State required and approved online course on the essentials of running a brokerage firm in Washington
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Upon completion of this section, you should be able to accomplish the following:
Brokerages and their affiliated licensees (brokers) enter into agency relationships all the time. It is essentially the basis of the brokerage business. There are multiple types of agencies that the brokerage will engage in depending on whom it represents in a transaction. It is interesting to note that the relationships formed under agency law are transaction-based. This means, in most cases, a broker will enter into an agency agreement with a principal for a particular transaction but there is nothing precluding the principal from beginning another agency relationship with another broker or brokerage firm for a separate transaction.
As a real estate broker, you work on behalf of others. The laws regarding a broker’s duties to their client are of critical importance and are known as agency law. Agency describes the relationship between a principal and an agent. Agency law governs this relationship and the requirements of the agent.
That is a mouthful, so first let’s define what an agent is. When a person acts on behalf of another, that person is known as an agent. The agent, in our case a real estate broker, is acting on behalf of the other party in the relationship, the client. The client can also be referred to as a principal, which means there is an agency relationship. On the other hand, the term customer refers to a relationship where one person is assisting another, which is usually not an agency relationship.
Agency does not just apply to clients and brokers; it also exists between the broker and their firm. The agency relationship between the firm and the affiliated licensees carries responsibilities for both the designated broker and the licensee. An affiliated licensee is another term for a broker or managing broker working with a brokerage firm. Licensees are considered subagents for their designated broker. A subagent is an agent of another agent, such as a real estate broker who is a subagent of the real estate firm who is the agent of a client. The licensee is referred to as having a subagency relationship with the brokerage firm and is considered to be a general agent.
Requirements of Agency
Prior to 1996, in Washington State, real estate brokers were bound by a fiduciary relationship when acting as agents on behalf of a principal. A fiduciary relationship is when the principal places trust and confidence in the agent and grants broad responsibilities to that agent. In 1996, Washington State passed a law outlining agency relationships and their limitations in real estate. Because it is a written law, the responsibilities are known as statutory responsibilities. The change was designed to be more specific to real estate brokerages. The change is written in RCW 18.86.110.
"The duties under this chapter are statutory duties and not fiduciary duties. This chapter supersedes the fiduciary duties of an agent to a principal under the common law. The common law continues to apply to the parties in all other respects. This chapter does not affect the duties of a broker while engaging in the authorized or unauthorized practice of law as determined by the courts of this state."
Next, let's go through the statutory responsibilities (laws) that govern real estate brokerage in Washington State.
Duties of a Broker to All Parties
In Washington State, regardless of whether a broker is an agent, the broker owes the following duties to all parties for whom they provide real estate brokerage services:
Reasonable Skill and Care
Reasonable skill and care indicate the obligation of the broker to perform their duties as an agent with the competence expected of someone in the real estate brokerage profession and with reasonable caution (care). The broker cannot claim to have exercised reasonable skill and care if they are doing something that a real estate broker would not do given the typical skills and qualifications of the profession.
Judgment is a large part of the real estate profession. Reasonable skill and care are not intended to mean that the broker cannot exercise judgment, only that they must not be negligent and irresponsible. For example, if a broker makes a judgment by giving an opinion of value on a property as $550,000 and the property sells for $575,000, this would not violate the duty of reasonable skill and care. The opinion of value is within the bounds of the broker's duty and could be made by a number of qualified real estate professionals. If, however, a broker urges a seller to enter into a contract offering$275,000 for a property that should be worth $550,000, this would be an example of failing to exercise reasonable skill and care.
Deal Honestly and in Good Faith
Dealing honestly is easy enough. If you deal honestly while acting on behalf of a principal, you are halfway there in this duty. Dealing honestly does not imply that you must not give opinions, but you cannot misrepresent facts. The other part of this requires that an agent operates in good faith, which means being open, fair, and sincere. An agent cannot be duplicitous or deceitful. Having an ulterior motive (one that is not known to the principal) would be an example of violating this principle. This duty applies to all parties in a transaction, not just to the principal whom the agent represents.
This requirement is to present all written offers, written notices, and other written communications to and from either party in a timely manner, regardless of whether the property is subject to an existing contract for sale or the buyer is already a party to an existing contract to purchase. The long and short of this duty is that you need to make sure that all written information is quickly given and presented to your client. There's no situation where you can hold an offer back so that another can be signed. The hardest part is the obligation to remember that you need to present all communications and offers from any party even if you have a transaction that is under contract. As a broker, keeping the files and communications relating to a transaction is critical; this is an important practice to demonstrate that you have fulfilled your duty to present all communications, in case you are ever questioned about a transaction. Noting the time and date that you received each communication is extremely helpful if there are questions. Email is especially useful because the timestamp is included.
