Real estate agent liability arises when a real estate agent violates either real estate laws or the real estate professional conduct guidelines. In some cases, it may be difficult to determine which parties are liable to seller or buyer clients.
This is because, in most real estate transactions, there are multiple parties who are involved, for example:
- The real estate agent, or salesperson, who is working directly with the buyer;
- A real estate broker, or the individual who supervises the salesperson;
- Home inspectors and appraisers;
- Mortgage and loan companies; and
- Lawyers and other professionals.
A real estate agent may become legally responsible if they breach a duty that is owed to their client. This may occur in a variety of ways but is typically associated with fraud or through a breach of contract.
Real estate agent’s liability for a client’s losses will, in general, depend on what type of relationship they have with their client. In general, the agent will become liable if they owe the client certain duties under the law or under a real estate contract.
In these types of cases, an individual may be able to file a lawsuit against the real estate agent. In some instances, a real estate agent may also be held liable for the unauthorized practice of law if they provide legal advice. For example, suggesting a certain course of action based on their presumed legal knowledge.
What Is a Real Estate Agent?
Real estate agents are authorized to conduct real estate business in specific states as licensed professionals who are educated in real estate issues. In addition, a real estate agent has passed a state real estate board exam.
The tasks that real estate agents may perform will depend largely on their education, licensing, and certification. Common examples of the tasks real estate agents perform may include, but are not limited to:
- Handling standard client forms and questionnaires;
- Answering any basic questions that a buyer or seller client may have;
- Reviewing all real estate contracts;
- Engaging in the negotiation of prices up to the closing of a deal;
- Showing properties by guiding clients on walk-throughs and open houses; and
- Giving clients specific information up to a certain level of knowledge and expertise.
It is important to be aware that a real estate agent or salesperson is often limited in their actual work capacity. One example of this would be how, in some cases, they are required to obtain confirmation from a supervising broker related to more important transaction decisions.
What Is the Difference Between Agents and Brokers?
In numerous states, there are significant differences between the terms broker, agent, salesperson, or other terms that may be used. Typically, when an individual uses the term agent, they are referring to the salesperson as opposed to the broker.
Brokers typically handle higher-level real estate issues. In certain states, an agent is also referred to as a real estate broker, while the real estate broker is called a qualifying broker.
In some states, for example, Colorado, every licensed real estate professional is considered to be a broker. For the majority of home buyers, the difference between an agent and a broker does not have much of an effect.
However, for experienced and commercial investors, brokers may be preferred over sales agents.
What Is an Agency Relationship?
In the simplest terms, agents are individuals who agree to represent other individuals. The individual whom the agent is representing is referred to as the principal.
Agency relationships are, in general, formed by an agreement between two parties. Agents can only act on behalf of principles for specific issues, depending on their agreement.
Agents essentially serve as employees. The difference between agents and employees, however, is that agents work with principals by representing principals in specific situations and transactions.
In addition, agents are given different types of authority and power in order to act on behalf of other individuals or groups of individuals in business settings. The principal can completely control the conduct of the agent as it pertains to the duties given to the agent by the principal.
These types of duties form once an agent enters into a formal agency relationship with a client. Agency relationships may create the following duties for agents:
- Placing listings in a home listing service;
- Finding potential buyers or sellers;
- Reviewing relevant real estate and legal documents;
- Placing money received from the client into a separate account implies a fiduciary duty to the client; and
- Informing the client of any changes associated with offers or negotiations.
A violation of these duties may lead to a lawsuit that involves monetary damages awards for the losses the plaintiff suffers.
What About Non-Agency Relationships?
If a non-formal relationship is formed between an agent and a seller or buyer, it does not create the same obligations as those of an agency relationship. One example of this would be when an agent is simply providing general tips or pointers to an individual and has not formed a working contract agreement with that individual.
In this situation, the agent would not have the same duties. They would be obligated to make proper representations and provide accurate information, However, the agent may not be required to seek out listings and engage in similar actions.
Scope of Agency Relationship
Principal and agent relationships are important because an agent can enter into a binding contract on behalf of a principal. Even when a principal-agent relationship exists, however, an agent has to have the authority to enter into contracts for the principal.
This means that the agent must be acting within the scope of the agent’s authority. In order for a contract to be binding, an agent has to have at least one of the following types of authority:
- Express authority: Express terms may be specifically stated in a written contract between a principal and an agent;
- One example of this would be how the principal may state in a contract, “I authorize an agent to sign all documents associated with the sales transaction involving the red pickup truck;”
- In addition, they may also expressly limit the agent’s authority in the contract;
- Implied authority: Implied authority may arise from the agent’s actions and conduct. Implied authority can also exist if the agent is engaging in conduct that is generally identified as authorized by the principal, either traditionally or through custom;
- One example of this would be how an agent who is expressly authorized to repair computers may be implicitly authorized to purchase the computer parts that are necessary to repair those computers;
- Apparent authority: Apparent authority is granted when a third party believes that the agent has the authority to act for the principal. With apparent authority, the focus is on whether the third party believes that the agent has the authority to act on behalf of the principal;
- One example of this would be if an agent were performing a specific task at the time specified for that task while wearing an ID badge and uniform issued by the principal; it may be implied that they are acting with the principal’s authority; or
- Ratification: With ratification, the principal is not aware of and did not authorize the agent to enter into a contract. However, the principal then accepts the benefits of that contract upon discovering the agreement;
- One example of this would be if an agent buys a box of steaks that shows up at the principal’s door. If the principal accepts the shipment or begins to cook and eat the steaks, the principal cannot argue that they never approved of the shipment.
Do I Need a Real Estate Lawyer?
If you have any issues, questions, or concerns related to a real estate transaction or real estate agent liability, it is important to consider consulting with a real estate lawyer. Your attorney can examine your case, determine if a legal cause of action exists, and advise you whether or not an agency relationship exists.
Your attorney can also explain your rights and legal options under your state’s specific real estate laws. In addition, your real estate lawyer will represent you in court if you are required to appear.
