Have you ever talked with a real estate agent about their fiduciary duty? In all my years of working in the industry, I’m not sure I’ve ever talked with other agents about this outside training classes. So, what are fiduciary duties?
Fiduciary duties are at the core of real estate representation. They are a defining part of the expectations you should have for your agent. They’re even at the core of the National Association of REALTORS® (NAR) code of ethics. But why is such a fundamental element of the real estate industry so misunderstood?
While buying or selling a home is a financial transaction, just like buying a hoagie from Wawa is a financial transaction, that’s where the similarities end. To start with, the sandwich artist at Wawa is responsible to Wawa first and foremost. You don’t sign a contract or any disclosures with the sandwich artist; you don’t negotiate that person’s compensation; you don’t even have room to negotiate how much that hoagie costs.
When you work with a real estate agent, you sign an agency disclosure and a contract. This binds them to certain legal obligations called “fiduciary duties.” When you hire a real estate agent, they work for you first and foremost. When you hire a real estate agent, you should negotiate their compensation. When you buy or sell real estate, you do get to negotiate the price - and the value of a hoagie doesn’t compare with the value of a home.
Join me this month as I take a look back through my real estate career and talk about the core of my profession. In my nearly 40 years as a full-time real estate agent in and around Chester County, time and time again I’ve run up against the perceived commoditization of real estate. This misunderstanding disadvantages agents as much as it does consumers. Real estate agents aren’t just there to open doors and file paperwork, we have legal responsibilities to our clients.
It’s a complex concept that’s big enough for a college program. Even agency, the relationship honored by those fiduciary duties, is a big enough topic to get its own course in law school. I am not a lawyer or law professor, so we won’t be going that deep. Instead, let’s go through what NAR has to say about fiduciary duty, then apply that with some hypothetical examples.
By the end of this article, I hope you know what to expect when working with a real estate agent. Best case scenario, you even know your rights and how to defend them (don’t worry - there will not be a test). I’ve heard too many horror stories from new clients about why they left their former agents, and want to prevent such horror stories from repeating.
Definitions
Fiduciary Duty
As we dive in, let’s take a look at what NAR has to say about fiduciary duty. From their website, NAR describes fiduciary duty as:
Fiduciary duties are the highest duties known to the law. Classic examples of fiduciaries are trustees, executors, and guardians. As a fiduciary, a real estate broker will be held under the law to owe certain specific duties to his principal, in addition to any duties or obligations set forth in a listing agreement or other contract of employment. These specific fiduciary duties include:
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Loyalty
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Confidentiality
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Disclosure
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Obedience
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Reasonable care and diligence
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Accounting
If you’d like to read NAR’s full description of these duties, check out their quick 2-page breakdown of the fiduciary duty agents have to their buyer or seller clients.
In short, by accepting fiduciary duty, a real estate agent puts their client’s best interests ahead of their own.
Agency
While fiduciary duty and agency go hand-in-hand, and are often used interchangeably in conversation, they are different aspects of the same larger concept. NAR has a breakdown of the types of agency usually encountered in real estate. Here’s my very basic definition of agency:
Agency:
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The relationship between a fiduciary and their principal;
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The relationship that comes into existence with a contract between consumer and agent.
With a few definitions under our belt, let’s take a look at what it means in practice. Learning the definitions, duties, and responsibilities is a great starting point, but it makes a lot more sense when we look at how those obligations are applied during real estate transactions.
Examples
Example 1
Q: Is this real estate agent acting in your best interests?
Congratulations on your new job! Now it’s time to find a home near your new work and sell your current home. Until then, you’re working remotely. The only problem is that you’ve been living in a registered historic residence that needs just the right buyer. Finding the right person has been a challenge, especially with lower activity than historic levels, and it’s taking months.
When summer and vacation time come around, you ask your agent to put a hold on any showings while you’re out of town. It’s time for a vacation from everything, including selling your house. While you’re out of town, your agent gets a call from a buyer’s agent that seems to have the perfect potential buyer. They want to schedule a showing immediately, and your agent thinks this opportunity is too good to pass up. They go ahead and do the showing, and the potential buyer accidentally breaks a knob while opening a drawer. Even so, they put in an offer well above asking price a few days later, and your agent has the good news waiting for you on your return.
