Buying or selling a home is often the single biggest financial decision people make in their lives. Whether you are a first-time homebuyer, are looking for a second home, or need to sell property, you will likely hire a real estate agent for assistance. In fact, according to the National Association of Realtors, about 87% of homebuyers used a real estate agent’s services in 2015, up from about 69% in 2001.
But what happens if your relationship with the agent sours? How do you protect yourself? What steps should you take to ensure that your interests are protected?
While the answers to these questions differ depending on your circumstances, needs, and desires, it is essential to know how to deal with potential problems with your real estate agent. To understand your options, you first need a solid grasp of the relationship between real estate agents and their clients.
The Principal-Agent Relationship
Whenever someone hires a real estate agent to buy or sell property on his or her behalf, he or she enters into a special kind of legal relationship known as a principal-agent relationship, or the “agency relationship.” This relationship imposes on real estate agents a heightened legal duty to act on behalf of the client (known as a “principal”), requiring the agent to act in specific ways.
In everyday situations, people can deal with one another at arm’s length, and are under no legal obligation to protect someone else’s interests. For example, if you want to buy a used car from someone because you believe it is more valuable than the seller believes it to be, you are not under any legal obligation to disclose your beliefs or to try to protect the seller in any way. Similarly, the seller is free to choose any desired price, and doesn’t have to sell at all if he or she does not want to.
The same standard does not apply between agents and the people (principals) whom they represent. For example, when you hire an agent to buy or sell property on your behalf, the agent must act with your best interests in mind. Agents cannot simply use their position to make money off of you. This legal obligation is known as a “fiduciary duty.”
Fiduciary duty requires the agent to act in a number of specific ways:
- Loyalty. Agents cannot act solely to better themselves, and must act to protect your needs and interests. For example, a real estate investor might try to persuade a seller to sell at a low price so the investor can then later sell a property at a much higher price. Agents cannot do this. If you hire a real estate agent, that agent cannot try to persuade you to sell your property to the agent’s friend so that the friend can quickly flip the house at a much higher price. Agents have an obligation to protect your interests and to not use their position solely to better their interests, nor the interests of their friends, co-agents, or business partners.
- Confidentiality. The principal-agent relationship is one in which the agent typically learns sensitive information about the principal, such as personal financial details. Agents have an obligation to keep such information confidential, not revealing any potentially damaging details. For example, if you hire an agent to sell your home, your agent cannot tell a buyer’s agent that you are under strong pressure to sell the home because you have recently lost your job and are willing to accept a price that is substantially below the home’s market value.
- Obedience. Agents work on the principal’s behalf and are obligated to follow all instructions or wishes. So, if you tell your agent you want to list your home for $500,000, but are willing to accept any offers of $450,000 or more, your agent can sell your home for you only if a buyer makes an offer in your specified range. In general, your agent has to do what you say unless your instructions violate the terms of a contractual relationship you have with the agent (or otherwise violate the law). For example, the Fair Housing Act is a federal law that prohibits certain types of discrimination when people buy or sell homes. Under this law, homeowners are not allowed to refuse to sell a home to someone based solely on specific factors, such as race, religion, family status, or disability. So, if you hire an agent to sell your home and tell that agent not to sell to people with children, your agent does not have to follow your instructions, and the refusal to follow those instructions does not violate the agent’s duty of obedience. Otherwise, agents have to follow your instructions during the course of the relationship.
- Candor/Disclosure. Agents must be candid and disclose to you information that furthers your interests. Also, agents cannot use their experience, knowledge, or insights to your detriment. For example, agents cannot keep secret the identity of potential buyers, nor can they keep negative information about the property from buyers in an attempt to make a sale and earn a commission.
- Competency, Care, and Diligence. Agents have to be competent, and must act with care and diligence when representing your interests. For example, an agent must understand the details of any transaction and be able to communicate those details to you so that you can understand them. It also means that if the agent is not competent in any aspect of a transaction, such as negotiating the purchase of a commercial property when the agent only has experience dealing with residential property, the agent has a responsibility to inform you of this and assist you in securing the services of someone who is qualified.
