Real estate Chapter 2 Unit 2

What does the law say about the disclosure of latent defects?

A broker has no duty to discover "latent" material defects in a property if the seller has not disclosed these defects prior to the sale.

A licensee is bound to inform the client of all facts that might affect the client's interests in the transaction. This includes both the facts that the licensee knows and those that the licensee should have known.

A licensee is responsible for discovering anything that might be deemed important to his client in making an informed decision, whether or not they are favorable to the client's position. A licensee could be held liable for damages if he or she failed to disclose such information.

Implied Agency

A written agreement is not necessary to create an agency relationship - the relationship can be implied. This relationship is formed when the actions of the parties indicate that they have mutually consented to an agency. In fact, the persons involved may not have consciously planned to form an agency relationship. However, their actions may unintentionally, inadvertently or accidentally form the relationship. For example, Buyer Mary calls Broker Jim to show her a home. She assumes then that he is her agent. Note: Whether intended or accidental, the creation of implied agency obligates the agent to duties and professional standards of care. If these are not fulfilled, the agent may be held liable.

Disclosure

Agency disclosure - must be given to seller before listing agreement is signed; confirms that a designated agency relationship exists; includes name(s) of designated agent(s); removes confusion about who the agent is working for, lists fiduciary duties Agent responsible to inform client of all facts that might affect the client's interests in the transaction; includes what the agent should have known Disclosure of latent defects is not required by law

In some cases, the purchase and sale agreement may include the required disclosure as long as it is set out in a separate paragraph. However, most often, the agency disclosure is a separate document. When all parties sign the disclosure, it gives evidence that they understand and accept the agency relationships as they exist.

Agency disclosures are designed to be used by the licensee who is showing homes to prospective buyers, but if all parties must sign, it effectively discloses the agency status to both the buyers and the sellers in any transaction.

Agent's authority

Agency relationship is vested only in the agent or agents named as the designated agent or agents Contractual relationships always formed at the managing broker level

Recent legislation requires an agent to disclose to all parties the fact that the agent represents one party and does not represent the other. In other words, an agent must inform client and customer that the agent represents the client and does not represent the customer (unless it is a dual agency).

An agent must disclose agency relationships whenever there is a transfer of a real estate interest, whether the interest is a fee, partial fee, exchange, leasehold, sublease, assignment, air right or subsurface right.

Informed written consent.

An agent who desires to operate in a dual agency capacity must obtain the informed written consent of all parties. Subsequent contracts should confirm the disclosure. "Informed written consent" means both parties have read, understood, and signed an acceptable disclosure form. Undisclosed dual agency is a violation of the license law and can result in penalties such as reprimand, fines, and license suspension or revocation.

Define implied agency.

An implied agency is formed when the actions of the parties indicate that they have mutually consented to an agency. The persons involved may not have consciously planned to form an agency relationship. However, their actions may unintentionally, inadvertently or accidentally form the relationship.

No subagency

As another response to the problem of "who works for whom," some states have recently moved in the direction of disallowing subagency. In this scenario, subagency is replaced by buyer agency and seller agency only. In other words, an agent either represents the buyer directly, or the seller directly. An agent who shows a buyer a property either represents the buyer, or is in fact the listing agent. Note that this arrangement need not change traditional compensation structures: an agent may represent a buyer and still receive a portion of the commission paid by the seller.

Universal Agency:

Authorized to do all acts that may be lawfully delegated to an agent. Such an agent may handle all of the principal's affairs. Think of a celebrity's business manager or someone appointed to settle the estate of a deceased person. When given authority to act for the principal without consultation, including the authority to bind the principal by signing in his or her place, such authority would be granted by a document known as a power of attorney and the agent is an attorney-in-fact.

When must a licensee give a client an agency disclosure notice?

Before the seller signs the listing agreement or shows property to a buyer client.

A licensee for the buyer has a duty to disclose such things as:

Deficiencies in the property Any contract provision of financing terms that don't suit the buyer's interests How long the property has been listed unless the seller is also a client Why the seller is selling, if this is not confidential information from a previous relationship with the seller.

What is designated agency and why is it important?

