BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
To save costs, many real estate agents list and sell their own properties. However, in doing so they fail to recognize that there are a number of significant risks associated with this practice. Consider the following scenarios:
SCENARIO NO. 1: Agent lists the agent’s own property for sale. At an open house, a buyer asks the agent to write an offer and represent the buyer in that transaction. The agent does so without recognizing that there is an irreconcilable conflict of interest. The buyer later reports the situation to the Department of Real Estate (“DRE”). The DRE responds by seeking a revocation of the agent’s license.
RESPONSE: An agent who is also the seller may not under any circumstances represent the buyer in a buyer’s purchase of the agent’s property. Because fiduciary duty requires that an agent put the client’s interests ahead of the agent’s interests, the agent cannot properly advise the buyer as the buyer’s agent if the agent is also serving as the seller. This is an irreconcilable conflict of interest. There is a civil liability as well as exposure to license censure and sanctions by the DRE for undertaking this practice. Likewise, a listing agent should not represent a buyer in a buyer’s purchase of the agent’s spouse’s property, even if the property is spouse’s separately owned property.
SCENARIO NO. 2: Agent represents herself and her husband in the listing and sale of their property. The buyer is represented by a different agent and after the close of escrow files a lawsuit against the sellers and seller’s broker for non-disclosure. Because the broker cannot defend the agent in their capacity as a seller, the sellers are required to retain their own counsel at their personal expense. The broker retains a separate counsel to defend them and pays significantly more in settlement because the listing agent was also the seller and had personal knowledge of defects that were not disclosed to the buyer.
RESPONSE: The lines between acting as a seller and acting as a listing agent get blurred and generally lead to additional expense and liability for the sellers and the broker. In some instances, brokerages may seek indemnity from the agent acting, and creating liability, in their capacity as the seller.
SCENARIO NO. 3: Agent acts as the listing agent for his property. After the close of escrow, the buyer believes there has been a misrepresentation by the seller. The buyer files a claim with the DRE asserting that the seller had information but did not disclose it, which rises to the level of intentional fraud. The DRE investigates and places more scrutiny on the agent since the agent was not only the seller but also the listing agent.
RESPONSE: If an agent is selling their own property acting as listing agent and does not disclose required information to the buyer, there is not only potential liability to that agent both as a principal and as an agent, but also increased risk to their license.
SCENARIO NO. 4: Agent is the seller of the property with her husband whom she is divorcing. It is an amicable divorce, and the soon-to-be ex-husband agrees to the listing to save costs. Escrow closes and the buyer asserts a claim against both sellers for non-disclosure. Now, the ex-husband asserts a claim for indemnity against the agent and the real estate brokerage.
RESPONSE: Agents are discouraged from representing themselves, much less their soon-to-be-former spouses in transactions.
PRACTICE TIPS:
- It is recommended that agents list their own properties with other agents in their offices and avoid listing the properties themselves. The agent who lists this property must act fully as the listing agent; however, agents who are selling their own property can request that the listing agent pay them a referral fee.
- Agents who intend to list their own property for sale should consult with their manager before listing the property to ensure that they are able to do so under company policies and the brokerage’s E&O insurance policy.
- Agents should never represent a buyer in a transaction where they are representing themselves as a seller.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.