Real estate professionals can find themselves facing a lawsuit for any number of reasons. Conflicts of interest situations are one of those reasons — especially if you have a conflict of interest, and you don’t declare it.
Real estate agents have a fiduciary obligation to each client, so there’s an expectation that client interests will be served as first priority. A conflict of interest occurs when an agent has competing interests or loyalties which conflict with the interests of the client. In a real estate transaction, there are four main ways that this situation could occur:
- Dual agency situations
- When friends or relatives are involved
- Where an agent has a personal interest in a property
- When an agent recommends another company in return for commissions
Dual agency situations
Dual agency situations occur when the same real estate agent acts for both the seller and the buyer. It can also occur if there are two separate real estate agents working for the same brokerage (also called “designated agency”).
Dual agency arrangements are legal in some states, as long as all required disclosures are provided. However, both brokers and agents need to be aware of the risks involved to ensure there’s not an actual or perceived conflict of interest.
If you or a member of your team is acting as a dual agent, neutrality is essential. But, when commissions are paid on sales prices, some agents could be tempted to act more on behalf of the seller to increase their take-home pay. Ensure that everyone on your team understands that failure to keep neutral is a conflict of interest.
When a friend or relative of the agent is involved in a transaction
If relatives of the agent are involved in a real estate transaction, there is a conflict of interest. In this case, the agent must disclose a personal interest in the property.
Failure to do so is considered a contravention of the REALTORS® Code of Conduct. This applies to ‘immediate’ family, which includes spouse, children, siblings, parents, grandparents, grandchildren and other descendants.
These same disclosures are not required if friends of the agent are involved in a real estate transaction, but full disclosure is recommended nonetheless. Being upfront and transparent can avoid serious problems down the road. It can also help you protect the image and reputation of your brokerage and your team.
Some real estate brokerages have a blanket policy prohibiting their agents to be a party to deals that involve family or close friends. Keep in mind that some E&O insurance policies will not actually cover these types of scenarios, so be sure to check your insurer’s stance on the matter before formulating your policy.
When an agent has a personal interest in a property
Real estate agents have a trusted role and must ethically act in their client’s best interests. If one of your agents has a personal interest in a property, this must be disclosed. Imagine if sellers found out that their real estate agent purchased their property?
Personal interest also extends to more indirect benefits, including if the agent is a potential future beneficiary of the transaction (e.g. if they will inherit the house), or if they will receive shares or some other form of financial benefit in the future.
As a broker, you may do well to avoid such conflicts of interest occurring in the first place. If your agency is accused of acting more in your own personal interests than for your clients, this could cause extensive damage to your image and business. Not to mention the potential for lawsuits and costly damages in the future.
When an agent recommends another company in return for commissions
Another way a conflict of interest can occur in real estate is when an agent receives commissions from a third party. Whether it’s a mortgage broker or lender, or other organizations offering commissions, this type of behavior is not only a conflict of interest, but it’s also unethical — and illegal.
The Real Estate Settlement Procedures Act (RESPA) prohibits agents from receiving any financial benefits from referrals to mortgage lenders. This needs to be communicated strongly to your team to ensure compliance.
Tips to Avoid Conflict of Interest Situations at Your Brokerage
The best advice to brokers to avoid conflicts of interest is to plan for it and ensure policies are in place before you’re facing a conflict of interest crisis. Your team must be well aware of your expectations when faced with a conflict of interest situation, so team training and awareness is particularly important.
Remember also that perceived conflicts of interest can be just as damaging as actual conflicts of interest to your business and reputation. It’s always better to fully disclose everything in the interests of transparency.
To protect yourself against potential lawsuits, be sure you have errors and omissions insurance designed especially for real estate professionals. CRES Real Estate E&O + ClaimPrevent® offers a legal advisory service you can access 7 days a week — so you can prevent legal issues before they become lawsuits.
If you do decide to allow your agents to be a party to transactions where they have a personal interest, keep in mind that CRES can help with this too. CRES E&O policies can include a more comprehensive endorsement for agent-owned property that offers protection in these circumstances. Conditions do apply.
Contact CRES at 800-880-2747 for a confidential discussion today. Our friendly team can tailor an insurance solution to suit your specific business needs. Team Coverage is also available.