Agency is one of the most heavily tested topics on the real estate license exam, and one where well-prepared candidates lose points. The questions are rarely "define fiduciary." They describe a situation and ask what the licensee owes, to whom, and when. The wrong answers usually sound reasonable.
This guide covers the concepts that cause the most trouble and how to reason through them.
Key takeaways
- Know the difference between a client (you owe fiduciary duties) and a customer (you owe honesty, fair dealing, and disclosure of material facts).
- Agency can be created by conduct as well as by a written agreement. Exam questions test accidental, or "implied," agency.
- Confidentiality generally continues after the agency relationship ends.
- Dual agency, designated agency and transaction brokerage are defined differently by each state. Some states restrict or prohibit dual agency.
- When an answer choice helps your client by deceiving the other party, it is wrong.
The vocabulary you have to get exactly right
Many agency questions turn on one word.
- Principal: the person who hires the agent and whom the agent represents. In real estate, the principal is the client.
- Agent: the person authorized to act for the principal. Legally, the agency relationship is usually with the brokerage. The individual licensee acts on the broker's behalf.
- Client: someone you represent and owe fiduciary duties to.
- Customer: a party you work with but do not represent, such as the unrepresented buyer in a seller-agency transaction.
- Subagent: an agent of the agent. A cooperating broker who works on behalf of the listing broker, and so for the seller, is a subagent.
Types of agents by scope of authority
- Universal agent: broad authority to act for the principal in all matters, such as under a general power of attorney. Rare in real estate.
- General agent: authority over a range of matters in one area. A property manager is the classic example, and a salesperson is usually a general agent of the employing broker.
- Special agent: authority for one specific task. A listing broker is typically a special agent of the seller, hired to find a buyer, not to sign contracts for the seller.
Exam trap: Students often assume the listing agent can accept offers or sign on the seller's behalf. A typical listing agreement does not give that authority, so the listing broker is a special agent.
Fiduciary duties: the OLDCAR list
Most courses teach the fiduciary duties owed to a client with the acronym OLDCAR:
- Obedience: follow the client's lawful instructions
- Loyalty: put the client's interests above everyone else's, including your own
- Disclosure: tell the client all material information you learn
- Confidentiality: keep the client's private information private
- Accounting: account for all money and property entrusted to you
- Reasonable care and skill: act competently
Trap 1: Obedience has limits
Obedience means following lawful instructions. If a seller tells the agent not to show the home to families with children, or to hide a known defect, the agent must refuse. Following an illegal instruction is never the "obedient" answer. On the exam, the correct response is usually to refuse and, if the client insists, to end the relationship.
Trap 2: Confidentiality outlasts the listing
Your duty to keep a client's confidential information private (for example, that the seller must sell quickly because of a job transfer) generally continues after the listing expires or closes. If a question asks whether a licensee may share a former client's confidential information with a new client, the answer is almost always no. The specific rules vary by state, so learn your state's version.
Trap 3: Confidentiality does not override disclosure of material defects
Confidentiality covers personal and negotiating information, not known physical problems. A licensee cannot keep a known material defect, such as a leaking roof, secret from a buyer because the seller asked. What counts as a "material fact" that must be disclosed (for example, whether a death on the property must be disclosed) is set by state law and varies widely.
What you owe a customer
Customers do not get fiduciary duties, but they are not owed nothing. In general, licensees owe customers:
- Honesty and fair dealing
- Reasonable care in what they say
- Disclosure of known material facts about the property, as defined by state law
- Accounting for any money the customer gives them, such as an earnest money deposit
Exam trap: A question describes a listing agent who tells a buyer-customer, "The seller will take $20,000 less." That is a breach of loyalty and confidentiality to the seller, even though it was "helpful" to the buyer. The agent works for the seller.
Puffing vs. misrepresentation
- Puffing is an exaggerated opinion that a reasonable person would not rely on as fact: "This kitchen is gorgeous." Generally not illegal.
- Misrepresentation is a false statement of fact: "The roof is two years old" when it is fifteen. It can be intentional (fraud) or careless (negligent misrepresentation). Both create liability.
How agency is created and ended
Creation
Agency can be created by:
- Express agreement: written or oral, such as a listing agreement or buyer representation agreement
- Implied agency (by conduct): when a licensee acts as though they represent someone, and the person reasonably believes they do
- Ratification: the principal accepts the results of an act done without authority
- Estoppel: the principal's conduct leads a third party to reasonably believe an agency exists
Exam trap: accidental agency. A seller's agent at an open house gives a buyer detailed advice on how low to offer and promises to "make sure you get a good deal." The agent may have created an implied agency with the buyer, and with it an undisclosed dual agency. Correct answers on these questions usually involve clarifying the relationship early and in writing.
Compensation does not create agency
Who pays the agent does not decide who the agent represents. A buyer's agent can be paid out of the seller's proceeds and still represent only the buyer. Exam questions often try to get you to say "whoever pays is the client." That is wrong.
Termination
Agency ends by:
- Completion of the purpose (the sale closes)
- Expiration of the agreement's term
- Mutual agreement
- Death or incapacity of either party (in most cases)
- Destruction or condemnation of the property
- Bankruptcy of either party, in some cases
- Revocation by the principal or renunciation by the agent. These may still create liability for damages under the contract.
Exam trap: agency coupled with an interest. If the agent has an ownership interest in the property (for example, a broker who co-owns the property being listed), the principal generally cannot revoke the agency, and it is not terminated by the principal's death.
Dual agency, designated agency and transaction brokerage
This is where state law matters most, and the national and state portions can test it differently.
- Dual agency: one licensee, or one brokerage, represents both buyer and seller in the same transaction. Where it is allowed, it usually requires informed, written consent from both parties, and the agent's duties are limited (for example, the agent cannot tell either side the other's bottom line).
- Designated agency: the broker designates one agent to represent the buyer and a different agent in the same firm to represent the seller. Some states permit this as a way to manage in-house transactions.
- Transaction broker / facilitator: the licensee helps both parties complete the deal without representing either one as an advocate. Florida, for example, presumes transaction brokerage unless another relationship is set up in writing.
Some states restrict or prohibit dual agency altogether. Disclosure timing also varies: many states require an agency disclosure at the first substantive contact, before confidential information is discussed. Learn your state's disclosure form, when it must be presented and what it says. That is prime material for the state portion.
A short practice set
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A listing agent learns the seller has accepted a job in another state and must move within 30 days. A buyer asks why the seller is moving. The agent should: Decline to share the reason without the seller's permission. The seller's motivation is confidential.
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A buyer's agent's commission will be paid from the seller's proceeds at closing. Whom does the buyer's agent represent? The buyer. The source of compensation does not decide agency.
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A seller instructs the listing agent not to mention that the basement floods each spring. The agent should: Refuse. Known material defects must be disclosed to buyers, and an agent may not follow an unlawful instruction.
How to study agency for the exam
- Ask the three questions for every scenario: Who is the client? Who is the customer? What duty does the licensee owe each one right now?
- Read your state's agency statute and disclosure form. The national principles are the starting point, and your state law controls.
Review the agency terms in the glossary, then test yourself with timed scenario questions in a practice test. Your state's guide, such as the one for Florida or New Jersey, covers what your state permits and requires, and its state practice test drills the state-specific rules. Full question banks for every state are available on REEX Prep plans.