Designated agency means that a broker may designate one or more licensees to act exclusively as the agent of the seller or landlord, and designate one or more licensees to act exclusively as the agent of the buyer or tenant in the same transaction. This arrangement must also be disclosed to both parties and the broker must obtain the written consent of both the buyer and the seller. This is important because it can eliminate the potential conflict involved in a consensual dual agency arrangement.

As seen in the previous page, the third duty is disclosure. The licensee who turned a potential seller into a client should share the comparative market analysis of the current market value of that property. The licensee should also share his or her evaluation of any market trends that would affect the seller, such as a nearby area being zoned commercial or a large employer in town who is planning to shut down.

Disclosure to a client is more complete than to a customer. The buyer customer gets information about the property but not about the seller. Sometimes a licensee representing a seller gets information about a buyer customer that can be shared. For example, when a buyer customer spends time viewing a home with the agent representing the seller, that customer may inadvertently give away information about how high a price he or she could offer. Once the licensee learns this information, he or she can pass it on to the seller as soon as is practical. The licensee may even reveal information regarding negotiating plans to a client. This would never happen with a customer. The licensee may disclose to the seller the financial status of the potential buyer customer (if it has been learned). The licensee could also reveal to the seller the reasons why the other party wants to buy.

Additional types of agency

Dual agency - broker represents both principal parties to a transaction; must have signed agreement from both parties; contains inherent conflict of interest; must be disclosed to all involved parties Undisclosed dual agency - can arise unintentionally but can result in serious problems Designated agency - broker designates a licensee to act as seller agent and designates another licensee to act as buyer agent; alternate way to handle dual agency situations Non-agency - also known as transaction broker, facilitator, or coordinator; broker is not agent for either party but acts as neutral party between both sides; must disclose to consumer; owes limited confidentiality No subagency - subagency is replaced by buyer agency and seller agency only

Conflict of interest.

Dual agency contains an inherent conflict of interest. Since many of an agent's fiduciary duties can only be rendered to one party, dual agency is, by definition, difficult, if not impossible.

Dual agency means representing both principal parties to a transaction. The agent represents both buyer and seller or tenant and owner. For instance, if a salesperson completes a buyer agency agreement with a party on behalf of a broker, and the party then becomes interested in a property listed by the broker, the broker becomes a dual agent.

Dual agency has become increasingly prevalent with the advent of buyer and tenant representation. Dual agency may arise from voluntary, specific agreement between the principal parties or from the parties' actions, much like implied single agency.

What is dual agency?

Dual agency is the situation that exists when a real estate firm or a real estate licensee represents both the seller and the buyer or the landlord and the tenant in the same transaction.

As state regulatory authorities formalize the facilitator role, it is expected that brokers will have to obtain written consent from the principal parties, just as in the case of dual agency.

Duties not imposed on the transaction broker. Since there are no fiduciary duties binding the transaction broker, the broker is held to standards for dealing with customers as opposed to clients. These include honesty, fair dealing, and reasonable care. The transaction broker is under no obligation to inspect the property for the benefit of a party or verify the accuracy of statements made by a party. Important Note: This non-agency relationship is not allowed in all states. Be sure to check with your state license laws to determine if this option is legal in your state. As state regulatory authorities formalize the facilitator role, it is expected that brokers will have to obtain written consent from the principal parties, just as in the case of dual agency.

Types of agency

Express agency - agency relationship wherein the parties formally express the intention to form an agency relationship and outline the terms and conditions of the agreement Implied agency - non-written agreement formed when actions of the parties indicate they have mutually consented to an agency Agency ratification and estoppel - arises by the actions of the parties involved rather than a written agreement; also known as ostensible agency because on the surface the relationship appears to exist

Disclosure is a duty of the licensee to inform the client when facts or information might impact the transaction. The licensee is required to discover facts that a reasonable person would consider important when selecting a course of action. The key to disclosure deals with the issue of "did the licensee know or should have known" pertinent information that might impact the transaction.

For example, seller Mike has listed his home with Agent Gary. During the listing period, the county board has rezoned Mike's property for retail business use. This action has greatly increased the value of the Mike's property. Agent Gary is unaware of the change and continues with the existing listing. The listing sells at the "residential" value. A few weeks later, Mike discovers that he could have asked three times more the amount for his property. Agent Gary might be held liable for his mistake. Another example might be that when showing a property, a licensee fails to comment about the obvious growth of mold on the basement rafters. Even though the defect was not noted on the Seller's Disclosure, the licensee needs to point out the issue to the buyers.