A: While the agent seemed to be acting in the best interests of their client, acting against their clients explicit directions could be a violation of the fiduciary duty of obedience.
Example 2
Q: Does this violate a real estate agent’s fiduciary responsibility?
You just won the lottery and are moving to a bigger home. You don’t want your neighbors, or anyone else, to know about your recent luck, and want to wait to list your home on the MLS and 3rd party aggregate sites until after you’ve moved into your new mansion. You’ve already signed a listing agreement with an agent, but haven’t begun to get serious about that yet.
At the same time, you’re feeling lucky, and are willing to accept the right offer if it comes along before move-in day. So, you ask for some options. A week later, your neighbor asks what’s prompting you to move, explaining they saw your house listed online.
A: Though the agent may be trying to act in your best interests, by sharing your personal information (like address) without getting your consent first, they may be violating the fiduciary duty of confidentiality.
Example 3
Q: Does this violate a real estate agent’s fiduciary responsibility?
You’re moving to the area and find a local agent online. As your deadline draws closer, you widen your search and start looking for temporary options. Then, a prime-looking property pops up right where you originally wanted to live, and it’s just the type of place you’ve been looking for! You call your agent, make an offer way above asking price to try and finally secure this one, and move in a month later.
As you get to know your new neighbors, you learn that you purchased the house from your real estate agent's sibling - news to you.
A: Regardless of the relationship between the agent and their sibling, not disclosing this relationship upfront could be a violation of their fiduciary duty to disclose.
Example 4
Q: Which fiduciary responsibility comes into play in this interaction?
You’ve just purchased a larger home to fit your growing family, and it’s time to sell your old house. You’re really busy, though, and leave most of the details to your selling agent. When it comes time to look at offers, you ask your agent to present the options in the order they think is in your best interest. As you look through the offers, you notice all the top options come from the same brokerage your agent works for, and there are offers for more money with better terms lower in the stack. When you ask about it, your agent says those other offers are lower because they don’t think they’re as capable at following through with the transaction.
A: This could go against the duties of loyalty, disclosure, obedience, and reasonable care and diligence. It doesn’t matter the reason, your agent is obligated to present all offers and represent the buying power of all buyers to the best of their knowledge and ability.
Example 5
Q: This one is a little tricky. Which fiduciary duty takes precedence in this situation?
A real estate agent is working with a seller who found them online. When the day comes to write the listing description and set scheduling parameters for showings, the agent gets a bad feeling. Some of the wording and descriptions the client wants in the listing description violate Fair Housing, and the client tells them to deny access to anyone who fits a certain description - a description that happens to be a protected status.
Does the agent’s duty of obedience mean they should comply with the requests? Does the duty of loyalty mean the agent is responsible to their client above all else?
A: NAR says it best: “Compliance with instructions the agent knows to be unlawful could constitute a breach of an agent’s duty of loyalty.
Conclusion
I hope these examples make sense of the definitions we covered in the beginning. Fiduciary duty is more than just a vague legal concept, it’s the foundation of the relationship between an agent and their client. The moment you and an agent sign a contract to work together, your agent accepts fiduciary responsibility for your interests. By knowing what those responsibilities are, you know what to expect from your agent. Most importantly, it’s fiduciary duty that obligates an agent to put their client’s best interest above their own.
As your real estate agent, I take fiduciary duty very seriously. Before we work together, I take the time to go over the Consumer Notice, which outlines the fiduciary duties a real estate agent has to their clients. When we sign the contract to work together, your interests take precedence over my own. From then on, through searching, negotiating, and closing, I put you first.
Thank you for joining me on a more comprehensive discussion of the world of real estate! This is a brief glimpse into the many facets of real estate, something that’s complex enough to be covered in multi-semester courses and important enough to be a part of licensing requirements.
The best way to protect your interests is to work with a professional real estate agent who will honor their fiduciary responsibilities to you. If you’ve ever worked with a real estate agent and had no idea that they had a fiduciary duty to you, I’d love to chat!
