In this edition of Keeping You Informed, we’re going to address a matter of a legal nature which has amplified importance in light of short sales, REO sales and the MARS regulations.  As you know we have been in a market where many buyers and sellers have their guard up with real estate agents and lenders. Taking time to effectively and clearly explain your fiduciary duty to a prospective buyer or seller will not only assist you in fulfilling your legal obligations, it may help you sell yourself to them and to lenders who need help marketing their REO properties.  After all, many principles about providing high quality service tie in very closely to your fiduciary duty.

We’re going to go through the legal obligations to a customer and a client but we’re also going to show you how each of these components relates to how you can build your business.  It is important to understand that with regard to the definitions and descriptions that you see here in this edition, to make sure to verify these with your broker and make sure that everything that you do has the approval of your broker and is consistent with your individual state laws regarding representation.

First, there are always going to be two kinds of people with whom you deal:  customers and clients.  Whether the person you are doing business with is a buyer, seller, landlord, tenant, or other agent, they are either going to be a “customer” or a “client”.  If you’re not sure whether someone is one or the other, make sure to consult with your broker immediately to get clarification on your broker’s agency office policy.  You need to be very clear on understanding this policy as you will have to explain it to your prospective buyer or seller in a very understandable and comprehendible fashion.

The simplest distinction between a customer and a client is that you work “with” the customer and “for” the client.  The client employs you; the customer is someone that you provide goods and/or services to.  In the simplest of terms, you simply have a duty to describe the type of relationship that you intend to have with the buyer or seller.  Do you intend to treat them as a customer or a client?  It is also important to understand that they have the right to consent or not consent to this relationship.  Nearly all state laws, broker office policies, and the N.A.R. Code Of Ethics require that this conversation be documented.  Make sure that you fulfill these mandated requirements in your discussion.

To both the customer and the client, you have ministerial duties.  Ministerial duties are defined as follows:

1.      Honesty.

2.      Disclosure of material facts.

3.      Accounting – signed, legible copies of all transactions documents to all parties.

4.      Reasonable skill and care.

In some states, you may also have a codified duty to provide “fairness” to all parties, however, the word “fair” was stricken from the N.A.R. Code primarily because of the ambiguity of the term.

Of additional importance it might be very important to incorporate the mandatory MARS (Mortgage Assistance Relief Services) disclosures depending on your state’s laws and broker’s policies.  These disclosures include that when an agent is assisting a seller on a short sale or loan modification to disclose:

1. That the agent is not associated with the government or has been vetted and approved by the government in assisting the seller.
2. That the lender may not agree to a short sale or a loan modification during the process of attempting to work this out for the seller.
3. That should the seller elect to stop making payments on their loan because they are advised to by the lender or they decide to do so on their own, that they could lose their property and adversely affect their credit.

Currently, conventional wisdom has dictated that an agent in this situation should disclose this whether or not they are receiving a fee for this service.

Remember that these are obligations that you have with all parties with whom you deal.  For instance in many states, brokers have an office policy that might be described as follows:  (NOTE:  THIS IS ONLY AN EXAMPLE OF A TYPICAL BROKER’S OFFICE POLICY AND DOES NOT REPRESENT THE OFFICE POLICY OF ALL BROKERS.  MAKE SURE TO CHECK WITH YOUR BROKER.)

            You are the listing agent:  You and your broker represent the seller; the other broker and the selling agent represent the buyer.  The seller is your client and the selling agent, the selling broker, and the buyer are your customers.

            You are the selling agent:  You and your broker represent the buyer; the other broker and the listing agent represent the seller.  The buyer is your client and the listing agent, listing broker, and the seller are your customers.

            You or an agent in your company is handling both the listing and the buyer:  You, the other agent, and your broker probably represent both the buyer and the seller as dual agents although in states where dual agency is practiced, “informed consent” is almost always required by statute.  It is important to note that not all brokers allow their agents to practice dual agency as it is a legal conflict of interest and some brokers are just not comfortable with allowing it.  Again, please be sure to check with your broker on this.  Some states have also outlawed the practice of dual agency.