- Accounting. Agents often buy or sell property on your behalf. They might also manage your assets or money during the course of representation. The accounting duty requires agents to tell you exactly how your assets and money are used, and to provide details about any actions taken while managing your property.
Violating Fiduciary Duties
If a real estate agent enters into a fiduciary relationship with you and subsequently violates any of the associated duties, he or she can face substantial penalties. Though the type of penalty differs depending on the circumstances of each situation, a real estate agent who violates these duties can be denied a commission from the transaction, be forced to compensate you for any damages arising from the breach of duty, face real estate license restrictions or revocations, or even face criminal charges.
Agents, Brokers & Realtors
The terminology surrounding real estate agents, brokers, and Realtors can be confusing. Real estate agents and real estate brokers are similar types of licensed real estate professionals, but they are not identical. To buy or sell real estate on behalf of others, a person must receive an appropriate license from a state governing or licensing body. A real estate agent’s license is the entry-level license that most states require for real estate professionals. This license allows the licensee to act as a real estate salesperson, but only on the condition that the agent works under a licensed broker or as part of a brokerage run by a licensed broker.
A real estate broker, on the other hand, is someone who holds a more advanced real estate license. Like an agent, a real estate broker can buy and sell property on behalf of clients, but can do so independently and without working under the supervision of another real estate broker. Brokers can also employ other real estate agents to work for them, or create a real estate brokerage, while those who only possess a real estate agent’s license cannot.
Some states do not use the terms “agent” and “broker” to distinguish between different types of licensed real estate professions. For example, in Oregon, a “real estate broker” is the title given to those who would be called agents in many other states, while a “principal real estate broker” is the title given to those who would simply be known as real estate brokers in other states.
Furthermore, the term “Realtor” (also stylized as “REALTOR”) is a trademarked term that applies to real estate agents or other professionals who are members of the National Association of Realtors (NAR). The NAR is a trade organization comprised of people who work in the real estate industry, and not a state or federal real estate licensing body. As such, the term Realtor can apply to anyone the NAR allows to use it.
Anyone who wants to act as a real estate agent or broker must first be licensed to do so by a state licensing body. While you do not have to be a licensed real estate agent if you are buying property for yourself or selling property you own, you do have to possess a license to buy or sell real estate for others for a fee or for profit. So, in order for someone to act as a real estate agent for someone else, that person has to have a real estate license.
While individual states have different licensing requirements, the requirements are similar throughout the country. To obtain a real estate agent license, a candidate must meet several minimum qualifications:
- Education. Before becoming a real estate agent or broker, a candidate must complete some minimum educational requirements. These differ by state, but typically require applicants to have at least a high school diploma. Applicants must also take some college-level real estate-specific classes, such as real estate law, finance, or specific real estate practices courses. Furthermore, anyone who receives a license must participate in ongoing education every year to keep the license active.
- Examination. Would-be agents must take and pass a real estate examination. The exam tests the applicant’s knowledge of real estate principles, laws, agent responsibilities, and similar topics.
- Age. Real estate agents must be at least 18 years old.
- Criminal Background Check. Typically, real estate agents must pass a criminal background check. Anyone convicted of a crime can be denied a license.
Beyond the requirements for becoming an agent, anyone wishing to become a broker must meet additional qualifications, including additional education, proven work experience as a real estate agent, and the successful passing of a real estate broker examination.
Real Estate Transactions
A buyer’s agent is a real estate agent who helps a buyer find a home or property to purchase, while a seller’s agent is an agent who helps someone sell their home or property. Typically, real estate agents offer their services for both types of transactions.
When the buyer’s agent and sellers’s agent complete a sale, they typically receive their payment as a commission or fee based on the price of the property sold. Buyer’s agents and seller’s agents often agree to split the fee according to a predetermined arrangement, such as a 50-50 split of a 6% commission on the final sale price of a home. This fee is usually divided between the brokerages for which each individual agent works, and the brokerages pay the agent.
Dual Agency Transactions
It is not uncommon for the same brokerage – or even the same individual agent – to represent both the buyer and the seller. This is known as “dual agency.”
