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Understanding the Agency Relationship

The basic agency relationship works like this: Person A authorized person B to act on person A's behalf. Person A becomes the principal, person B becomes the agent and they have an agency relationship.

When an agency relationship is formed in real estate, the agent has a fiduciary responsibility to the principal. This means that in addition to those duties set out in the contract, the agent must be careful and loyal when carrying out the principal's property transaction. Below are the three basic types of agency relationships.

Single Agency
Single agency refers to being an agent for one party, either the buyer or the seller. This relationship begins when a prospective buyer or seller agrees to work with the agent. Legally, if you have authorization and agreement, you have an agency relationship.

In most instances, real estate agents legally represent the seller in a transaction because the seller has signed a listing agreement with the agent and pays a commission. A relatively new and growing trend in residential real estate is the concept of buyer's brokerage. In this relationship, the buyer contracts with an agent who legally represents the buyer in exchange for a commission or fee.

Dual Agency
This describes a situation where an agent represents two principals who have adverse interests. Obviously, this can prove to be very difficult.

In most states, both parties must be informed of the dual representation and must consent to it. The agent must also inform each principal of all related facts. If the principals agree to this relationship, they are agreeing to forego having the agent's undivided loyalty in order to expedite the transaction.

Subagency
Subagency is a very common agency relationship and involves two or more agents representing one principal. Basically, the subagent acts as an agent of the seller's agent. The seller's agent, then, can authorize the subagent to carry out elements of the property transaction on behalf of the principal.

For example, Agent A is working with Mr. & Mrs. Jones to help them find a house. Agent B is hired by Mr. & Mrs. Smith to represent them and assist them in selling their home. Agent A shows the Smith's home to the Joneses who decide to buy it. In this scenario, Agent A is acting as the subagent of agent B during the property transaction and they are both legally representing the Smiths.

Again, the concept of a buyer's brokerage is gaining popularity as buyers may want to work with an agent who will solely represent their interests and not act as a subagent for the seller.  Therefore, Mr. & Mrs. Jones could hire agent A to represent them during the property transaction.

Article courtesy of the Greater Erie Board of Realtors