Loyalty: The agent owes undivided loyalty to the client and puts the client's interests above her own.
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.
Fiduciary duty in real estate is the legal obligation real estate agents have to act in the best interests of their clients.
Key Takeaways
- Fiduciary duty in real estate requires realtors to act in the best interests of their clients.
- This includes disclosing any conflicts of interest and negotiating in good faith.
- Fiduciary duty in real estate consists of six parts: obedience, loyalty, disclosure, confidentiality, accounting, and reasonable care.
- If you violate your fiduciary duty in real estate, you could be sued in court and potentially lose your license.
How Fiduciary Duty in Real Estate Works
Fiduciary duty in real estate requires you to put your client's interests ahead of your own in all aspects of the real estate relationship, from providing honest and accurate advice to negotiating on their behalf.
This duty of care extends beyond the actual transaction and lasts as long as you're representing the client—even after the deal is done. If you violate these rules, you could be sued for breach of fiduciary duty.
Note
Almost every state requires you to create a written agreement that outlines your duties and responsibilities to your client. This agreement also establishes agency and clearly outlines your clients’ rights.
What Does the Acronym OLD CAR Mean in Real Estate?
Fiduciary duty in real estate is often broken down into six categories, commonly referred to as the “OLD CAR” acronym. It stands for:
- Obedience: You must obey your client’s lawful instructions.
- Loyalty: You must always act in your client’s best interests, even if it means forgoing your own interests.
- Disclosure: You must disclose any material facts about the transaction, including your relationship to the other party.
- Confidentiality: You must keep your client’s information confidential unless you have their permission to do otherwise.
- Accounting: You must keep accurate records of all money and property involved in the transaction.
- Reasonable Care: You must use reasonable care and skill when handling your client’s business.
Examples of Fiduciary Duty in Real Estate
Here are four examples of when you could violate your fiduciary duty as a real estate agent:
- If a buyer asks you to find homes that fit their budget and criteria, you would be violating your fiduciary duty if you instead showed them properties that were outside of their budget or didn't meet their criteria just because you thought it would result in a higher commission for you.
- If you were acting as a dual agent for both a buyer and seller and didn’t get written consent from each party, you’d be in violation of your fiduciary duty. (This violation also applies if the buyer’s agent and the seller’s agent are two different people but work for the same broker.)
- If you decline or accept an offer on your client’s behalf without telling them first, you would be violating your fiduciary duty in real estate.
- If you're working with a buyer who’s interested in a property that you know is in poor condition, under your fiduciary duty, you’d be required to tell them about the property's condition and advise them not to purchase it.
If you neglect your fiduciary duty—whether accidentally or on purpose—you could be sued for damages, breach of contract, intentional misrepresentation, and more. In some cases, you may even lose your real estate license.
Frequently Asked Questions (FAQs)
What fiduciary duties in real estate must you disclose to your clients?
As a real estate broker, you must disclose any information that would aid them in the transaction process. For instance, if your client is buying, you must tell them:
- How long a property has been on the market
- Why it’s priced the way it is
- Any counter-offers that have been made
- If the seller is willing to accept a lower price
If your client is selling, you must tell them:
- If a buyer is willing to pay a higher price
- What the buyer’s intentions are with the property
- All offers made on their property
How long does confidentiality last under fiduciary duty in real estate?
When it comes to fiduciary duty in real estate, the “confidentiality” portion lasts forever—even after a property is closed on. Unless under legal order or instructed to do so by the client, you can’t disclose any private information about your clients or their finances to anyone. The only exception is if you’re ordered by a judge.
What happens when you violate your fiduciary duty in real estate?
If you violate your fiduciary duties in real estate, you could be sued and any of the following could happen:
- You could lose any commission you were set to receive.
- You could have to pay damages.
- You could have to complete a rescission, which is where you refund the buyer and return the property to the seller.
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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Redfin. “What Is Fiduciary in Real Estate?”
California Department of Real Estate. “The Real Estate Brokerage as Fiduciary: A Summary Review of What it Means and Why It Matters,” Page 3.
Which of the following is an example of a fiduciary duty?
Fiduciary duties include duty of care, loyalty, good faith, confidentiality, prudence, and disclosure.
What is the most important fiduciary duty?
Fiduciaries should act in good faith in the interests of their beneficiaries, should impartially balance the conflicting interests of different beneficiaries, should avoid conflicts of interest and should not act for the benefit of themselves or a third party.
What are the fiduciary duties of an agent to her principal quizlet?
A fiduciary relationship is a position of trust, and the agent owes the principal the duty of obedience, loyalty, disclosure, confidentiality, accounting, and reasonable care (OLD CAR).
Who is the fiduciary quizlet?
Fiduciary: Someone that has been trusted to act for and in the best interest of another person.