When you hire a real estate agent or broker, that person is responsible for protecting your interests. (For the purposes of principal-agent relationships, a real estate broker and the agents who work for that broker are effectively the same person.) So, if a broker represents both the buyer and the seller in a transaction, that broker – and the broker’s agents – have to protect the interests of both parties in the same transaction. This can be a complicated relationship to manage for all parties involved.
Dual agency representation, like all real estate issues, is governed by state rules, and those rules can vary from state to state. But in general, dual agency is only possible if the agent makes full disclosure of the relationship to all parties involved. Also, the agent must receive the express consent of each principal or would-be principal before serving as a dual agent. If the agent or brokerage does not make a full disclosure of the dual agency relationship, or does not receive the consent of all parties, the agent may be violating fiduciary duties.
Real Estate Agent Contract Terms or Clauses
If you wish to use the services of an agent to purchase new property or sell property you own, you’ll typically enter into a contractual agreement with the agent you choose and the agent’s brokerage. The contract lists specific terms about the nature of the relationship to which you and your agent agree.
Real estate agent contracts come in many forms, but they all contain essential elements – typically called “clauses” – that determine what you and your agent can do, cannot do, must do, and must not do during the course of the relationship – and sometimes after it ends. Each clause or section of a contract addresses a specific issue, such as the names of the parties (the agent and the principal) and how long the contract lasts, among other key pieces of information.
Unless there are significant problems with how the contract was drafted or the circumstances under which the contract was entered into, real estate agent contracts are legally enforceable documents. This means that if a court becomes involved, the court will apply the terms of the contract to any dispute.
Contracts contain multiple types of clauses, but the following are some of the most common.
1. Seller Clauses
Generally, real estate agents have the ability represent principals in one of three primary ways:
- Exclusive Right to Sell. If an agent has an exclusive right to sell a property, that agent (or the brokerage) receives the commission (payment) when that property sells. The agent receives payment even if the agent’s actions do not directly lead to the sale of the property.
- Exclusive Agency. In an exclusive agency agreement, the agent has the exclusive right to list or market the home, but does not have the exclusive right to sell it. So, if the homeowner finds a seller independently, the agent does not earn a commission.
- Open Listing. Open listings are very similar to exclusive agency listings, wherein the owner is obligated to pay the agent a commission only if the agent’s actions result in the sale. If anyone other than the agent is responsible for finding a buyer, the agent is not entitled to receive a commission. However, in an open listing, the property owner may use multiple agents and brokerages instead of a single brokerage.
2. Buyer Clauses
When a real estate agent is hired to help a buyer purchase property, the contract includes terms that state what the agent is allowed to do and what the buyer’s obligations are.
- Exclusive. Many (if not most) buyer contracts are exclusive, meaning the agent acts as the buyer’s sole agent. These contracts also guarantee that the agent receives a commission even if the buyer finds a property without the broker’s assistance, such as buying a home directly from a builder.
- Nonexclusive. A nonexclusive contract allows the buyer to utilize the services of multiple agents or brokerages to help find the right property. If the agent assists the buyer in finding a property, the buyer has an obligation to pay the brokerage. In either the exclusive or nonexclusive contract, the buyer’s obligation to pay the brokerage is removed if the buyer’s agent receives payment from the sale as part of an agreement with the seller’s agent (such as when agents split a percent of the home’s value as a commission).
- Nonexclusive, Not-for-Compensation. Like a nonexclusive buyer’s contract, the nonexclusive, not-for-compensation contract allows the buyer to use multiple agents or brokerages. However, the contract also says that the buyer does not owe the broker any compensation.
3. Listing Duties
The responsibilities a seller’s agent has may be contained in one or more clauses, but typically include such actions as listing the property in an MLS (multiple listing service), marketing the property in publications, or negotiating, making, and accepting offers on the seller’s behalf. These contracts also include the price at which the agent agrees to list the house.
The contract states how long the principal-agent relationship exists. Typical agreements range from six to nine months, but shorter and longer durations are possible.
