Selling side risks flow from the same agency duties as on the listing side. The duties of loyalty, obedience, confidentiality, disclosure, reasonable care and diligence, and accounting all apply. Just like on the listing side, each duty is a separate risk generator for risk identification purposes. What changes is not the duties, but the relative importance of each duty as a risk generator. Loyalty, obedience, confidentiality, and disclosure duties create the same type of risk on the selling side as on the listing side, but the opportunity to violate these duties is greatly reduced. The opportunity to violate the duty of reasonable care and diligence is, however, greatly increased.
Loyalty to a buyer client means placing the buyer’s interests in front of the agent’s. The buyer’s primary interest is in finding suitable property at a price they are willing to pay. Loyalty usually only becomes an issue on the selling side if the buyer’s agent tries to beat their client out of a property by buying it himself or helping another client buy it.
Two buyers competing for the same property using the same agent raises serious loyalty issues. Indeed, it creates the most dangerous dual agency situation in real estate. Buyer/buyer dual agency is allowed under Oregon law if a disclosed limited agency agreement is signed by both buyers. Click here for a detailed discussion of dual agency and disclosed limited agency agreements. Notwithstanding that the law allows such situations, they are so dangerous that most companies forbid a single agent to represent two buyers competing for the same property.
Loyalty is always an issue in dual agency situations. Permission (through a disclosed limited agency agreement) to represent more than one party in a transaction does not resolve all loyalty risks. For instance, a listing agent who also represents a relative or even a close friend who wants to purchase the listed property has a loyalty problem even if they have permission to represent both parties. The loyalty problem is that the relationship with the buyer may influence the agent’s actions. That potential, the potential for influence created by the relationship with the buyer, must be disclosed to the seller to satisfy the duties of loyalty and disclosure. Controlling this kind of selling side loyalty risks is covered in the Risk Mitigation section of this subject.
As was the case on the listing side, the duty of obedience is rarely violated directly as in an agent refusing to do what the principal asks. Obedience becomes a risk management issue on the selling side only if the buyer demands the selling agent to do something, usually withhold information, which misleads the seller to their detriment. Typically, that information involves the buyer’s ability to perform the contract – for instance, the buyer’s inability to redeem the earnest money or lack of financial wherewithal in seller carry transaction. Controlling this kind of selling side obedience risk is covered in the Risk Mitigation section of this subject.
Confidentiality, we have seen, is implicated anytime an agent discusses the object of the agency relationship with a third party. On the selling side, that means potential risk anytime the buyer’s agent discusses the buyer’s motivation, financial situation, transaction details or other information with anyone other than the buyer. That doesn’t mean these things can never be discussed with third parties. But it does mean that agents should carefully consider confidentiality before doing so.
For instance, appraisers will often call agents and ask about transaction details. These details are, of course, known to both parties. That means that, as between the parties, the details are not confidential and either party may disclose them as they see fit. That, however, does not mean an agent can unilaterally disclose transaction details to a third party without permission of their client. One of the reasons buyer/buyer dual agency is so dangerous is because each buyer will seek information about what the other buyer is offering. Such information is, of course, strictly confidential notwithstanding the dual agency. Controlling selling side confidentiality risk is covered in the Risk Mitigation section of this subject.
The duty of disclosure creates risk anytime the buyer’s agent withholds information from the buyer. On the selling side, this is almost always the result of the agent placing their interests above the clients interests. For instance, an agent might withhold information about a newly listed property because their client is considering an offer received on a company property. If the newly listed property might be of interest to the buyer, the agent must disclose the information. We are talking here about the agent’s duty of disclosure to their own client. That duty requires disclosure of any information that may be helpful to or of interest to the client, not just “material” information. There is no such thing as withholding information for the client’s own good.
Material information, as we saw on the listing side, has to do with the license law duty to all parties to disclose latent material defects not know or readily apparent. Disclosure to all parties duty is implicated if the buyer wants material information (like inability to redeem an earnest money note) withheld from the seller. To be material, the information must go to the very purpose of the transaction. That is, it must be so important that it would cause a reasonable person to reassess the transaction. Controlling selling side disclosure risk is covered in the Risk Mitigation section of this subject.
The duty of reasonable care and diligence without doubt generates the most risk on the selling side. The buyer’s direct diligence risks in a real estate transaction are huge. The buyer may pay too much for the property or find the property contains material defects or discover that it is unfit for the buyer’s intended purpose or that external factors (everything from bad neighbors to flood hazards) greatly reduce its desirability.
When something is discovered after the transaction has closed that reduces the value or desirability of the property, the buyer will wonder why their real estate professional did not prevent the harm or at least warn them of the potential. Thus, a buyer’s agent is at risk in every transaction where the buyer questions the wisdom of their purchase after the fact. One need only consider the phenomenon of “buyer’s remorse” to understand why the duty of reasonable care and diligence creates so much risk for a buyer’s agent.
Almost all lack of care and diligence suits are based on hindsight. That is, the buyer finds a problem after closing and using hindsight looks back over the transaction to see where they went wrong. Once that point is identified, there is a tendency to look for someone to blame. The agent who allowed whatever it was to happen is an obvious target. The only defenses available for the agent at that point are: There is no way I could have known; or, I did know and warned you. That makes control of the risk created by the duty of care and diligence a matter of anticipating what might go wrong before it does. This can be a very daunting undertaking. Controlling this kind of selling side risks is covered in great detail in the Risk Mitigation section of this subject.
Accounting is the final direct risk duty on the selling side. As on the listing side, the duty to account requires the agent to keep track of (account for) any money or property of the client’s coming into the agent’s hands as a result of the agency. Because Oregon law requires licensees to keep their client’s funds in trust accounts, accounting is mostly a matter of following trust account rules.
Following trust account rules is usually not difficult. The exception, of course, is handling earnest money on the selling side. Click here for a discussion of earnest money rules and practices. Real estate practices regarding handling and accounting for earnest money are antiquated and dysfunctional. As a result, agents are often caught up in earnest money disputes. Controlling this kind of selling side accounting risk is covered in the Risk Mitigation section of this subject.
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