General Agency:

Has broad powers to act for the principal in matters associated with the continuing operation of a particular enterprise. Examples: A principal gives a property manager full management authority on a long-term basis. Also, an associate broker is typically a general agent of the employing broker on a continuing series of sales and listings. General agency may also be established through a power of attorney. Important note: A broker may never sign for a principal in preparing or accepting an offer or any other document unless given that authority by previous written power of attorney.

Designated agency is a form of "limited" agency. What that means is that the clients do not have the full level of fiduciary duties available to them that they would have if they were fully involved in seller agency or buyer agency. What the client gives up in this situation is the fiduciary duty of undivided loyalty.

However, the agents can and are expected to actively advocate for their respective clients just as if the transaction involved separate firms. As soon as a buyer becomes interested in one of the firm's listings, the broker must disclose the situation to both parties and get their consent to the dual agency arrangement. The broker can explain the benefits of using designated agents and if the parties agree, the broker will appoint the agents. It's also a good practice to have both parties sign some sort of designated agent agreement, even though signing such a form may not be mandatory in some states.

Oral disclosure.

If an agent becomes involved in a substantive contact over the phone or in such a way that it is not feasible to make written disclosure, the agent must make the disclosure orally and follow up with a written disclosure at the first face-to-face meeting.

State laws require that licensees disclose information to consumers about the kinds of relationships they can form. These disclosures serve to remove any confusion about who the agent is working for and give the consumer a clear understanding of the services that licensees provide to clients and customers.

In most states, a licensee must provide a written disclosure of any existing agency relationships to all parties for whom he or she provides real estate brokerage services. Typically, this disclosure must be made when they make their first substantive contact,but must certainly be made before either party signs an offer for a purchase. The disclosure must be given whether the licensee represents the buyer, the seller, both parties, or neither party. Note: Depending on the state, these forms may require the signatures of all parties or they may not require signatures at all. You need to check your own state's license laws regarding these agency disclosures.

Written, informed consent.

In states that permit dual agency, the agent must meet strict disclosure requirements, and principals must agree in writing to proceed with the dual agency relationship.

To summarize: Brokers are liable for what they:

Know from disclosure by the principal Should know because of their skill and training Should know by inspection of the property

What does law mandate that a licensee provide to a client at the beginning of a designated agency relationship?

Law requires that at the beginning of the agency relationship: The client receives documentation in writing that a designated agency relationship exists, unless there is written agreement between the sponsoring broker and the consumer providing for a different brokerage relationship. The written confirmation shows the name of the designated agent (or agents).

What are the duties a customer can expect from a licensee?

Licensees do have certain obligations to customers, even though they do not represent them. In general, they owe any third party: Honest dealing Reasonable care and skill Proper disclosure

There is no obligation to obtain or disclose information related to a customer's race, creed, color, religion, sex or national origin: anti-discrimination laws hold such information to be immaterial to the transaction.

Many states have enacted laws requiring a seller to make a written disclosure about property condition to a prospective buyer. This seller disclosure may or may not relieve the licensee of some liabilities for disclosure.

A transaction broker is not an agent for either party but instead acts as a neutral party between both sides. When serving in this capacity, a licensee:

Must advise the consumer that he or she is not acting as an agent or advocate for the consumer and should not be provided with confidential information Owes the additional duty of limited confidentiality and may not disclose the following information:The seller or landlord will accept a price that is less than the asking listing price.The buyer or tenant will pay a price greater than the price submitted in a written offer.The seller or landlord or the buyer or tenant will agree to financing terms other than those offered.

Defects are known as either

Patent - readily visible to any observer, or Latent - hidden from normal view and, therefore, must be revealed.

A seller's licensee must disclose what kinds of things to the seller?

Purchase offers Who the prospective purchasers are and if the licensee has a relationship with them in any way Ability of the purchaser to complete the transaction Ability of the purchaser to offer a higher price unless the purchaser is also a client Purchaser's intention to resell the property for a profit unless the purchaser is also a client.

