Isabella Carter
A conflict of interest in the real estate industry can arise when an agent's personal or professional interests compete with the client's interests. This could be due to kinship, employment, partnership, common membership, religious affiliation, civic ties, or socio-economic context. For example, if an agent is selling a property that they or someone they are related to owns or has a financial interest in, this must be disclosed to the buyer in writing. Another example is when an agent recommends a service or property to a client from which they will receive a benefit, such as shares, a referral fee, or discounted goods. In some cases, a conflict of interest may occur when an agent is representing multiple clients with competing interests, such as in a dual agency situation where the same agent acts for both the seller and the buyer. It is important for real estate professionals to maintain ethical standards and disclose any potential conflicts of interest to protect their reputation and avoid legal consequences.
| Characteristics | Values |
|---|---|
| Agent has a personal or professional interest that competes with the client's interests | Financial interests, ownership interests, kinship, employment, partnership, common membership, civic ties, etc. |
| Agent receives financial benefits from referrals to mortgage lenders or other organisations | Commissions, referral fees, discounted goods, etc. |
| Agent has a relationship with a party involved in the transaction | Family, friends, business associates, etc. |
| Agent has a duty of confidentiality to the client | Confidential information that may impact the seller's ability to get the highest price for the property |
| Agent represents multiple clients with competing interests | Dual agency, where an agent acts for both the seller and the buyer |
| Agent puts their personal interests above the client's interests | Self-dealing, where an agent directly benefits from a business outcome or decision |
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What You'll Learn
Personal relationships and benefits
One scenario where a conflict of interest can arise is when a real estate agent or broker has a pre-existing relationship with a buyer or seller due to kinship, employment, partnership, common membership, religious affiliation, or any other socio-economic context. For example, if an agent assists a relative in buying a property listed by the agency they work for, they must disclose this conflict and obtain the vendor's consent. Similarly, if a broker or their agent has a special pre-existing relationship with an individual who has an ownership interest in the property, they must disclose this relationship.
Another situation that can lead to a conflict of interest is when a real estate professional stands to gain a direct profit or benefit from a business dealing. This is known as self-dealing and is generally illegal. For instance, a real estate agent purchasing a client's property and then selling it to another client for profit creates a conflict of interest as they are directly benefiting from the transaction.
Dual agency, where a single agent or two separate agents from the same brokerage represent both the buyer and the seller, can also lead to conflicts of interest. In this scenario, it becomes challenging for the agent(s) to remain neutral and impartially represent the interests of both parties. While dual agency is legal in some states, full disclosure and consent from all parties involved are required to avoid any ethical or legal repercussions.
It is important to note that even indirect benefits or perceived conflicts of interest can be just as damaging as actual conflicts. For example, if an agent recommends a service provider affiliated with a relative or friend without disclosing this relationship, it could be seen as a conflict of interest. Additionally, receiving commissions or referrals from third parties, such as mortgage lenders or brokers, is unethical and illegal and should be avoided to maintain transparency and uphold ethical standards.
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Dual agency
In a typical real estate transaction, the buyer and seller are each represented by their own separate agents: one buyer's agent and one listing agent. Each agent works on behalf of their respective party, with the duty to act in their client's best interests.
Firstly, a dual agent has a financial incentive to complete the transaction and collect the commission from both parties. Their commission is usually based on a percentage of the final sale price, so they are incentivized to bid up the sale price. This may result in misaligned interests between the agent and the buyer, as the agent may not be inclined to help the buyer negotiate a better price.
Secondly, the agent may favour one party over the other, particularly the seller, as their commission depends on the final sale price. This creates a conflict between their duty to act in the best interests of both clients, and it may be difficult for them to remain impartial.
In some states, dual agency is illegal due to the potential for conflicts of interest. If both parties choose to proceed with a dual agency arrangement, they must provide informed consent, and either party reserves the right to opt out of the deal if they are uncomfortable.
To maintain transparency and protect all parties, brokers and their agents can use Conflict of Interest Disclosure and Dual Agency Disclosure forms to document their fiduciary duties and any potential biases.
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Self-dealing
For example, a real estate agent may be engaging in self-dealing if they recommend a property to a client that they have a financial interest in, such as receiving a referral fee or discounted goods. This creates a conflict between the agent's personal interests and their duty to act in the best interests of their client. Similarly, an agent may be self-dealing if they assist a relative in buying a property that is listed by the agency they work for without disclosing the relationship.
