What is Real Estate Agency?

Q: Marsha, I’m confused about the term “agency” in California real estate. I’m involved in a home purchase, and I keep signing “agency disclosures.” What am I signing?

A: Good question! Join the club in not understanding what agency means in real estate. It seems as if the relatively benign concept of who is working for whom should be easily understood and clear. Wrong! Most civil lawsuits in real estate involve agency: negligent misrepresentations, breaches of fiduciary duty by real estate licensees, and failure to disclose professional relationships. Note: I am not an attorney, so don’t take what I say as legal advice.

One of the forms you’ve undoubtedly signed is “disclosure regarding real estate agency relationship.” This form defines different configurations of agency and what the duties of the real estate agent is to the principal parties. There is the seller’s agent, the owner of the property, the buyer’s agent, the purchaser of the property, or one real estate agent or firm representing both parties.

It’s vital to know who the principals are and who represents them in the transaction. Agents owe a fiduciary duty to their principals. That means they must hold their principal’s financial concerns above their own.

Confused? It’s easy to become bogged down in terminology. California has worked steadily over the years to bring transparency and clarification to the subject. Agents are required to have potential and new clients sign agency disclosure forms as soon as they begin a real estate relationship with a buyer or seller. 

A few years ago, California Association of Realtors (CAR) upgraded the residential purchase agreement to further emphasize agency. The first paragraph of the purchase agreement states the names of the buyers, the property address, and purchase price offered. The second paragraph discloses and confirms who is representing whom. Agency is stated as soon as possible; it’s that important.

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The traditional way real estate agents are paid has created much of the mystification.  Real estate commissions are always negotiable. In Santa Barbara, commissions are generally 5 or 6 percent of the ultimate purchase price. The listing agent presents the home for sale in the Multiple Listing Service and agrees to split the commission with a buyer’s agent. It would appear the seller is paying for both the agents. So, aren’t both the agents working for the seller? But wait, an argument can be made that the buyer actually pays the commissions. The seller settles all debts of the transaction from the buyer’s purchase money. This is an ongoing discussion in real estate.

What’s important is not who is paying the agents; it’s whom the agents represent. Agents owe their loyalty and fiduciary responsibility to their principal clients. They owe honesty, ethical behavior, and full disclosure to the other agent’s client. If a dual agency arises, the agent, who now represents both seller and buyer, has a fiduciary duty to both principals. 

I hope this gives you some understanding of what agency means in real estate. It’s a fundamental and critical concept in residential property transactions. Who’s looking out for your best interests? It had better be your agent.

Marsha Gray, DRE #012102130, NMLS#1982164, has been a real estate broker in Santa Barbara for over 20 years. She works at Allyn & Associates, real estate services and lending. To read more Q&A articles visit MarshaGraySBhomes.com. She will research and answer all questions submitted. Contact Marsha at (805) 252-7093 or MarshaGraySB@gmail.com.

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