Fiduciary Responsibility in Real Estate

I have been thinking about this word an awful lot lately. As a real estate agent, you have, by law, a fiduciary responsibility to your client. I want to examine and have you, as an agent or client, think about, whether you’re are living up to your fiduciary or has the fiduciary been breached.

 I am often asked what the difference is between a residential and a commercial real estate agent is. The short answer is A LOT. Yes, we go through the same class and take the same test to get the same license, but that is where it ends.

 Once the residential agent is licensed and starts working at a brokerage, they get some training on how to fill out forms and put information in the MLS. I’m sure there are some agencies that teach them basic prospecting, but I’ve been told it’s let all your family and friends know you’re an agent and do desk time answering phone. Continuing education is around fair housing, ethics, and state laws, but I have not heard of anyone teaching you how to bring value. And certainly not taught what a commercial agent must learn.

Typically, for a commercial real estate agent you get a solid week of training, learning all the paperwork, how to interview a client and price deal. You start your education on CAP Rate, ROI, Cash on Cash return and what you ask for when in a listing appointment so you can begin to price a deal, like rent rolls, P&L’s, and tax returns. What will the seller do with the proceeds? 1031 Tax Deferred Exchange, utilize the IRS PUB 453, pay the capital gains tax and get to cash? What is your recommendation? What’s the pros and cons to each? There are multiple certifications and education programs to increase your knowledge like CCIM & SIOR.

Once you understand those things, you start calling on owners of properties in the asset class you will specialize in to set up an introduction meeting. Do that for the first 90 days. As you get appointments set up, you should have a mentor to with you so you can watch and learn how a professional does it. For me, it’s very conversational. And most importantly I try to bring value by offering knowledge and services they may or may not know about. You will get your first listing from those efforts. Your mentor will help you work through the information and do a valuation on the property to price it. The mentor will go with you and present your findings and secure the listing. Your mentor is there for you for at least the first six months, most will have you commit to a year on their team or until you’re comfortable going out alone.

 So, ask yourself this; do you have the specialized knowledge to list a commercial deal? I will be the first to tell you I have no business listing a house for sale. I have been asked to if I will sell someone’s house numerous times over the last 18 years, I refer it out 100% of the time.

 Let’s look at the definition of FIDUCIARY per real estate law; it is the highest level of legal duty of one party to another, being a fiduciary requires being bound ethically to act in one’s best interest.

 Do you recall the way we were taught to remember fiduciary? OLDCAR: Obedience, Loyalty, Disclosure, Confidentiality, Accounting, and Reasonable Care.

 ·        Obedience: As an agent of your client, you must obey their instructions, barring illegal, unethical requests, or requests which contradict terms of the contract.

·        Loyalty: As the agent for your client, you must be loyal and keep their best interests ahead of those of any other party, including yourself. How much commission you might make, particularly in competing for offer situations, should not be a consideration and would be disloyal to your client.

·        Disclosure: In many states the law requires a real estate agent, whether in an "agency" capacity or not, to disclose material facts to their client. Material facts are those which, if known by the buyer or seller, might affect purchase or sale actions.

·        Confidentiality: Your fiduciary duty of confidentiality means that you do not disclose anything that you learn about your client, their business, financial or personal affairs or motivations.

·        Accounting: Accounting for all documents and funds in the transaction is a fiduciary duty. Accurate reporting of the whereabouts of all monies pertaining to the transaction and their ultimate disposition is a fiduciary responsibility.

·        Reasonable Care: an agent is required to protect the principal from foreseeable risks of harm, recommending EXPERT device when the principal needs are outside the scope of the agents’ expertise.

 As a commercial broker, I wouldn’t know how to list and sell a home. I don’t belong to the MLS or board of realtors for that matter. Residential agents don’t have premium access to LoopNet or the expertise to sell a commercial property, do they? Even if they have the ability now, did they on those first deal?

 What if one of those sellers came back and sued for breach of fiduciary? To win a breach of fiduciary duty complaint, the claimant only must prove that you were in a fiduciary position (his/ her agent) and you breached that duty for your own personal gain (commission).

 So, what’s an agent to do? I can only tell you what has worked in my area for me. I sign a one-year referral letter with the agent referring the client that the agent can renew with 30 days’ notice, that says the referring agent gets a 25% of my fee each time I represent that client. Why would an agent do that? The likelihood of me getting the deal closed is much higher than if the residential agent does it on his own. I also un more, like are they going to do a 1031 Exchange? DO they have more properties? Often times a residential agent will take a couple of rentals as listings not knowing the seller has more properties and it’s easier to present to an investor as a package than individual deals. Or the fact it’s better for the seller, especially if they have a “must take”. In short, find a commercial broker you can with. Develop a relationship that you can rely on long term. OR get educated yourself, you don’t know what you don’t know.

 Now ask yourself the question again, are you as an agent living up to your fiduciary?