A licensee for a seller has a duty to disclose such things as:

Purchase offers Who the prospective purchasers are and if the licensee has a relationship with them in any way Ability of the purchaser to complete the transaction Ability of the purchaser to offer a higher price, unless the purchaser is also the client of the licensee Purchaser's intention to resell the property for a profit unless the purchaser is also the client of the licensee

Agency duties to all

Reasonable skill and care Fair and honest dealing Disclosure

An agent owes fiduciary duties only to a principal but is obligated to all parties to a transaction for:

Reasonable skill and care: Remember the state issued your license and the public has a right to rely on your competence. Fair and Honest Dealing Disclosure of material facts - Not quite the standard of fiduciary, but an agent may not withhold property defects, such as leaking basement, flood plain, foundation problems, termites, etc. even if the intent is upholding your fiduciary duty of loyalty to your principal. In fact, an agent may be liable for failure to disclose material defects, even if unknown, if a court feels the agent had a duty to inspect or find out. If your principal/client balks at disclosing these facts, it is best to decline or sever any agency agreement."As is" sales, while legal, are tempered by this duty and by various statutes requiring that a buyer must be fully informed as to the property condition before signing a purchase offer. Once all defects are fully understood, a buyer is free to buy property in any state of disrepair. Defects are known as eitherPatent - readily visible to any observer, orLatent - hidden from normal view and, therefore, must be revealed.To summarize: Brokers are liable for what they:Know from disclosure by the principalShould know because of their skill and trainingShould know by inspection of the property

Reasonable skill and care:

Remember the state issued your license and the public has a right to rely on your competence.

Facilitator disclosures Rules for disclosing a transaction broker's status of non-agency are similar to those of dual agency. The agent must provide written notice to all parties or their agents on first becoming a transaction broker or on the first substantive contact, whichever comes first.

Rules for disclosing a transaction broker's status of non-agency are similar to those of dual agency. The agent must provide written notice to all parties or their agents on first becoming a transaction broker or on the first substantive contact, whichever comes first.

Non-agency

Some states also allow a licensee to act in a non-agency capacity. Depending on the state, the licensee could be known as a transaction broker, facilitator, or coordinator.

On what classification of agency is most real estate brokerage based?

Special agency

Additional types of disclosure

Substantive contact - occurs when agent is showing the prospect a property, eliciting confidential information from a prospect, executing a contractual offer to sell or lease Oral disclosure - when agent becomes involved in substantive contact over the phone, he/she must make the disclosure orally and follow up with a written disclosure at the first face-to-face meeting Dual agent disclosures - informed written consent is required by law; lack of disclosure is violation of license law and can result in penalties Facilitator disclosures - transaction broker must provide written notice to all parties when first becoming transaction broker or on first substantive contact, whichever comes first

Before a licensee signs a listing agreement with a seller, he or she must give the seller an agency disclosure. According to Indiana law, a licensee must inform the consumer in writing of the following:

That a designated agency relationship exists, unless there is written agreement between the sponsoring broker and the consumer providing for a different brokerage relationship. The name or names of his or her designated agent or agents. This written disclosure can be included in a brokerage agreement or be a separate document, a copy of which is retained by the sponsoring broker for the licensee.

In Indiana, contractual relationships are always formed at the managing broker level, never at the broker level. For this reason, each office must have a managing broker who is responsible for all real estate activities.

The agency relationship is vested only in the agent, or agents, named as the designated agent or agents. In other words, if a seller lists her property at a particular managing broker's office, the agent in the office, who has been named the designated agent, has the job of obtaining the best possible transaction for the seller. In the same way, if the buyer is under contract with this same managing broker, then the agent in the office who has been named the designated agent is onlyrepresenting the buyer.

The agency relationship is vested only in whom?

The agent or agents named as the designated agent or agents

Define special agency.

The broker has limited, well-defined powers confined to a single transaction and is not empowered to sell the property, nor bind the principal to any contract nor exercise any authority over the seller's other affairs.

