Buying or selling a home? Learn whom you can trust before a slip of the lip.
By Harvey S. Jacobs,
In the Washington area, when we think of parties, it’s practically first nature to think of Democrats and Republicans. But for people buying or selling a home, other parties are of critical importance, namely the “parties of the first part” and “parties of the second part,” also known, respectively, as “sellers” and “buyers.”
Most residential real estate transactions also involve several other parties, including one or more real estate agents, a settlement attorney, insurance agents for homeowners and the title insurance company and a lender. Sorting out who’s who, where their loyalties lie and what each party does will help keep your deal on track and help prevent you from inadvertently revealing confidential information to the wrong party.
Every real estate purchase transaction has a seller and a buyer. The confusion arises when real estate agents are added to the picture. The real estate agent that represents the seller’s interests is called the “listing agent;” he or she enters into a listing agreement with the seller to sell the house. The listing agreement is a binding contract between the seller and the listing broker. Among other terms, it obligates the seller to pay a commission when the home sells.
It also creates a legally recognized “fiduciary” duty obligating the listing agent to act in the seller’s best interest and to maintain seller’s confidential information, even if those actions are contrary to the agent’s self-interest.
It is vital that the buyer understand that the listing agent does not work for the buyer and does not owe a duty of confidentiality to the buyer. Anything a buyer reveals to the listing agent may be disclosed to the seller.
Often, the buyer will work with his or her own real estate agent. This can occur in two ways: through a written buyer-broker agreement, in which the buyer agrees to work exclusively with that one real estate broker, called a buyer’s agent. But the more typical arrangement is when a buyer works with a subagent of the seller, called the cooperating agent or selling agent.
This often arises when a buyer meets an agent at an open house or socially and starts to work with that person without entering into a written buyer-broker agreement. In either case, these agents have a duty to treat the buyer and seller fairly and honestly, but only a buyer’s agent has a fiduciary duty solely to the buyer. What’s the difference? For example, the cooperating or selling agent must answer all questions about a home honestly and fully, but those agents do not have a legal duty to let the buyer know there is a nearly identical house for sale nearby with a 20 percent lower asking price.
A true buyer’s agent, having knowledge of that cheaper home, has a legal duty to inform the buyer. Of course, in such a case, the buyer’s broker’s commission would also be reduced by 20 percent.
Buyers, beware: No matter now nice and helpful your cooperating or selling agent is, he owes his duty of loyalty solely to the seller, not to you. So before you tell him that your first offer is just a low-ball and that you would be willing to pay more, understand that your cooperating or selling agent is duty-bound to disclose that strategic information to the seller.
The concept of dual agency has arisen to allow two real estate agents from the same firm to represent both the seller and the buyer in the same transaction. A dual agency can be formed only if both the seller and the buyer sign a written dual-agency agreement allowing the same firm to represent both sides. In such a case, legally, neither agent owes exclusive loyalty to either buyer or seller.
Inherent in any dual agency is a conflict of interest, because the seller seeks the highest possible price and most seller-favorable terms, while the buyer seeks the lowest possible price and most buyer-favorable terms. Agents are typically paid a commission based on a percentage of the purchase price. So if both agents work for the same brokerage, their loyalties may be divided between getting the best price for their client and getting the highest overall commission for their brokerage. Since they work for the same brokerage, confidential information and negotiating strategy that typically would be used to gain a tactical or price advantage may be compromised to the benefit of the brokerage and to the detriment of buyer and seller.
Another major party to most deals is the lender. The buyer selects the lender. The lender, by obtaining an independent, professional appraisal, evaluates the property value. By verifying employment and examining credit reports, the lender determines the buyer’s ability to afford the home and the likelihood of the loan being repaid. While the lender is solely looking after its own interests, in many respects its interests are aligned with the buyer’s.
Insurance agents play a role in all residential deals as well. Without evidence of homeowner’s insurance, no lender will provide the money needed to purchase a home. The buyer selects an insurance agent and type of policy, and as long as it covers the full replacement value of the improvements and names the lender as an additional insured and loss payee, the policy is usually not too difficult to obtain.
Another party to the deal is the settlement attorney. By law, the buyer has the legal right to select the settlement attorney. The settlement attorney uses the loan documents generated by the lender, county land records and other settlement-service providers — such as title abstractors and surveyors — to prepare and deliver a draft HUD-1 settlement sheet to all parties. This draft is ideally delivered to the buyer one day prior to settlement. (The borrower may need to request this review of the HUD-1 statement.)
This standardized four-page form discloses all the fees, costs and financial figures among the buyer, seller, lender, real estate agents, taxing authorities and any other parties to the transaction.
Although selected by the buyer, the settlement attorney does not represent the buyer in the traditional attorney-client sense. In the Washington area, the settlement attorney represents “the deal” and thus owes a duty to all the parties to the transaction.
The duty to the buyer is to make sure that before the buyer’s money is disbursed, a good and marketable title is being obtained. The duty to the seller is to make sure that before the deed gets recorded, all of the seller’s money is on deposit and will be available to be disbursed in accordance with the settlement statement. The duty to the lender is to follow the lender’s detailed instructions regarding the creation of the purchase-money lien against the home. The duty to the title insurance company is to make sure that the requirements set forth in the title commitment are followed to the letter.
Without the coordination of all these moving parts, settlement can quickly become chaotic.
The more you know about who does what — and when they do it — the better equipped you will be to make sure that all parties are doing their job so you can get to the settlement table on time and within budget.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord, settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.