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Licensees Acting as Principals

(Below you will find a discussions of: general requirements for licensees in dealing with their own real property and notifications required to be made to their brokers.)

So you want to sell your own home.

A lawyer who represents himself has a fool for a client. - Author Unknown.

Who are the Commission's most upset complainants? Probably those requesting investigations of the activities of licensees acting as principals. While a prospective purchaser may forgive an unlicensed seller for a minor error on a property disclosure statement, the same minor error made by a licensee always seems to become "a fraud" or "a substantial misrepresentation."

Some licensees believe that if they act as a principal, their actions as a principal are not subject to review by the Commission. They are wrong. Georgia's license law expressly makes a licensee's actions subject to Commission review and disciplinary action whenever the licensee acts as a principal in a real estate transaction or as an officer, employee, or member of any business entity acting as a principal.

When a licensee acts as both principal and agent in a transaction, he or she only compounds this problem. Acting as a principal and agent in a transaction is as difficult as acting as a dual agent. (Some say acting as a dual agent is impossible.)

An April 11, 1996, case before the Mississippi Supreme Court addresses this issue directly. The Mississippi Real Estate Commission (MREC) suspended a broker's license for three license law violations when the broker sold a house that her unlicensed building corporation owned. After the sale the new owner found active termite infestation that apparently existed prior to the sale. The MREC found that the licensee had failed to deliver a termite inspection certificate reflecting no infestation as she had promised prior to the sale of the property. A Mississippi Circuit Court (similar to Georgia's Superior Court) overturned the MREC ruling in part on the following ground:

This Court is well aware that it must not substitute its judgment from (sic) that of the Board but a review of the record fails to reveal any substantial evidence that the [licensee] as a realtor made any representations that were misleading or false on the issue of termite inspection or certification.

To the contrary the purchaser's statement indicates that they were well aware that [the licensee] was acting as a seller in any statement concerning termites. [emphasis added by MS Supreme Court]

That view is similar to the argument that the Commission often hears when a licensee "wears two hats" in a real estate transaction.

Upon hearing the matter on appeal, the Mississippi Supreme Court completely rejected the argument that a licensee acting as a principal is not subject to discipline by the licensing agency. It found:

To allow [the broker], or any other licensed real estate broker in Mississippi, to not be held responsible for misrepresentations made during the course of the sale of property wholly owned by the broker, while simultaneously holding that a broker will be held responsible for making misrepresentations during the sale of another's property, would create logically inconsistent results. As the Pennsylvania Court in Real Estate Commission v. Tice , 190 A.2d 188, 190-91 (Pa. 1963) reasoned, which was adopted in In the Matter of Perron , 437 N. W.2d 92,94 (Minn. 1989) by Minnesota:

A broker who is dishonest or incompetent in the real estate activities in which he [or she] is involved as owner, is not likely to be honest or competent in his [or her] activities which are purely brokerage in nature.

Therefore, as reasoned by another Court over thirty-three years ago, and as adopted by yet another Court less than seven years ago, to permit dishonesty by a broker in their "private" lives, and yet condemn the same actions in their "public" lives, is to disregard the overall intent behind the legislation and not afford the general public the protection which the legislature has deemed worthy of protection. Accordingly, this Court finds that neither [the licensee], nor any other real estate broker in Mississippi, shall be permitted to commit fraudulent misrepresentations in their private lives without disciplinary repercussions when they are not permitted to do the very same thing while representing another's property. Therefore, this case is reversed and rendered to prevent such an anomaly from occurring in this state.

If a lawyer cannot represent himself adequately, can a real estate licensee? Perhaps licensees should take the advice they often give "For Sale By Owners." Many times a licensee will encourage a "For Sale By Owner" to list a property with the licensee in part because the seller will obtain the benefit of the licensee's independent judgment. Following that same advice may help a licensee avoid a wide variety of problems when tempted to act as both principal and agent in a transaction.

Why do I have to tell my broker that I am marketing a property that I own if I am not paying her a commission?

Some licensees attempt to draw an improper distinction between their brokerage activity for others and their brokerage activity on real property they personally own. For example, such a licensee will place an earnest money deposit or a security deposit received from a member of the public into the custody of a broker for safe keeping. That same licensee who receives an earnest money deposit or security deposit on property that he owns refuses to give it to his broker. After all, "What business is it of my broker what I do with my own property?"

The license law does not allow a licensee to draw such distinctions. In order to protect the public, it requires a licensee to comply with its provisions whether acting as an agent or as a principal [ See O.C.G.A. Section 43-40-29 (c) ].

The license law requires brokers to review all of their affiliated licensees' activities for compliance with the law, whether the activity is that of an agent or of a principal and agent. Thus, whenever an affiliate intends to act as a principal or as a principal and an agent in handling her own real property, the license law requires the affiliate to disclose her intentions in writing. When that disclosure is made, the affiliate and the broker should discuss all aspects of the transaction and agree on how the licensee should act. Among other items, they should discuss whether and how the licensee will pay any brokerage fees, how she will handle trust funds, what marketing strategies she will utilize, and what contract forms she will use.

No matter what variation of these questions arises, two things seem certain. First, to avoid unwanted problems, licensees should follow the guidelines above unless they have legal advice to the contrary. Second, if licensees timely address the issues raised by these questions, they can have successful, profitable transactions.

The information contained in this article is believed to be current and accurate. The GREC staff reviews the contents periodically and updates it when appropriate. If you have questions or comments about this article, you may contact us at grecmail@grec.state.ga.us . Last reviewed August, 2006.