Executors of estates may also engage in self-dealing by investing estate funds in their own businesses or selling estate assets to themselves at a discount. For instance, an executor who purchases a valuable piece of property from an estate at a price below market value without the approval of the beneficiaries or the court is engaging in self-dealing.
In the context of nonprofits or private foundations, self-dealing can involve transactions with "disqualified persons," such as trustees, directors, officers, relatives, or key contributors. For example, the sale or exchange of property between a private foundation and a disqualified person is considered self-dealing, regardless of the amount involved.
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Undisclosed conflicts
For example, a real estate agent may have a conflict of interest if they are selling a property that they or someone related to them owns or has a financial interest in. In such cases, the agent must disclose this conflict to the buyer in writing before they sign a sale and purchase agreement. Failure to do so could result in a breach of certain sections of the Real Estate Agents Act.
Another example is when an agent recommends a business or property to a client from which they will receive a benefit, such as shares, a referral fee, or discounted goods. This type of conflict of interest can also occur when an agent collects more than one commission for a sale or acts as a mortgage advisor or valuer.
In some cases, a conflict of interest may arise due to an agent's relationships with other professionals. For instance, an agent may recommend the services of a provider operated by or affiliated with a relative, friend, or associate. This could create a conflict if the agent stands to gain a direct profit or benefit from this recommendation.
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Financial interests
Dual Agency: This situation arises when a single agent or brokerage represents both the buyer and the seller in a real estate transaction. While dual agency can be legal in certain states, it raises questions about the agent's loyalty and creates a conflict of interest. The agent may struggle to negotiate the best price for both parties and may be incentivized to favor one client over the other, especially if their commission structure varies between the buyer and seller.
Referral Fees and Kickbacks: Real estate professionals may receive referral fees or kickbacks from third-party service providers such as mortgage brokers, home inspectors, or contractors. This practice can create a conflict of interest if agents refer clients to these service providers based on their own financial gain rather than the best interests of the client. It may also result in clients paying higher fees or receiving subpar services.
Self-Dealing: This conflict of interest occurs when a real estate professional or firm transacts with a related party, such as buying or selling property to or from a family member, without proper disclosure. Self-dealing can create an incentive for the agent to prioritize their personal financial gain over obtaining the best deal for their client.
Commission Structures: The way an agent's commission is structured can sometimes lead to conflicts of interest. For example, if an agent's commission is based on the sale price of a property, they may be incentivized to encourage clients to accept higher offers, even if it exceeds the client's budget or original requirements. Similarly, agents may rush buyers into making a purchase decision to avoid splitting commissions with other agents.
Outside Investments: Real estate professionals may have personal investments or financial interests in properties or developments they are representing. This can create a conflict of interest if they prioritize their own financial gains over the needs of their clients. For example, an agent may push clients to purchase a property they partially own or have invested in, even if it doesn't fully meet the client's criteria.
To avoid conflicts of interest in real estate, it is crucial for professionals in the industry to maintain transparency and disclose any potential conflicts upfront. Real estate agents and firms should always act in the best interests of their clients and provide unbiased advice and services.
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Frequently asked questions
A conflict of interest arises when a real estate professional's duty to act in the best interest of their client may be at risk from their duties to another client, former client, or third party. This could be due to personal interests, loyalties, or benefits that may hinder their ability to fully represent the needs of their client.
Examples of conflicts of interest include:
- Dual agency: When a real estate agent represents both the buyer and the seller in a transaction.
- Self-dealing: When an agent directly benefits from a business outcome, such as purchasing a client's property and selling it to another client for profit.
- Undisclosed relationships: When an agent has a pre-existing relationship with another person involved in the transaction, such as kinship, employment, or partnership, and fails to disclose it.
- Financial interests: When an agent receives commissions, referral fees, or other financial benefits from a third party involved in the transaction.
Conflicts of interest can be avoided by maintaining ethical standards, disclosing any potential conflicts, and prioritizing the client's interests. Real estate professionals should also be aware of relevant legislation, such as the Real Estate Settlement Procedures Act (RESPA), which prohibits agents from receiving financial benefits from referrals to mortgage lenders. In some cases, it may be necessary to recuse oneself from a situation or decline an offer to avoid a conflict of interest.
