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Due Care

DEFINITION

Care that is reasonable to the average person.

EXPLANATION

An agent is the representative of a significant financial transaction in a principal’s life. As such, the agent is expected to perform agency-related activities for the principal with due care (otherwise known as reasonable care). This means that an agent must conduct himself or herself with competence, responsibility, and sufficient knowledge.

As most clients are not as experienced in real estate procedures as agents, they hire agents to provide expertise and accurate advice. An agent’s license signifies that he or she possesses a level of real estate knowledge that exceeds that of the average principal. Consequently, a principal should be able to expect that an agent has the necessary skills to meet reasonable real estate goals when an agent’s services are employed.

Agent’s Have a Duty to Provide Due Care to Client’s

Buying or selling a home can be an overwhelming experience. Oftentimes, principals do not know what is to their benefit. Legal precedents have established that agents owe an increased duty to unsophisticated buyers over other buyers. These buyers, particularly first time buyers, may not be aware of the consequences of their decisions. It is an agent’s duty to help unsophisticated buyers avoid compromised positions, such as buying a property they cannot afford, signing a balloon payment provision, or signing an agreement with an acceleration clause.

A principal has the right to utilize any strategy he or she wishes within the parameters of the law, but an agent must inform a principal when a decision is not productive to his or her stated goals. For example, if a seller wishes to sell his or her home for a minimum of $620,000, but the market suggests that the property could be sold for $790,000, the agent should inform the principal that they should increase the listing price.

However, the role of an agent extends far beyond simply providing basic information. An agent must inform a buyer of all implications of the real estate transaction. This includes property taxes, mortgage rates, and real estate provisions. It also includes being aware of pertinent information that would adversely affect the outcome of the principal’s transaction. The law recognizes the fact that although agents are not mortgage professionals, accountants, or zoning experts, agents should be aware of basic information pertaining to the ramifications of the transaction for their principals.

Each real estate transaction carries different risks. An agent has a duty to inform his or her principals of the risks and worst case scenarios associated with each type of transaction. The market is ever-changing and agents must constantly verify the accuracy of their information in order to best inform a principal’s decision.

Due Care and Providing Sound Advice to Principal’s

One transaction that may present risk to a principal is called rent skimming. This is when a buyer promises to purchase a seller’s property using the current rental income of the property. An agent should inform the seller of the drawbacks of this kind of deal, which may include the forfeiture of future rental income to a buyer who simply doesn’t have the credit or income to currently purchase the property.

Agents should also warn principals of the risk of directly exchanging one property for another. The task of accurately comparing multiple properties can be difficult and could result in a loss of value for the principal.

Agents must be prepared to halt a transaction if the manner in which the transaction is occurring is not ideal to the principal.

Real estate crosses a variety of fields, such as engineering, construction, the law, and banking. It is not reasonable to expect an agent to be familiar with all aspects of related fields. In fact, an agent should refrain from offering advice in other fields in which they are not an expert. If an agent provides inaccurate information — such as untrue legal or tax code information — the agent could be held liable for any damages that ensue.

If an agent is unable to provide specific knowledge on a subject, he or she should advise the principal to consult a professional third party. Although having a third party review the house may result in the loss of a sale, and consequently, cost the agent his or her commission, the agent’s role is to help buyers make an informed decision.

Case Law As It Relates to Due Care

Case review: Pepitone v. Russo (1997)

The case, Pepitone v. Russo (1997) 64 Cal.App.3d 685., involved a buyer who filed suit against their broker for fraud and a breach in fiduciary duty.

Pepitone bought a property on the advice from his agent, Russo. However, Russo never disclosed the presence of an acceleration clause in the second mortgage necessary to purchase the property. The

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