Fiduciary Relationships in Real Estate

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A fiduciary is a person you can trust, and a fiduciary relationship is formed between two parties who trust each other. This trust typically has to do with assets, money, or property. The Sixth Edition of Black's Law Dictionary defines it this way:

"A relation subsisting between two persons in regard to a business, contract, or piece of property, or in regard to the general business or estate of one of them, of such a character that each must repose trust and confidence in the other and must exercise a corresponding degree of fairness and good faith. Out of such a relation, the law raises the rule that neither party may exert influence or pressure upon the other, take selfish advantage of his trust, or deal with the subject-matter of the trust in such a way as to benefit himself or prejudice the other..."

The National Association of Realtors indicates that fiduciary duties cover six distinct areas: loyalty, confidentiality, disclosure, obedience, reasonable care and diligence, and accounting. Some—but not all—of these duties are self-explanatory

Confidentiality means information you share with your agent stays with your agent. It cannot be divulged to anyone else—and certainly not the party on the other side of the transaction—without your express permission.

Obedience indicates that your agent must do or act as you request, even if they don't necessarily agree with your decisions.

The accounting provision relates not only to safeguarding your money, but all related deeds and documents as well.

The Fiduciary Relationship in Real Estate

A fiduciary relationship is created in real estate between an agent, known as the fiduciary, and a buyer or a seller, who is referred to as the principal.

A buyer's agent works on behalf of the buyer and must hold that buyer's interests above the interests of the agent or the seller. That trust requires the highest standard of care and loyal treatment to the buyer.

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 some states. A seller's agent can't tell a buyer whether the seller will accept less, or divulge any other personal information about the seller to the buyer without the seller's express written permission.

A Seller's Agent Example

When a buyer or their agent calls the listing agent to ask if the seller will accept a lower offer, the listing agent isn't permitted to divulge that information, even if she knows the answer. It would be considered a strict violation of fiduciary for the agent to say, "I think the home is overpriced, and the seller is dreaming" without the express written permission of the seller.

If a buyer asks a listing agent how low will a seller go, a few correct answers might be:

  • "Write an offer and I'll present it."
  • "The seller expects to receive list price."
  • "I'm not allowed to discuss a lower price with you."

A Buyer's Broker Example

A buyer broker's agreement is a legal document between the buyer and the buyer's broker/agent. It spells out the fiduciary duties of each party.

A buyer would no longer trust the agent and the fiduciary relationship would be considered broken when it's been breached. The buyer's agent might be in a position of authority to cancel the contract, or the buyer might cancel it.

A buyer's agent would breach fiduciary responsibility if they were to send the buyer's offer to the listing agent and apologize for the terms of the offer. Some agents throw their buyers under the bus, and that's a direct violation of fiduciary duty.

A buyer's agent should never suggest ways to undermine the buyer's offer to a listing agent.

Fiduciary Abuse

A buyer's agent might disclose something along the lines of, "We asked for 10 things to be repaired in our Request for Repair, but the buyer is really only concerned with the pest work. We can make a deal if you counter back with the seller agreeing to pay for the pest work."

The buyer would most likely be furious in this situation and might be tempted to fire the agent on the spot. A judge would say that the 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.

Other obvious examples include:

  • Accepting kickbacks or money from a third party for guaranteeing a certain outcome to the deal
  • Dual representation, which involves representing both sides in a transaction without their knowledge of each other
  • Not informing sellers of additional offers made after one has been accepted
  • Taking any action without the client's express approval

The Bottom Line

Fiduciary abuse is against the law and can leave an agent open to a lawsuit, and it destroys the professional and ethical standing of the real estate agent.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.