5. Agent Commission or Fee
One of the most important clauses in any real estate agent contract is the commission, fee, or payment clause. These clauses state how much the agent is paid for services rendered. Agent payment clauses typically state that the agent is entitled to either a flat fee or a commission upon the completion of the transaction, known as “closing.” A flat-fee is a specific amount of money, while a commission is a percentage of the property’s final sale price.
Additional fees or conditions are also sometimes used. For example, a contract may include a clause that provides the agent with a higher fee if the agent sells the home for the full initial listing price within 30 days. Cash bonuses or other agent incentives can also be included. Also, because seller and buyer agents often split the same commission on any sale, the contract may include terms regarding how much the seller’s agent agrees to give the buyer’s agent.
6. Fee Protection Period
The fee or commission protection period clause – sometimes referred to as the “tail clause” – states that the seller’s agent is entitled to receive a commission or fee, even after the contract term has expired, if the sale results from a buyer the agent had originally introduced to the seller. For example, if an agent introduces a potential buyer to the seller in June and the agent’s contract expires in July, this clause allows the agent to get paid if that same buyer decides to purchase the home in August.
This clause may require the agent to provide the seller a written list of potential buyers the agent introduced to the seller. If any of those potential buyers end up purchasing the property within the time-frame established in the fee protection period clause, the agent is entitled to receive the agreed-upon fee or commission.
7. Agent Liens
In addition to the commission clause, a real estate contract may include an agent lien clause. Lien clauses allow the agent to place a lien against the property if the seller fails to pay the agent’s fee or commission.
A lien is legal notice attached to the title of the property stating that the property owner owes money and has yet to pay. Therefore, in order to sell the home, the property owner must first clear the lien by paying the amount owed to the agent. Some states, such as Florida, may refuse to allow a real estate agent to obtain a lien against a property for the purpose of obtaining a commission unless the agent contract expressly permits the agent to do so.
8. Brokerage Administration Fees
Many real estate brokerage contracts include a fee for administrative (or other) services. This clause states the amount of the fee and the date by which it must be paid.
The separation or termination clause, sometimes called an “opt-out clause,” addresses when and how you or your agent can terminate the contract or end the relationship. For example, the clause may state that the relationship can be terminated at any time upon the mutual consent of both parties.
10. Seller Representations
Seller contracts typically require the seller to make guarantees or statements to the agent. For example, the seller must state that the seller is the property owner and has told the agent about any possible interests that others may have in the property, such as liens or a mortgage against it.
11. Dispute Resolution
Some contracts include a dispute resolution clause, also known as arbitration or mediation clauses. These clauses require you and your agent to first participate in a mediation or arbitration process before taking any dispute to court. The mediation or arbitration clause typically states which process is required should a dispute arise, and identifies who is responsible for paying for the process.
Mediation and arbitration are ways disputing parties can resolve their disagreement without going to court (litigation). Both processes require the disputing parties to visit with a third party in an attempt to resolve the dispute. In mediation, the third party is a mediator whose aim is to get the two sides to come to an agreement. In arbitration, the third party is an arbitrator who effectively acts as a private judge, ultimately issuing a ruling on how the dispute is to be resolved.
12. Dual Agency
Contracts can contain clauses that either explicitly allow or disallow an agent to act as representative for both the buyer and seller.
13. Brokerage/Agent Separation
This clause states whether you can terminate the contract if the agent leaves the brokerage, or if you are obliged to remain with the brokerage if the agent you originally used leaves or is fired.
Negotiating Contract Terms
Even if you have already signed a real estate agent contract, it can be worthwhile to understand that negotiating contract terms is something you can (and usually should) do. The collection of terms and clauses contained within the contract presented to you are simply an offer that you are free to reject or accept outright, or accept upon conditions or changes.
For example, say you want to sell a home, and an agent presents you with a contract stating that he or she (or his or her agency) has the exclusive right to list and sell your home. Assuming your home sells, this clause would give the agent a guaranteed commission, even if the agent or agency had nothing to do with finding the buyer. Therefore, negotiating a nonexclusive agency agreement may be in your best interests, and may give the agent added incentive to find a buyer, as commission isn’t guaranteed.
