The Disclosure Regarding Real Estate Agency Relationship - The California-Required Disclosure Before Hiring an Agent
by Justin Gramm, Broker
What is the Disclosure Regarding Real Estate Agency Relationship?
The State of California wants you to be aware of how agency works BEFORE you begin working with an agent.
In fact, the state law requires it!
There is a two-page disclosure form drawn up by the California Association of REALTORS® that helps real estate agents fulfill this disclosure requirement before an agent goes to work for a client.
When is the Agency Disclosure Supposed to Be Given to Consumers?
Sellers should receive the disclosure paperwork from the listing agent (and have time to read it) BEFORE signing a listing agreement...
And buyer's agents should be giving this form to prospective homebuyer clients BEFORE representing them on the buyer-side...
What is the Purpose of the Disclosure Regarding Agency Relationship?
The PURPOSE of the Agency Disclosure form is to make sure that EVERY person who hires a real estate agent in the state of California is given an opportunity to learn how agency works BEFORE they hire a real estate agent.
Upon reading this form you should understand which types of real estate agents are looking out for your best interests, and which types of real estate agents legally CANNOT look out for your best interests, etc.
Globella Buyers Realty is dedicated to helping San Diego home buyers only, and so we will be looking at this disclosure paperwork from a buyer's point of view in this article.
As a San Diego home buyer, I recommend that you get familiar with this form.
Although you will be asked to sign the form, it's NOT a contract. It's simply a disclosure.
In this article, I will discuss the 2-page form section-by-section to help you understand what you are signing.
If your buyer's agent has NOT provided you with the disclosure form yet, I recommend that you ask for a copy ASAP.
The First Sentence of the Disclosure Regarding Agency Relationship
The form's introductory sentence states:
"When you enter into a discussion with a real estate agent regarding a real estate transaction, you should from the outset UNDERSTAND what type of agency relationship or representation you wish to have with the agent in the transaction."
The 3 Main Types of Agency You Will See
The form then lists three different types of agency:
(1) SELLER'S AGENT
(2) BUYER'S AGENT
(3) AGENT REPRESENTING BOTH SELLER AND BUYER.
The key phrase you will see in this disclosure is "fiduciary duty." What does "fiduciary duty" mean?
TheFreeDictionary.com defines "fiduciary duty" as "the legal duty of a fiduciary to act in the best interest of the beneficiary."
The Legal Duty of the Seller's Agent to the Seller
The seller's agent has the legal duty to act in the best interest of their client, the seller.
The reason that California wants home buyers to read this disclosure form BEFORE signing an agreement or contract with a real estate agent is probably clear to you by now.
Many buyers don't understand how agency works until they read about it on this disclosure form.
The Legal Duty of a Seller's Agent to the Buyer
As you read further you will see that the seller's agent also has certain duties to the buyer.
Line (c) states that the seller's agent is required to disclose to you (the buyer) all facts materially affecting the value or desirability of the property.
Although, they are required to disclose these things to a buyer, the seller's agent is NOT required to act as a fiduciary in helping the buyer make sense of disclosures.
And the seller's agent is NOT obligated to reveal information about the seller that may aid the buyer in the negotiations.
The Definition and Duties of the Buyer's Agent to the Buyer
Next you will read what the form has to say about BUYER'S AGENTS. First, it explains that the buyer's agent is not an agent of the seller EVEN IF an arrangement has been made for the seller to pay a commission to the buyer's agent (as this post is written, it is common practice in San Diego for many sellers to offer a commission to the buyer's broker).
Even though a seller pays a commission to the buyer's agent, the buyer agent's fiduciary duties are to the buyer only!
...To help the buyer get the lowest price and best terms possible...
...And to help the buyer review all disclosures, reports, inspections, and other documents and forms of investigation to determine if purchasing the home at the agreed-price is in the buyer's best interest.
What is a Dual Agent?
The next paragraph explains Dual Agency. A "dual agency" situation is one in which the same agent represents BOTH the buyer and the seller on the same transaction.
