Q. I am a real estate broker and have a listing on a very nice house. The real estate market has been disastrous in recent months, and obviously I am anxious to make a sale. Recently, a young couple expressed interest in this house, and although they may be able to qualify for a mortgage loan, they don't have enough cash for the down payment, I am willing to lend them some money, but have heard that this is not permitted. Can you advise?
A. You can lend the buyer money, but only if you have disclosed this fact to the seller.
To understand the relationship between a seller and a real estate broker, you have to look to the law of agency to determine what is permissible. Generally speaking, an agent has a fiduciary relationship to the principal. An agent is under a duty to the principal to act only as authorized, and if an agent exceeds the authority, the agent is responsible to the principal for all loss or damage which naturally results from any unauthorized acts.
The agency relationship implies that the principal has given trust and confidence to the agent, and the agent is bound to the exercise of the utmost good faith, loyalty and honesty toward the proncipal.
The real estate broker or agent has a duty to make full disclosure to the principal of all material facts relevant to the agengy. This is a fundamental and underlying doctrine of the fiduciary relationship between the principal and the agent.
Accordingly, if you intend to make a loan to the buyer, this could be interpreted as doing acts inconsistent with the fiduciary relationship owed to your seller. However, if you disclose these facts to your seller, and if the seller approves, there is nothing wrong with making the loan.
A recent Iowa case addressed this very issue. The seller of farmland listed the property with a broker. The broker found a purchaser who was only able to come up with $2,500 of the required $10,000 down payment. The broker loaned this money to the purchaser, without telling his client, the seller.
Because of other problems, the seller refused to pay a commission, and the broker sued. The Supreme Court of Iowa specifically found that the broker had breached his duty of undivided loyalty and full disclosure to the seller, and this was not entitled to earn the commission. The court found that one of the basic duties of an agent weas to "use reasonable efforts to give his principal information which is relevant to affairs entrusted to him, and which, as the agent has notice, he would desire to have."