In identifying your obligations to your client, you still owe the ministerial duties we identified previously but in addition, you also have fiduciary duties.  Your fiduciary duties are as follows:

Confidentiality:  You must keep confidential, whatever your client confides in you unless the item is a material fact that must be disclosed under your ministerial duties.  Typical items that are kept confidential are buyers who require anonymity or a party’s deteriorating health status.  Assure them that you are bound by your duty of confidentiality even beyond the termination of your representation agreement with them.

Accounting (Copies plus estimates of buyer’s costs or seller’s net plus careful review of all closing documents):  Remember that the most important thing to most buyers is how much cash up front and how much a month they will be incurring.  To a seller it is the net proceeds or in the case of short sales, their costs, in most cases.  You have an obligation to be sure that they at least are provided an estimate of these items ahead of time.  Keep in mind that the new GFE (Good Faith Estimate) guidelines for lenders has made this estimate subject to greater fluctuations due to lender’s restrictive conditions on this.

Reasonable Care & Diligence:  In addition to reasonable skill and care, you have a duty to make sure that your client is advised to perform all of the “due diligence” (Reviewing inspection reports, transaction documents, and financial documents) that they will need to make a fully-informed decision.

Loyalty:  An agent has a duty to protect and promote his/her client’s best interests even above the agent’s own personal interests.  Assure them that you are obligated by the standards of care and by law to act in their best interests.

Obedience:  An agent has a duty to obey his/her client’s instructions provided that they are lawful instructions.  Let them know that you are bound to their wishes when you represent them.

Accountability:  An agent is accountable for all representations they make to their client whether they are written or verbal.  Let them know that the information that you will be providing to them will be as accurate as possible with the understanding that should be advised to verify it.

Disclosure (Full Disclosure of anything that could help your client’s negotiating position.):  You are obligated to share with them any information that you are made privy to that may assist them in getting an edge in negotiating with the other party.  This will actually assure them that they will have the peace of mind in knowing that you are their advocate and truly acting in their best interests.

Notice that if you were to create an acronym of these duties, they would spell out CARLOAD.  In other words you have a CARLOAD of responsibility.  This is an easy way to remember and explain your fiduciary duties to your prospective clients.

If you happen to end up in a dual agency, the duty of full disclosure is in conflict with the duty of confidentiality.  In this case, the duty of confidentiality will trump the duty of full disclosure unless the item is a material fact which, of course, must be disclosed to all parties.  That is why that when you are a dual agent, you are regarded as a limited agent.  You are limited in what you can tell the seller about the buyer and the buyer about the seller.  Essentially you will have to share the same information with both of them without favoring either party’s interests.  While this type of agency does impose some limitations on the services you provide, some agents and consumers are more sophisticated and have remarked that there are some benefits associated with dual agency in that the agent has more control of the quality of the transaction.  However, for someone who needs a lot of advice, counsel, and guidance, dual agency may not be the best way to represent them.  Again, this should be discussed with your broker.

Another point is to please remember to not offer to represent them unless you are certain you want to represent them.  You may want to say something on the order of “Since we don’t know yet whether I’ll be representing you or not, please don’t say anything that you would not want the other party to know.”  Also, remember that as you ask them qualifying questions, always ask them “What experiences have you had in previous real estate transactions?”  This will give the insight necessary to make your decision to represent them or not.

Good Luck!

David Compton is a professional speaker/trainer, author consultant in the real estate industry. He is also a partner in Practical Resources with George Smith; a company that specializes in delivering quality educational programs to real estate and mortgage professionals.   He has spent over 36 years in real estate in residential and commercial sales, site selector for a fast food restaurant chain, branch manager, director of education for one of the largest real estate brokerages in the nation, and for the last 25 years as a speaker/trainer.  He has developed over 200 real estate courses and has authored over 150 articles for real estate print and online publications.