Disclosure of Facts
This is the requirement to disclose all existing material facts known by the broker and not apparent or readily ascertainable to a party; it is not be construed to imply any duty to investigate matters that you have not agreed to investigate. A material fact is anything that, if it were known, might result in a different decision. While this is rather broad, it is best to consider anything affecting the value of the real property as a material fact. What this means is, that if you have knowledge of a fact pertaining to the property, it needs to be disclosed to every party involved.
Even a broker who represents the seller must disclose material facts to a buyer regardless of whether it is detrimental to the seller. If there was a leak in the bathroom that was covered with drywall and not visible, the broker would still be required to disclose that information to the buyer. This situation is an example of a latent defect. Latent defects are issues with the property that are not discoverable by the standard inspection.
One type of disclosure that comes up is stigmatized property or a property that had a bad event occur there, such as a drug deal, crime, or suicide. Negative events are not by their nature physical defects and therefore do not constitute material facts. A stigmatized property does not need to be disclosed during the sale of the property.
Account for All Money and Property
This duty is to account in a timely manner for all money and property received from or on behalf of either party. This particularly applies to the earnest money. Earnest money has strict rules regarding its handling. Rules are in place to ensure proper accounting. The accounting for all money and property also means that the broker must establish a chain of custody over a client's property or money. A chain of custody is an accounting that keeps a record of who has money or property at any given time. So if a broker receives money at 9:00 am on a Monday and delivers the earnest money to the party set forth in the agreement at 1:00 pm on Monday, they will need to keep proper accounting of who had possession of the money, dates, and times. When a buyer presents an earnest money check or cash to a real estate broker, there are strict trust and legal requirements that control how the funds will be handled.
Provide Agency Pamphlet
Brokers should provide a pamphlet explaining the law of real estate agency to all parties to whom they render real estate brokerage services, before the party signs an agency agreement with the broker, signs an offer in a real estate transaction handled by the broker, consents to dual agency, or waives any rights, whichever occurs earliest. The Multiple Listing Service (MLS) that you belong to in Washington State will have many preprinted forms that you can use to write transactions, and one of these is a pamphlet on the law of real estate agencies. The pamphlet lays out the items that must be communicated to the broker's clients as required by Washington State law. A good rule of thumb is to give the pamphlet to any clients the first time you meet with them. Be sure to do so even if the client has worked with another broker and received the pamphlet from them.
Brokers should disclose in writing to all parties for whom they provide real estate brokerage services before the party signs an offer in a real estate transaction handled by the broker, whether the broker represents the buyer, the seller, both parties, or neither party. The disclosure must be in a separate paragraph entitled "AgencyDisclosure" in the agreement between the buyer and seller or in a separate document entitled "Agency Disclosure." This requirement is intended to clearly establish who is representing whom. There are times when this is particularly important; for example, when a listing broker writes up a transaction for a buyer on the property and is not going to be a dual agent (representing both parties). The buyer would need to know they are not being represented in the transaction.
Not a Required Duty
Unless otherwise agreed, a broker owes no duty to conduct an independent inspection of the property or an independent investigation of either party's financial condition or to independently verify the accuracy or completeness of any statement made by either party or by any source reasonably believed by the broker to be reliable. This provides brokers with a limit to the amount of knowledge they should have about a property.
Agency Duties Owed to Clients
When a broker is acting on behalf of a buyer or seller or as a dual agent, the broker owes additional duties to their clients (principals) in addition to those duties we just discussed that are owed to all parties:
Disclosure of any conflicts of interest
Advice that they seek expert advice for issues outside the broker's area of expertise
To be loyal means taking no action that is adverse or detrimental to the client's interest in a transaction.
Conflicts of Interest
This means disclosing any conflicts of interest in a timely fashion.
This means advising the client(s) to seek expert advice on matters relating to the transaction that are beyond the agent's expertise.
Confidentiality means not to disclose any confidential information from or about the client(s), except under subpoena or court order, even after termination of the agency relationship. The confidentiality that a broker owes to the principal does not have an expiration.
The listing broker knows that the lowest amount that the seller would be willing to accept is $729,000. During an open house, a potential buyer visits and asks the listing broker, "What is the lowest price that the seller will take for this home?" The broker replies that he represents the seller and that the visitor should make a solid offer. This is a great example of effective representation, confidentiality, and acting in the best interest of a client.
Confidential information means information from or concerning a principal of a broker that: