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: The principal is the person the agent represents. In a brokerage agency relationship, that represented person is the client. Simply being a buyer, seller, or party to a contract does not identify whose client someone is.
Example: A seller who enters into a listing contract with a broker is a client of the broker.
Customer
Definition: A customer is someone the licensee assists without representing that person as a client. Whether an agency relationship exists depends on the facts, the agreement, and applicable state law.
Example: A buyer who asks the seller’s agent about a listing can be that agent’s customer while the seller remains the client.
The Difference
The key distinction is representation. Signing the required brokerage agreement can establish it, but the presence or absence of a signature alone is not a universal test for every agency relationship. Follow the state’s rules for agency formation, disclosures, and written agreements.
Agency or Principal-Agent Relationship
An agency relationship exists when an agent represents a principal in dealings with others. For example, California Civil Code § 2295 defines these roles. The agent must act within the authority granted and applicable law.
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.
Express Contracts
Definition: An express agreement states its terms in words, either spoken or written. Whether a particular real estate agreement must be in writing is a separate legal requirement. California illustrates the distinction in Civil Code § 1620.
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!
Implied Contracts
Definition: An implied-in-fact agreement is inferred from the parties’ conduct rather than stated terms. It does not mean someone merely forgot paperwork. See California Civil Code § 1621.
Example: Conduct showing mutual agreement may support an implied relationship where the law permits it. Helping a friend look at homes does not automatically establish agency, and an implied agreement does not automatically satisfy a legal writing requirement.
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.
Special Agent
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.
General Agent
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 common exam example of a general agent: the authority concerns the continuing business of managing property. The management agreement sets its scope. The New York salesperson syllabus, Property Management section, uses this classification.
Universal Agent
Definition: In general exam terminology, a universal agent has the broadest scope of authority, covering all matters the principal may lawfully delegate. This does not authorize unlawful or nondelegable acts; the actual authority granted remains important.
Managing all aspects of one property-management business is not enough by itself to establish universal agency. That is still authority within a particular business, the usual general-agency example. A universal-agency question needs to specify authority extending across the principal’s lawfully delegable affairs.
