If you’ve ever hired someone to represent you legally or financially, you probably expected that person would act in good faith with your best interests in mind. And legally, that person has a fiduciary duty to do what’s best for you. But did you know that there is also a fiduciary duty in real estate?
What Is A Fiduciary Duty?
A fiduciary duty exists anytime a consumer puts their trust and well-being in the hands of another person. The individual referred to as the fiduciary is responsible for putting the other person’s interests ahead of their personal interests.
A fiduciary duty is an ethical and legal obligation, which means a breach could lead to legal action. The consequences of a fiduciary breach can range from a damaged reputation to potential fines and penalties.
A fiduciary duty can exist in many different situations. For instance, an attorney, company executives, and financial advisers all have a fiduciary duty in their professions. And a fiduciary duty can also exist in real estate.
Who Owes A Fiduciary Duty In Real Estate?
In real estate, the most common example of fiduciary duty is the relationship between the real estate agent and their client. But other parties, including the escrow agent and any attorneys involved in the transaction, also have a fiduciary duty to the individuals they represent.
Real estate brokers have a fiduciary duty to their clients, which means they’re responsible for the following:
- Disclosing all material facts to the client
- Transmitting all offers to the client
- Refraining from dual representation in a transaction
- Generally putting their client’s interests ahead of their own
If a real estate agent breaches their fiduciary duty, this can lead to legal action. However, it can be challenging to prove that a breach of fiduciary duty occurred.
How Should A Real Estate Agent Fulfill Their Fiduciary Duty?
At this point, you may be wondering about the fiduciary duties of a real estate agent. A real estate agent should always protect the good faith of their clients and offer reasonable care to them.
The National Board of REALTORS® (NAR)’s description outlines the fiduciary duties real estate agents owe to their clients. These duties include the following tenets:
- Loyalty: Agents should always act in the best interest of their clients.
- Confidentiality: Real estate agents agree to keep confidential information that could weaken the client’s bargaining power if revealed.
- Disclosure: Agents must disclose any relevant information, including offers, factors affecting the property’s value, and other information about the transaction.
- Obedience: Real estate agents must follow through on all lawful instructions from the client.
- Reasonable care and diligence: Real estate agents are required to use reasonable care and due diligence in managing their client’s affairs.
- Accounting: Agents must account for any money, deeds or documents entrusted to them.
How Do Fiduciary Conflicts Arise?
In real estate transactions, the buyer typically has a buyer’s agent, and the seller has a seller’s agent. And ideally, each agent works for a different company, so no conflicts arise. And with rare exceptions, sellers pay all agent fees.
However, fiduciary conflicts do sometimes arise in real estate. Let’s look at a few examples of potential conflicts.
Potential Conflict #1: One-Brokerage Towns
Geographically, the U.S. is mostly small towns and rural areas. And many of these small towns don’t have competing local brokerage companies.
If the buyer’s and seller’s agent work for the same brokerage, and the brokerage fees are paid by the seller, there’s an inherent fiduciary conflict. This situation is known as dual representation, and state laws outline how this situation should be handled.
Guidelines can vary from state to state. But in general, dual representation is only an option if the brokerage company discloses the agency relationship to everyone involved in the transaction. The brokerage firm has a fiduciary duty to the seller and the buyer to let them know what’s going on.
Potential Conflict #2: For Sale By Owner Properties
Another potential conflict arises when a buyer wants to purchase a for sale by owner (FSBO) property. In a typical real estate transaction, the average seller will hire a real estate agent to represent them in selling their home.
However, a FSBO property is that which someone is attempting without a real estate agent's assistance. In this situation, the seller has a fiduciary duty to the buyer to disclose any important information about the transaction's material facts.
Who Else Owes A Fiduciary Duty?
There are often many different professionals involved in a real estate transaction. And all of these individuals owe a fiduciary duty to their clients.
Real Estate Attorneys
In a typical real estate transaction, a buyer is represented at closing by a real estate attorney. This individual not only owes a fiduciary duty to their client but is also tasked with an even higher standard of ethics to uphold.
The buyer’s earnest money and other payments are deposited into an escrow account pending closing. Later, part of their monthly mortgage payment goes into an escrow account until tax and insurance payments come due. In this situation, both escrow accounts are managed by an escrow agent, who owes a fiduciary duty to the account.
Executors and Trustees
If a property owner dies, the probate court will appoint an executor or administrator to manage the deceased’s property. And if the property passes into a trust to avoid probate, a trustee manages the property. Both roles owe a fiduciary duty to the estate or trust they are managing.
What Happens If A Fiduciary Breaches Their Duty?
When a fiduciary breach happens, this can often result in legal action. If the breach can be proven, the courts will often award damages caused by the breach. There can also be professional consequences to breaching your fiduciary duty.
A Fiduciary Owes Their Client Their Best Efforts
If you’re looking at buying a home, you’ll most likely hire a real estate professional to help the sale proceed smoothly and quickly. That individual has a fiduciary duty to act in your best interest and disclose any potential conflicts.
If a fiduciary breach does occur, this can lead to legal and professional consequences for the agent. If you’re interested in learning more about home buying, be sure to check out our Learning Center.