Chapter 6: Conflict of interest

** A broker cannot act for >1 party in transaction (including themselves) without BOTH (2)? [See Chapter 5; see Form 527]

1.) disclosing their dual agency & 2.) obtaining client's consent AT TIME conflict arises.

What is a dual agency?

-Agency relationship that arises - when: broker represents both parties in real estate transaction [See RPI Form 117]

What are affiliated business arrangement (ABA)?

-Referral of client -to: financially-controlled business -whose: earnings are shared w/ broker -which requires: a written disclosure. [See RPI Form 205 and 519]

What is net listing?

-Type of listing -setting agent's fee as all sums received -exceeding net price established by owner

Chapter 6 Key Terms (4):

1.) conflict of interest 2.) affiliated business arrangement (ABA) 3.) dual agency 4.) net listing**

A conflict of interest arises and is disclosed to client when broker (2):

1.) has a pre-existing relationship w/ another person due to kinship, employment, partnership, common membership, religious affiliation, civic ties, or any other socio-economic context; and 2.) that relationship might hinder their ability to fully represent the needs of their client

** Had buyer known broker held an ownership interest in property when it was first presented, buyer might have (2):

1.) negotiated differently when setting price & payment terms OR 2.) retained a diff. broker who was not compromised by conflict of interest.

fees and benefits derived from conflicting source ARE required to be disclosed to the client This includes compensation in the form of (3): Similarly, referral of a client to: financially-controlled business, owned or co-owned by broker, needs to be disclosed by: affiliated business arrangement (ABA) disclosure. [See RPI Form 519]

1.) professional courtesies 2.) familial favors and 3.) preferential treatment toward the broker or their agents by others. [See RPI Form 119]

Chapter 6 LEarning Objectives (3)

1.) recognize types of arrangements, situations, & relationships that can give rise to conflicts of interest in real estate transactions 2.) disclose types of relationships & interests presenting a potential conflict of interest; and 3.) mitigate potential conflicts resulting from familial and investment relationships

*** Potential overlaps of allegiance or prejudice which cause a conflict that a broker or their agent must disclose include (5):

1.) the broker or their agent holds a direct or indirect ownership interest in the real estate, including a partial ownership interest in a limited liability company (LLC) or other entity which owns or is buying, leasing, or lending on the property; 2.) an individual related to the broker or one of their agents by blood or marriage holds a direct or indirect ownership interest in the property or is the buyer 3.) an individual with whom the broker or a family member has a special pre-existing relationship, such as prior employment, significant past or present business dealings, or deep-rooted social ties, holds a direct or indirect ownership, leasehold, or security interest in the property or is the buyer 4.) the broker's or their agent's concurrent representation of the opposing party, a dual agency situation [See Chapter 5]; or 5.) an unwillingness of the broker or their agent to work with the opposing party, or others, or their brokers or agents in a transaction.

What is the seller's broker to disclose (4)?

1.) their agency 2.) their acquisition of any direct or indirect interest in the seller's property 3.) whether a family member, a business owned by the broker, or any other person holding a special relationship with the broker will acquire an interest in the seller's property 4.) other conflicting relationship they might have with the buyer

** Whenever broker is employed under ANY type of listing, broker has what 2 obligations to seller (2)? What happens if NOT (1)?

1.) voluntarily disclose to seller any special relationship they may have w/ buyer & 2.) obtain seller's consent before proceeding seller can recover broker fee they paid to broker

When should conflict of interest (whether patent or potential) be disclosed by broker (2)? When does conflict typically arise (2) ? What discloses conflict of interest (1)? What does the disclosure do (2)?

AT TIME it occurs OR ASAP after conflict arises Prior to: 1.) providing buyer w/ property info OR 2.) taking a listing from seller Disclosure agreement 1.) creates transparency in transaction. 2.) reveals broker's bias --> client can take bias into consideration w/ negotiations.

THINK: What is an example that IS NOT considered a conflict of interest? What is an example that IS considered a conflict of interest?

NOT: broker's financial objective of compensation IS: fees and benefits derived from conflicting sources

Is a broker's financial objective of compensation for services rendered considered a conflict of interest?

No

** T of F? Unfortunately, comprehensive rules do NOT yet exist which establish instances where conflict of interest arises & needs to be disclosed. --> brokers must draw their own conclusions when situations regarding a property or transaction w/ or involving third-parties arise. In practice, brokers, & agents, all too often err on side of nondisclosure, putting their broker fee, if not their license itself, at risk

T

T of F? A potential conflict of interest also exists when a broker manages multiple LLCs which own like-type properties in the same market area.

T

True or False? The duty to disclose exists even if seller fails to inquire into whether broker has relationship w/ buyer

True

When does a broker NOT have a conflict of interest when selling or buying a property?

When they act solely as the principal (when they sell or buy for their own account, acting solely as the seller or buyer since they aren't acting as a broker or agent on behalf of another person in the transaction)

Do fees and benefits derived from conflicting sources are required to be disclosed to the client?

Yes

____________ is -Referral of client -to: financially-controlled business -whose: earnings are shared w/ broker -which requires: a written disclosure [See RPI Form 205 and 519]

affiliated business arrangement (ABA)

Thus, a conflict of interest creates a fundamental ____________ for brokers; it is NOT a compensation or business referral issue

agency dilemma

The disclosure & consent does NOT neutralize the inherent _________ itself. However, it does neutralize the _________ which would breach broker's fiduciary duty if left undisclosed.

bias element of deceit

A ____________ addresses: broker's personal relationships potentially at odds w/ agency duty of care & protection owed the client

conflict of interest

________________ is when broker or agent has (+) or (-) bias -->towards party in a transaction which is: incompatible w/ duties owed to their client

conflict of interest

*** The disclosure creates transparency in transaction. It reveals to client broker's bias which, when disclosed, allows client to take bias into consideration in negotiations. The disclosure & consent does NOT neutralize the inherent bias itself. However, it does neutralize the _________ which would breach broker's fiduciary duty if left undisclosed.

element of deceit

** As a result of nondisclosure, the buyer can recover (2)?

fee received by broker & the increase in price under the counteroffer.

Failure to disclose a broker's personal interest as a buyer in a transaction when they are ALSO acting as broker on behalf of seller can cause what?

grounds for discipline by the Real Estate Commissioner

Here, the broker has a duty to promptly disclose their ownership interest in property to buyer the moment the conflict arises. The conflict of interest in the broker's ownership is a _______________ requiring disclosure since buyer's decisions concerning the acquisition of the property might be affected

material fact

** Broker who becomes aware they have conflict of interest, BUT is reluctant to disclose it & seek client's consent, should consider?

reject or terminate the employment w/ that individual

When does a broker subject themselves to real estate agency requirements in a trasancation?.

when a broker-seller receives a brokerage fee on the sale or purchase of their own property

What is a conflict of interest?

when: broker or agent has (+) or (-) bias -->towards party in a transaction which is: incompatible w/ duties owed to their client