Agency relationships can be complicated, so it is vital to understand how they work. Like many businesses, real estate success depends on a good network of individuals working together; with that comes many terms for who does what. Principals? Clients? Agencies? Today we break them down and simplify all of it.
The Difference Between Principal, Customer, and Client
For starters, the terms principal and client can be used interchangeably as they mean the same thing. However, the terms customer and client or customer and principal are different. Often these terms get used interchangeably, but there is a slight difference, so let’s break them down.
Principal and Client
Definition: A principal or client is a party who has signed an agreement with an agent or, more specifically, a broker. In other words, it is any person directly involved in a contract, such as a buyer or a seller.
Example: A seller who enters into a listing contract with a broker is a client of the broker.
Definition: A customer is a party that uses the services of a real estate agent but has not signed an agreement with an agent.
Example: A seller who has yet to enter into a contract with a broker is a customer of the broker.
Think of the terms as phases. A customer is the first phase, and your goal as an agent should be to make them enter the second phase and become your client. In the first phase, customers can call you up and ask you questions about a property, but legally you are not representing them. At this stage, they are not your clients. Both customers and clients can use real estate agent services; the difference is one party has signed a contract while the other has not.
Agency or Principal-Agent Relationship
So let’s tie everything together. As we learned above, a principal or client is any person involved in a contract, such as a buyer or a seller. In this relationship, the agent acts on behalf of the principal at all times. This relationship between the principal and the agent is called an agency or principal-agent relationship.
All agency relationships are fiduciary relationships. This means an agent is expected to exercise discretion when acting on your behalf, and they must work with high standards of good faith and loyalty.
How Can an Agency or Principal-Agent Relationship Be Created?
An agency relationship can be established either by an agreement between parties (typically in the form of a contract) or by an action. An agency relationship is typically created in two ways: express and implied.
Definition: An express contract occurs when both parties legally establish an agency relationship. In other words, they sat down and wrote a contract stating their relationship. This is the most common method of creation for agency relationships. It’s worth noting in most states, the agreement must be in writing, but there are a few exceptions.
Example: A client sees your ad in a newspaper and calls you up to help them find a house. You bring them to your office, and they fill out all the appropriate paperwork. Congratulations, you just established an express contract!
Definition: An implied contract occurs when an agency relationship is created without the proper legal steps. It can occur by accident or intentionally. So maybe one party suggests creating an agency relationship and intends to but forgets.
Example: Let’s say you have some friends that are looking for a house. You help them search and eventually find something with them. However, because they were your friends, you completely forgot to do the paperwork stating you are representing them. Unintentionally you just established an implied contract. Whether or not your relationship is legal or not depends on what state you live in.
The Different Types of Real Estate Agent Relationships
Now that we understand how real estate agency relationships are created let’s talk about the different types of relationships. Non-real estate agency relationships can be divided into a few different ways. In real estate, they are typically divided into three groups: special agents, general agents, and universal agents.
Definition: A special agent is an agent hired to perform a specific duty. The real estate agent’s power and authority are limited to that specific task.
Example: If you list a house on behalf of a seller, you are hired for one specific job – listing the house. Once that job is complete, then the agency relationship is over.
Definition: A general agent is an agent hired who can perform all acts associated with a particular business that a principal has appointed the agent too; these relationships are typically continuous.
Example: A property manager is a general agent since the relationship between the principal and agent is continuous, and all the actions completed are related to managing property.
Definition: A universal agent is an agent hired who can act on behalf of a principal with complete power. In other words, a universal agent can legally act in replacement of their principal. Establishing a universal agency is incredibly rare.
Example: If someone who owns a property management business wants to spend more time with their family, they might enlist a universal agent to take care of all facets of the business.