General Principles of Agency: Practice Questions & Explanations

An agent owes fiduciary duties to their principal — the highest standard of care recognized in law. The mnemonic OLD-CAR captures the duties: Obedience to lawful instructions; Loyalty (acting in the principal's best interest, not the agent's); Disclosure (sharing all material facts known to the agent); Confidentiality (protecting the principal's private information); Accounting (handling money carefully); and Reasonable care (using skill and diligence). These duties apply whether the agent represents a buyer or a seller. They do not apply to the other party in the transaction — to whom the agent owes only honesty and disclosure of material defects. Dual agency (representing both sides) is allowed in some states with full informed consent of both parties, but compromises some of these duties.

'Puffing' is salesmanship — exaggeration or opinion that a reasonable person would not rely on as a statement of fact. Examples: 'This is the best house in the neighborhood', 'You'll love it here', 'This is a great investment'. Puffing is not actionable misrepresentation because no reasonable buyer would treat the statement as a guaranteed fact. Specific factual claims, however — 'The roof is two years old', 'The house has 2,400 square feet', 'There has never been a flood here' — are statements of fact that, if false and material to the buyer's decision, can constitute misrepresentation or fraud. The line between puffing and fraud is sometimes blurry; agents should stick to verifiable facts and clearly label opinions.

An agent who represents the buyer in a real estate transaction is called a buyer's agent or buyer's broker. They owe fiduciary duties (OLD-CAR) to the buyer. A listing agent represents the seller. A dual agent represents both parties in the same transaction (allowed in some states with full informed written consent of both; in some states, dual agency is prohibited). A transaction broker (or facilitator) represents neither party as a fiduciary but assists in completing the transaction; they owe a duty of fairness and honesty to both sides. The role must be clearly disclosed in writing before substantive negotiations begin so all parties understand who represents whom.

Commingling is mixing a client's funds — most commonly earnest money — with the agent's or brokerage's own operating funds. It is a serious violation of real estate license law in every state. Client funds must be deposited promptly into a designated trust or escrow account, kept separate from the brokerage's business accounts, and disbursed only as authorized by the contract or by court order. Commingling can result in license suspension or revocation, fines, and criminal charges in extreme cases. The reason for the strict rule: clients trust their agent with sometimes-substantial sums of money, and the integrity of the entire industry depends on those funds being absolutely safe. 'Conversion' (using client funds for the agent's own purposes) is the most extreme form and is treated as theft.

A LISTING AGREEMENT is a bilateral contract between a property owner (principal) and a real estate broker (agent). It: authorises the broker to market and sell the property; defines the agency relationship (broker represents the seller as their fiduciary); specifies the compensation (commission percentage or flat fee); sets the listing period; and describes the property and listing price. Types: EXCLUSIVE RIGHT TO SELL (most common — broker earns commission regardless of who finds the buyer); EXCLUSIVE AGENCY (broker earns commission unless the owner finds the buyer themselves); OPEN LISTING (non-exclusive — seller can list with multiple brokers, pays only the one who finds the buyer). The listing agreement establishes the broker's authority to act on the seller's behalf.

DUAL AGENCY occurs when the same broker/agent represents both sides of a transaction. The conflict: the agent owes fiduciary duties (loyalty, confidentiality, full disclosure) to both parties — but their interests directly conflict. The seller wants maximum price; the buyer wants minimum price. The agent cannot fully advocate for either without harming the other. State laws: most states allow dual agency ONLY with full written informed consent from both parties; some states prohibit it; some permit only 'disclosed dual agency' or 'facilitated agency' where the agent becomes a transaction facilitator without full fiduciary duties to either party. Designated agency (different agents from the same brokerage represent each party) avoids some but not all dual agency issues.

An agent owes a client a set of fiduciary duties often memorized as OLD CAR: Obedience (follow the client's lawful instructions), Loyalty (put the client's interests above all others, including the agent's own), Disclosure (tell the client all material facts the agent knows), Confidentiality (protect the client's confidences, which continues even after the relationship ends), Accounting (account for all money and documents), and Reasonable care and diligence (act competently). These duties are owed to the principal/client. To customers (non-clients), the agent owes honesty and fair dealing and the disclosure of known material defects, but not the full fiduciary set. Agency duties are among the most heavily tested national topics.

Dual agency arises when the same agent or brokerage represents both the buyer and the seller in one transaction. Because the agent cannot give undivided loyalty to two parties with opposing interests, dual agency is permitted in most states only when both parties give informed, written consent after full disclosure, and even then the agent's duties are limited (for example, the agent may not disclose one party's confidential bargaining position to the other). Some states prohibit it or use 'designated agency' to assign different agents within a brokerage. Undisclosed dual agency is a serious violation. The national exam expects familiarity with disclosure and consent requirements.