller the five statutory agency duties owed to principal.


Seller AgencyDuty owed to buyer

Seller’s agent owes duty of honesty and good faith to buyer as well.

Seller’s agent should disclose latent defects and answer buyer’s questions honestly.


Seller AgencyMust be loyal to seller

Seller’s agent should not:give buyer advice on how much to offer

for listed propertyput buyer’s interests above seller’s

interests in any waydisclose seller’s confidential information

to buyer


Seller AgencyServices to buyer

Seller’s agent may provide certain services to buyer without violating duties to seller:

discussing buyer’s housing needsdisclosing information and answering

questions about propertydiscussing financing alternatives


Seller AgencyServices to buyer

furnishing copies of documents that might affect property

explaining negotiating and closing processes


Seller AgencyPrevious relationship with buyer

If seller’s agent has previous relationship with buyer, conflicts of interest may arise.

Agent should: remind buyer of her agency status and where

her loyalty lies, tell buyer if he shares confidential information

with her, she must disclose it to seller, and recommend buyer work with another agent.


Buyer Agency

A buyer is automatically represented by the agent the buyer is working with, unless there is a written agreement to the contrary.

Buyer’s agents owe agency duties to buyers rather than sellers.


Buyer AgencyBenefits

Benefits of buyer agency include:loyalty and protection of confidential

information,objective advice on price and condition of

homes,help with negotiation, andaccess to more properties (such as

foreclosures and FSBOs).


Buyer AgencyWritten agreement

Buyer agency can be automatically created through agency law.

It may also be created through a written buyer agency agreement.


Buyer Agency

Buyer agency agreement will:authorize brokerage to represent buyerstate that dual agency will be created if

brokerage also represents sellerdescribe buyer’s agent’s authoritylimit scope of buyer’s agent’s

responsibilitiesdetail promises buyer makes to buyer’s

agent


Buyer AgencyCompensation

Buyer’s agent typically compensated with portion of commission paid to seller’s agent.

Even though payment comes from seller, buyer’s agent still represents buyer.


Buyer AgencyBuyer-paid fee

Buyer’s agent and buyer may agree to buyer-paid fee instead. May be:

hourly feepercentage feeflat fee


Buyer AgencyBuyer-paid fee

Usually used only if property search is expanded beyond MLS (for instance, to include FSBOs).

Agent may insist on getting part of fee up front, through nonrefundable retainer.


SummarySeller and Buyer Agency

Establishing seller agency Advantages of seller agency Establishing buyer agency Advantages of buyer agency Compensation of buyer’s agent


Dual Agency

Dual agency occurs when agent represents both buyer and seller in same transaction.

Dual agent owes agency duties to both parties.

Because interests of both parties often conflict, WA law imposes duty to refrain from acting to detriment of either party.


Dual AgencyBefore disclosure laws

Before agency disclosure laws were passed, dual agency relationships were often created inadvertently.

Seller’s agent would give advice to buyer, who assumed seller’s agent represented his interests.

Created undisclosed inadvertent dual agency.


Dual AgencyIn-house transactions

Today, most dual agencies occur in in-house transactions.

In-house transaction: when agent representing buyer and agent representing seller both work for same brokerage.


Dual AgencyWritten consent required

Dual agency legal in Washington only with written consent of both parties.

Most listing agreements and buyer’s agency agreements allow parties to agree in advance to dual agency in in-house transaction.

Separate dual agency disclosure forms also available for obtaining consent.


Non-Agency

Person may be involved in transaction without forming agency relationship with either party.

Known as facilitator or intermediary, and compensated through finder’s fee.


Non-AgencyNo agency duties owed

Facilitator does not owe agency duties to either party, but still owes general duties a licensee owes to any party, such as:

disclosurereasonable care and skillhonesty and good faith


Subagency

Only real estate brokerage has a direct agency relationship with a buyer or seller.

A broker, for example, is the agent of the brokerage and subagent of the client.

Subagent: an “agent of an agent.”


Subagency

Although the client works directly with a broker, the client signs an agency agreement with the brokerage firm.

Strictly speaking, the brokerage firm is the client's agent. The broker is the brokerage firm's agent and the client's subagent.


SummaryDual Agency, Non-agency, Subagency

Dual agency Written consent to dual agency Non-agency Intermediary Subagent


Documents

Washington Real Estate Practices Lesson 1: Real Estate Agency © 2013 Rockwell Publishing