Fiduciary Relationships in Real Estate
Definition: A fiduciary is generally a person you trust. A fiduciary relationship is formed between two parties who trust each other. The trust typically has to do with assets, money or property.
In real estate, a fiduciary relationship is created between a real estate agent, known as the fiduciary, and a buyer or a seller, known as the principal. A buyer's agent, for example, works on behalf of the buyer and must hold that buyer's interests above the interests of the agent. That trust created requires the highest standard of care and loyal treatment to the buyer.
Similarly, a seller's agent can be placed into a fiduciary relationship with the seller through an Exclusive Listing Agreement, coupled with an agency disclosure (in California). As such, a seller's agent cannot tell a buyer whether the seller will accept less nor divulge any other personal information about the seller to the buyer without the seller's express written permission.
This means when a buyer or her agent calls the listing agent to ask if the seller will accept a lower offer, the listing agent is not allowed to divulge that information, even if she knows it. Without express written permission, it would be considered a strict violation of fiduciary for the agent to say, for example, "I think the home is overpriced, and the seller is dreaming." Yet, how many listing agents do you hear make similar remarks?
If a buyer asks a listing agent how low will a seller go, a few correct answers are:
- Write an offer and I will present it
- The seller expects to receive list price
- I am not allowed to discuss a lower price with you
A buyer broker's agreement establishes a legal document between the buyer and the buyer's broker/agent, which spells out the fiduciary duties of each party. Once a fiduciary has been breached, for example, the buyer no longer trusts the agent, that fiduciary relationship can be considered broken, and buyer's agent might be in a position of authority to cancel the contract, and vice versa.
What could a buyer's agent do to breach fiduciary? How about sending the buyer's offer to the listing agent and apologizing for the terms of the offer? I've certainly had that happen. Some agents will throw their buyers under the bus, and that is a direct violation of fiduciary. A buyer's agent should never suggest to a listing agent ways to undermine the buyer's offer.
Yet, I've had buyer's agents routinely disclose things like, "Although we asked for 10 things to be repaired in our Request for Repair, the buyer is really only concerned with the pest work. If you counter back with the seller agreeing to pay for the pest, we can make this work."
What would the buyer have to say about that sort of statement? I imagine a buyer would be furious and might be tempted to fire her agent on the spot. But what's worse is what would a judge say? That representative of the buyer just told the listing agent to pretty much disregard the buyer's request for repairs. The agent disclosed personal information about the buyer to the listing agent, and by extension, to the seller.
This is fiduciary abuse. It is against the law. And it also destroys the professional and ethical standing of the real estate agent. No wonder some people believe this horrible impression that agents care more about the commission than their client's best interests. Trust -- without this precious cornerstone to a business relationship, you've got nothing.
Example: Because of Jack's fiduciary with his client, buyer Bonnie, Jack cannot tell the seller whether Bonnie would be willing to pay more to buy the seller's home. Jack must present Bonnie's offer as it is written to the seller and disclose nothing about Bonnie's intentions to negotiate.