Although some states have outlawed dual agency, it is currently legal in the state of California for an agent to represent both the buyer and the seller in one transaction, so long as both the buyer and the seller are aware of (and have consented to, in writing) the dual agency situation.
Is this the situation you want to get yourself into? Of course not! How can ONE agent negotiate the BEST price and terms for the seller and, at the same time, negotiate the best price and terms for the buyer? It's impossible... Because the buyer and the seller have competing interests. And it's OK that they have competing interests. It's just the way it is.
Now do you understand why California requires this disclosure to be given to California home buyers?
In fact, it's actually a federal law that every state must require their real estate agents to make this sort of disclosure.
Dual Agency presents a conflict of interest in which the role of the real estate agent is reduced to that of a "transaction facilitator"... rather than truly advising their client and being able to look out for their client's best interests. And isn't that the main reason you are hiring a real estate agent in the first place (to have an experienced person that you trust give you expert home buying guidance and advice)?
A Buyer's Agent Who Works for a Traditional Real Estate Company Can Become a Dual Agent
You may have wondered, "What if my buyer's agent doesn't represent any sellers, but their company does?
All real estate agents must "hang their license with" (work for) a licensed California broker.
A broker is a real estate agent who has taken extra classes, met extra criteria, and passed an extra "broker" exam.
Every San Diego real estate company has at least ONE broker, and every real estate salesperson must EITHER BE a broker OR WORK FOR a broker.
Here is where it gets more interesting: The broker is responsible for every transaction that takes place in their office, AND the broker legally represents every client that their agents are working with.
In most cases, the buyers and sellers have NEVER even met the broker... But if they are being represented by one of the broker's agents, they are actually also being represented by the broker.
This is an important concept to understand, because it changes the way you read this disclosure form.
In reality, dual agency is happening quite a bit in San Diego. Any time a buyer and seller are being represented by the same company in one transaction, it's dual agency (and the buyers and sellers tend to be the losers in these situations, in my opinion).
Even if there are two seperate "real estate agents" involved, the truth is that BOTH of those agents report to the same broker, AND both the buyer and the seller are the clients of the same broker.
Buyers and Sellers (the Consumers) Are the Losers in Most Dual Agent Transactions
Unfortunately in these situations, even when working with the nicest and most honest real estate agents, the people who lose out are the clients.
The clients lose out because they sacrifice having true agency and fiduciary benefits from working with a real estate agent who only works for them.
Now, I must also tell you that I have friends and relatives who work for large traditional real estate companies. Real estate agents who work for traditional brokerages are not bad people (perhaps some are, but the majority are not).
Many real estate agents actually try to avoid dual agency situations by practicing single agency.
Others DO NOT try to avoid dual agency situations. They actually seek it out as a way to make more money.
The Practice of Exclusive Agency in California
A few companies have decided to practice exclusive seller agency OR exclusive buyer agency.
There are real estate companies in San Diego that ONLY represent sellers or ONLY represent buyers. A company that only represents buyers is commonly referred to as an exclusive buyer agency or exclusive buyer brokerage.
The disclosure form we reviewed in this article doesn't go into much detail about exclusive agency, but I believe it's important for buyers to be aware of their right to work with an exclusive buyer agent.
Signing the Disclosure Regarding Real Estate Agency Relationship
The last section of Page 1 explains why you are signing the form (you acknowledge receipt of a copy of the form and the section of the California Civil Code that the form refers to).
In case you are unfamiliar with the term "civil code," it's basically the actual text from the Laws of California that this first page is summarized from.
UPDATE: I've written a second post reviewing the second page of this disclosure form (the Civil Code). Be sure to read this new post by clicking here.
Legal Disclaimer: The writer of this article has no intentions of offering legal advice of any kind. Globella Buyers Realty and its real estate agents do not practice law. A real estate agent can only offer real estate advice. If you are in need of legal advice, please consult with a real estate attorney.