What to Do When a Problem Arises
Say you’ve signed a contract with a real estate agent to buy or sell a property, but a problem arises and you’re unhappy with your agent. What can you do? What should you do? While there is no single answer, there are numerous options.
1. Read Your Contract
Any relationship you have with a real estate agent or broker is likely governed by the terms of the contract into which you both entered. Always review the terms of this contract before you decide to take any actions on your problem. In some instances, the contract explicitly states what must occur in specific situations, such as requiring dispute resolution before you can file a lawsuit.
2. Talk to the Agent
In many situations, a conversation can go a long way toward resolving a conflict. For example, you may fully understand what the agent is doing on your behalf, and simply need more information to be satisfied. The agent may very well be working as intended, but a lack of communication or understanding on either side can obscure those efforts and lead to confusion or conflict.
Even a brief conversation or email can be effective in clearing up minor disagreements or problems. When you talk to your agent, be clear about your concerns and what you want to make the situation right. If you have questions, write them down in advance and request an explanation.
If you are satisfied, the problem is resolved. If not, you and the agent may decide to mutually end the relationship.
It’s important to note that some real estate contracts require you to speak to your agent about any problems. The clause may also give the agent the right to remedy the situation in a reasonable, or specified, amount of time. If you try to end the relationship before giving the agent the chance to remedy the issue, you could be creating an additional problem.
3. Talk to the Broker
If a conversation with your agent does not produce answers or provide a solution, you may be able to resolve the problem by speaking to the agent’s boss: the broker. Like the agents who work for them, brokers are responsible for ensuring that your needs are protected. Moreover, having satisfied clients is typically good business, and brokers have an incentive to ensure that clients are happy.
Brokers often try to resolve problems amiably with clients, even to the extent of voluntarily ending the contractual relationship when not required. In some situations a broker may agree to assign a different agent to you, amend the terms of your contract, or make other concessions in an effort to ensure that you are pleased with the brokerage’s services.
4. Gather Evidence
Regardless of the nature of your disagreement or problem with your agent, you’re always on better ground when you have specific, objective evidence on your side. Whether your dispute arises out of contract terms, something your agent has done or said, or anything else, having evidence that supports your concerns leaves you with better options.
Get It in Writing
Even if you do not anticipate any problems with your agent, it’s always best to have key communications in writing. Communicating through email and written documents that you can keep in your possession gives you a trail of evidence you can later use if a problem arises.
However, much of the real estate process occurs person-to-person, and conversations you have with your agent are rarely written down. In situations where you and your agent discuss important details about your relationship, it can be helpful to follow up this verbal conversation with a written document. For example, if you and your agent negotiate a commission percentage, following up the conversation with an email stating the agreed-upon commission is an easy way to create a record.
In addition to written communication, protecting yourself by recording phone calls or conversations is also possible. However, there are significant limitations on whether you can record phone calls or person-to-person conversations, and these limitations differ by state.
- Recording When You Are a Part of the Call or Conversation. There are two ways that state laws treat recording phone calls: unilateral consent and two-party consent. Unilateral consent requires that at least one person in a conversation give consent to the conversation being recorded. In a two-party consent state, all parties present in a conversation must consent to its recording. So, if you live in any of the unilateral consent states, you can record any conversation of which you are a part without asking anyone else’s permission. If you live in a two-party consent state, you must have everyone’s permission to record the conversation. (Organizations such as the Reporters Committee for Freedom of the Press keep track of state recording laws, but you should always talk to a lawyer to be sure which laws apply to you.) The law regarding recording phone calls that take place between people in different states is somewhat more complicated. While federal law allows for unilateral consent, and you may not violate any federal laws when recording cross-state conversations, you may be violating state laws if one party lives in a state requiring two-party consent.
- Recording When You Are a Not a Part of the Call or Conversation. The laws about recording when you are not a party to a conversation or phone call are much more restrictive. Generally, you cannot record conversations of which you are not a part. However, you can record such conversations if you have the requisite consent needed under state or federal law. So, if a conversation takes place of which you are not a part, but you are in a unilateral-consent state and have the consent of one of the conversation’s participants, you can record the conversation.
