Agency Relationships

Ah, relationships. Can’t live with ‘em, can’t live without ‘em- especially in real estate. So it’s probably a good idea to understand how your relationships with people change based on the legal relationship that gets created when you represent someone as an agent.

But before we can get into the different types of relationships, you must know what it is to be a “fiduciary”. A fiduciary duty legally obligates one person to act solely in the interest of another person, so a “fiduciary” is the person that knowingly accepts that obligation. A fiduciary agrees to always put their clients’ best interests first, which brings us to another important point: Understanding the difference between a customer, client, and principal. The differences are subtle but important. 

A customer is an interested party who might be dealing with an agent, but who is not being represented by the agent. There is no fiduciary duty owed to the customer. That being said, a customer can still expect an agent to provide “honest and fair” dealing, which is just smart business anyways since dishonesty during a transaction can be a basis for litigation from the customer.

Clients and principals get confused for a good reason, but here’s a secret: they’re the same thing. Many people hear the two terms and think “Well, they must be different relationships because they have different names.” But nope, just like pancakes and flapjacks or sprinkles and jimmies, it’s the same thing with a different name.

Becoming a client means you have an agency relationship with an agent, and now that agent has a fiduciary responsibility to you. This means the agent is expected to exercise discretion when acting on your behalf, and they must adhere to very specific responsibilities and standards of acting in good faith and loyalty.

Let’s put this in real-world terms. Say you get a listing. The seller is your client, so now you owe that seller a fiduciary duty. Potential buyers of that property are your customer. You must be fair and honest with them, but you do not have a fiduciary duty to them because you are looking out for the best interests of the seller. 

In some transactions, the seller and the buyer might both be represented by the same agent. This is known as “dual agency”. Different states have different laws regarding dual agency, so be sure to check with your local jurisdiction before doing a transaction this way. Even when it is permitted, most people prefer not to work with dual agents because there is a natural conflict of interest. The agent is trying to be fair to both sides in a transaction, but because they are in the middle and must remain neutral, dual agents are effectively not working on behalf of either party.

Now that we got the sticky business of dual agents out of the way, there are a few other types of agents you’ll hear about while studying for the exam: special agents, general agents, and universal agents.

Special agents are hired to perform one specific duty for a client. This is the standard agency relationship for an accountant who does your taxes, as well as a real estate agent who helps you through a transaction. A real estate agent's authority is limited to one specific task. When you get a listing, for example, you are hired for the one act of finding a buyer for the listed property. Once that act is complete, the agency relationship ends. You were authorized to perform one act, so you were a special agent.

General agents can perform any and all acts associated with the principal’s ongoing business the agent has been appointed to act in. Whew- that was a mouthful, but it sounds more complex than it is. Basically, this just means that the agency relationship is continuous and ongoing, like a property manager. The relationship ends when the contract ends, or by mutual agreement.

Finally, we have universal agents. These are the superheroes of agency relationships, with full authority to act on behalf of a principal. Many times, universal agents will have a “power of attorney” to act on their principal's behalf. Universal agents can, in a sense, act like they are the principal. They can even sign legal documents and purchase or sell property for them. Universal agents are powerful but rare. Like superheroes, there aren't very many of them.

I hope that helps you understand some basics of agency relationships. This is Joe from PrepAgent, and as always, keep it concise and keep it simple.