Special Agency:

The broker has limited, well-defined powers confined to a single transaction. Most real estate listing contracts are special agencies. The broker is employed only to procure a ready, willing and able buyer. The broker is not empowered to sell the property, nor bind the principal to any contract nor exercise any authority over the seller's other affairs.

Designated agency means that a broker may designate one or more licensees to act exclusively as the agent of the seller or landlord, and designate one or more licensees to act exclusively as the agent of the buyer or tenant in the same transaction. This arrangement must also be disclosed to both parties and the broker must obtain the written consent of both the buyer and the seller.

The broker is still a dual agent in the transaction, but by designating separate agents for each principal, the individual client's interests are protected.

The issue of stigmatized property in recent years has been a popular topic for discussion. Stigmatized properties are those properties that have an undesirable reputation due to an associated unpleasant occurrence, such as a murder or gang violence. Due to the potential liability, a licensee should seek legal advice when dealing with such properties.

The disclosure of sexual offenders living in a neighborhood is another issue sometimes faced by a licensee. At the federal level, Megan's Law is known as the Sexual Offender Act of 1994. This Act requires offenders to notify law enforcement when they change address and/or employment locations. Listing agents have no legal duty to disclose the location of known sex offenders in a neighborhood to a potential buyer. However, if the topic does come up in conversation, a competent agent should refer a buyer client to the public record. If doubt arises, the agent should consult with an attorney.

Dual agency can arise unintentionally; but if it is not recognized, disclosed, and agreed upon in writing, it can pose some serious problems. To avoid those problems, dual agency must be disclosed to both the buyer and the seller. Both parties must agree in writing to the dual agency relationship.

The issue of an undisclosed dual agency will never arise if both the buyer and seller are happy with the transaction. If either of the parties becomes unhappy at any point, it can mean, at the very least, the undoing of the transaction even several months after the transaction has closed. If one of the parties should choose to initiate a legal action over some perceived problem, there is no legal defense the dual agency was unintentionally created or that it was performed with only the best of intentions. If a buyer or seller chooses to consult an attorney about some perceived problem with the transaction and then finds out that he or she did not receive the level of representation he or she should have received, this is a major problem. Cases of unlawful dual agency generally have a high success rate for the person filing the suit and the settlement amounts are usually pretty high. Besides the awarding of monetary damages, the legal process could result in the rescission of the contract for the property transaction.

Disclosure of latent defects poses another issue for a licensee. A latent defect is hidden flaw, weakness or imperfection on a property which a seller knows about, but the buyer cannot discover by reasonable inspection.

The law holds that a broker has no duty to discover "latent" material defects in a property if the seller has not disclosed these defects prior to the sale.

The most primary of relationships in real estate brokerage is that between broker and client, the relationship known in law as the agency relationship. In every state, a body of law, generally called the law of agency, defines and regulates the legal roles of this relationship. The parties to the relationship are the principal (a client), the agent (a broker), and the customer (a third party).

The laws of agency are distinct from laws of contracts, although the two groups of laws interact with each other. For example, the listing agreement -- a contract -- establishes an agency relationship. Thus the relationship is subject to contract law. However, agency law dictates how the relationship will achieve its purposes, regardless of what the listing contract states.

Disclosed (voluntary) dual agency.

The parties to a transaction may create a dual agency by giving written consent in disclosure forms, confirmation forms, and sale contract forms. For example, an agent represents a buyer who becomes interested in a property that the agent has listed with the seller. The agent then discloses the relationship with the principals to both principals, and the principals agree in writing to move ahead. A disclosed dual agency is thus voluntarily created. If both parties accept the dual agency, the agent owes all the fiduciary duties to both parties except full disclosure, undivided loyalty, and exclusive representation of one principal's interests.

In most instances, real estate brokerage is based on a special agency.

The principal hires a licensed broker to procure a ready, willing, and able buyer or seller. When the objective is achieved, the relationship terminates, although certain fiduciary duties survive the relationship.

Agency Ratification and Estoppel

This agency is also known as ostensible agency because on the surface an agency relationship appears to exist. In the example above, once this type of agency is created, Charles is prevented by estoppel* from denying its existence. *Estoppel is defined as a legal doctrine by which a person is prevented from asserting rights or facts that are inconsistent with a previous position or representation made by act, conduct, or silence. Taking the scenario above a bit further, ratification is the adoption or confirmation of an act already performed on behalf of a person without prior authorization. So in our example above, if one of broker Hal's buyers indicates an interest in purchasing the property, Broker Hal will contact Charles. If Charles agrees to sell, he "ratifies" an agreement to pay a commission.

Agency Ratification and Estoppel

This agency relationship arises by the actions of the parties involved, rather than by a written agreement. For example, Charles is the owner of a vacant property he is selling himself. He knows that broker Hal is showing the property to prospective buyers without the authority to do so. If Charles doesn't stop Hal from doing the showings, the law considers that the prospective buyers have the right to believe that Hal is Charles' agent.

Express Agency

This most common way of creating an agency relationship is a written agreement in which the parties involved formally express the intention to form an agency relationship and they outline the terms and conditions of that agreement. A listing agreement is the common form of express written agency agreement between a seller and a managing broker, authorizing the designated agent within the managing broker's office to find a ready, willing and able buyer for the property. A buyer's agency agreement is the common form of express written agency agreement between a buyer and a managing broker, authorizing the designated agent within the managing broker's office to find a suitable property to purchase or rent.

What is undisclosed dual agency and what happens in this situation?

Undisclosed dual agency is a dual agency relationship that is not disclosed and agreed to in writing. If this situation occurs, the agent has breached his or her fiduciary responsibilities to the client.

Classifications of agency

Universal agency - broker is authorized to all acts that may be lawfully delegated to an agent General agency - gives broad powers for broker to act for the principal in matters associated with the continuing operation of a particular enterprise Special agency - broker has limited, well defined powers confined to a single transaction; most real estate listing contracts are special agencies Agency coupled with an interest - the agent has an interest in the property being sold

An agency coupled with an interest is

an agency relationship in which the agent has an interest in the property that is being sold. This type of agency cannot be revoked by the principal, nor is it terminated if the principal dies. For example, a broker agrees to finance a condominium development if the developer agrees to give the broker the exclusive right to sell the finished condo units. Since the broker has a special interest in the transactions, the developer would not be able to revoke the listing agreement after the broker has provided the financing.

Exclusions. Interaction between a seller's agent and a customer is not always substantive. Possible instances that might be excluded from the requirement of disclosure are:

attendance at, or supervision of, an open house, providing the agent does not engage in any of the contacts described above preliminary "small talk" concerning price ranges, locations, and architectural styles responding to questions of fact regarding advertised properties

An alternate way to handle dual agency situations is called

designated agency.

Specifically, the requirement to disclose aims to:

notify clients and customers about whom the agent represents inform clients and customers of the fiduciary duties and standards of care the agent owes them inform prospective clients and customers that they have a choice in how they are represented obtain acknowledgement and acceptance of the disclosure from the principal parties

Disclosure

of material facts - Not quite the standard of fiduciary, but an agent may not withhold property defects, such as leaking basement, flood plain, foundation problems, termites, etc. even if the intent is upholding your fiduciary duty of loyalty to your principal. In fact, an agent may be liable for failure to disclose material defects, even if unknown, if a court feels the agent had a duty to inspect or find out. If your principal/client balks at disclosing these facts, it is best to decline or sever any agency agreement.

"As is"

sales, while legal, are tempered by this duty and by various statutes requiring that a buyer must be fully informed as to the property condition before signing a purchase offer. Once all defects are fully understood, a buyer is free to buy property in any state of disrepair.

Substantive contact. Subject to variations in state regulation, "substantive contact" between listing agent and customer occurs whenever the agent is:

showing the prospect a property eliciting confidential information from a prospect regarding needs, motivation, or financial qualification executing a contractual offer to sell or lease

Agency relationship -

the most primary of relationships in real estate brokerage between broker and client; governed by law of agency; includes principal, agent, and customer.

Prohibited disclosures. State regulations prohibit a dual agent from making certain disclosures. For instance, a dual agent, unless expressly instructed by the relevant party, usually cannot disclose:

to the buyer that the seller will accept less than the listed price to the seller that the buyer will pay more than the price submitted in a written offer to the seller the motivation of any party concerning the transaction that a seller or buyer will agree to financing terms other than those offered