- Talking to a Lawyer. Because there are potentially serious consequences to recording conversations or phone calls illegally, and because the laws differ significantly depending upon where you are, talking to an attorney in your state before you decide to make any recordings is always a good idea.
5. Terminate the Relationship
Regardless of whether you talk to the agent or broker, you may simply want to end the principal-agent relationship. In this situation, consult your contract and read any clauses that address separation or early termination of the relationship. If the contract allows you to end your connection to the agent, you can do so.
On the other hand, if you still want to end the relationship and do not believe you can do so under the terms of the contract, the agent or brokerage has to have breached at least one of the terms of the contract before you can terminate it unilaterally. Talking to an attorney about whether you have the evidence to support a breach of contract situation, or whether the agent’s actions are enough to breach the contract, is advisable.
6. File a Complaint With the State Real Estate Licensing Agency
If you feel that your brokerage or agent has mistreated you, violated their fiduciary duty, or has done something you believe to be unethical or illegal, you can file a complaint with the state real estate licensing agency. Each state has its own licensing body, and each has its own method though which you can file a complaint. Once you file a complaint you may be asked to provide evidence or speak to an investigator about your claim.
If an agent is found by the state licensing agency to have violated duties or responsibilities, the agent can face sanctions, such as suspensions and even revocations of the agent’s license. You can find the appropriate agency by searching the Internet for state-specific real estate licensing organizations.
7. File a Complaint With the Local Board of Realtors
If your agent or broker is a member of the National Association of Realtors, you can also file a complaint with the local board of Realtors. Like the state governing bodies that license real estate professionals, the NAR has standards with which its Realtors must comply, though it cannot suspend or revoke an agent’s real estate license.
8. Contact a Law Enforcement Agency
Some agent actions, and even agent violations of a fiduciary duty, can rise to the level of criminal activity. While you cannot predict how law enforcement agencies are going to proceed after you make a criminal complaint, you can always report suspected crimes to authorities.
When dealing with a real estate agent, it may be a good idea to report a suspected crime to both a local law enforcement agency, as well as a state-level agency. Local police may be less likely to investigate some matters, such as a criminal violation of a fiduciary duty, than a state agency that looks at real estate or fiduciary-related crimes.
For example, your state may have an agency that investigates consumer complaints that might arise out of real estate transactions. You may need to contact your state’s Attorney General’s Office about who to talk to about your concerns.
9. Consult a Lawyer
In a situation where you believe your agent’s or broker’s actions have caused you harm, resulted in lost money, or have otherwise affected your interests or your life in a significant way, you should talk to a lawyer about your options as soon as possible. Similarly, even if you just need advice about your interaction with an agent, an experienced real estate attorney is the best person to speak to.
Not all disputes with an agent have a possible legal solution, and not all solutions are financially justified. However, without talking to a lawyer, you may have no way to know what options are available.
For example, your real estate agent contract may include a mediation or arbitration clause that requires you to resolve your dispute through a third-party mediator. Should you try to initiate litigation first, your real estate agent might be able to dismiss your suit on the grounds that you breached the mediation clause. On the other hand, if your agent and broker do not allow you out of your agreement or have engaged in an action that has harmed your interests, your only option may be to sue them to recover damages. In either situation, an attorney can explain to you what you can or cannot do.
While speaking to a real estate attorney may not be something you want to do, some are willing to speak to you without charging a consultation fee. If you are unsure of whom to talk to about your situation, you may be able to find a suitable attorney by calling a state Bar Association attorney referral service.
Problems with your real estate agent are never ideal, but you shouldn’t let the prospect of a conflict stop you from acting. Whether your issue arises with the buying or selling of a home, or with your agent or with someone else’s, protecting yourself may require action to fully protect your interests. Furthermore, if the real estate agent or brokerage has harmed you, you may not be the only one – deciding to act may help others who have been similarly harmed.
Have you ever been mistreated by a real estate agent?