Real Estate Law 6

12-4c Duty of Care

A broker is required to exercise care in listing the seller's property, presenting offers, and handling the details of closing.

This duty of care requires the broker to list the property at a reasonable market value figure. Because of commission pay structures, underappraising properties and listing them accordingly can result in rapid, easy sales, complete with the broker's percentage earnings. The listing price should be set according to market comparables with the overarching goal of assisting the seller with the sale of the property that brings a fair return. Brokers should exercise caution in making over-zealous statements about sales potential of the property and their abilities, because inflated seller expectations can cause problems for the broker later.

If the seller needs to net a certain minimum from the transaction, the broker's computation of the sales price is even more critical. The broker should take into account all fees and contingencies, and understand every cost associated with the sale, from transfer fees to title insurance to commissions.

The broker's duty of care continues throughout the period of the relationship. Brokers must present all offers to their sellers and provide their expertise in helping sellers evaluate the soundness of those offers, including the hazards or pitfalls, such as the advantages or disadvantages of financing alternatives as well as the risks of contingencies, involved in each offer. Brokers do not advise which offer a seller should take, but they can explain offers' weaknesses and strengths.

In explaining offers, however, brokers should not cross over the fine line between exercising care and practicing law. A broker may explain to a seller the customs and practices of the real estate industry, but not the law. Brokers should refer clients who have questions about legal details or issues to their attorneys.

Brokers should also proofread documents such as the listing agreement, the offer, the contract for the property, and closing documents by checking for errors in figures, descriptions, and dates. In some states, brokers may fill out contracts, but they are under a high duty of care to be sure that all terms are present, carefully drafted, and accurately stated. When brokers use form contracts, offers, and agreements, they should be cautious and be sure that the form language reflects the parties' intentions.

Brokers who prequalify prospective buyers can match properties and sellers with buyers more easily and avoid the problems that arise when a contract falls through because the buyers cannot obtain financing. Also, a broker who knowingly presents an offer from an unqualified buyer exposes himself to liability.

Clauses in listing agreements that try to exculpate brokers for breach of their duty of care are invalid, as they are for accountants, lawyers, engineers, and other professionals. A contract exculpatory clause cannot excuse professionals from liability when they have failed to exercise the standards of care for their profession.

12-4d Fiduciary Duty

Once a broker is employed by a principal, that broker is expected to act only in the best interests of the principal, regardless of the negative effects and consequences that may result for the broker. Brokers cannot lead their sellers into unsound transactions for the sake of a commission and are obligated to tell sellers when problems arise in the negotiation or closing of a transaction. Brokers must be accurate and timely in their disclosures, including any changes affecting the seller's rights or interests.

Most states impose a separate fiduciary duty on brokers with respect to earnest money deposits. Money that belongs to the seller should not be commingled with the broker's own funds. Most states require that deposits be placed in trust accounts or escrow accounts, or else require the establishment of escrow funds within a short time after receipt. Brokers who retain deposits for unreasonable lengths of time may face license revocation or suspension. Sellers and buyers need to use caution in selecting and supervising their real estate agents and brokers because, as the Queiroz v. Harvey case indicates, they are responsible for their agents' conduct. (Jennings, 20160101, pp. 291-292)

12-4e Duty of Loyalty

A broker may not work both ends of the transaction by representing both parties unless there has been full disclosure and both parties’ consent to such dual representation. (See earlier clarifications on state variations on duties and types of agencies.) A broker may not profit secretly from a transaction involving the principal. Brokers must disclose to their clients all they know about all parties involved in the transaction. A broker who wants to buy a listed property or has an ownership interest in a property a buyer is considering must make a full and complete disclosure of these interests. A broker who is a partner, shareholder, or relative of a party to the transaction must disclose those ties as well. If a broker does not make the appropriate disclosure and realizes a secret profit, that profit belongs to the broker's client. Under dual agency relationships, the duty of loyalty becomes complicated. For example, suppose that a broker representing both buyer and seller knows that the buyer is a credit risk. Does the duty of loyalty require the broker to disclose that to the seller? Does such a disclosure breach the duty of loyalty to the buyer? Most states that permit dual agency also list categories of information the dual agent must keep confidential, such as (1) the seller being willing to take less than the asking price; (2) the buyer's willingness to pay more than the asking price; (3) the motivation of the parties in buying and selling; and (4) the willingness of either party to accept less favorable financing terms. The Warren v. Merrill case deals with the issues of broker duty and disclosure. (Jennings, 20160101, p. 294) Jennings, M. M. (20160101). Real Estate Law, 11th Edition [VitalSource Bookshelf version]. Retrieved from vbk://9781337413503 Always check citation for accuracy before use.