Real Estate Pros Must Disclose Self-Dealing
It is no secret that Texas real estate professionals (brokers, agents, etc.) are frequently principals in real estate transactions. That is, real estate brokers and agents — like other people — act as Sellers or Buyers of property in which they have an ownership or other economic interest. This activity is frequently referred to as “self-dealing.”
Some Texas real estate license holders (“licensees”) regularly encounter available properties that the public may never about. For a busy licensee, potential opportunities to make money on real estate may are a common part of professional life.
There is nothing inherently wrong or illegal with a real estate professional “self-dealing.” However, ethical considerations are particularly important in this scenario, as the TREC Rules require clear written disclosure by the licensee engaging in a real estate transaction on his or her own behalf.
In Texas, a
broker is considered to be acting on their own behalf if he or she is a named party to the transaction or is working on the behalf of a business entity in which the licensee is more than a 10 percent owner, or is working on behalf of his or her spouse, parent, or child.
The exact nature and scope of the licensee’s duty depends largely on his /her relationship with the opposite party to the transaction.
SELF-DEALING WITH THE LICENSEE’s OWN CLIENT
The duty of loyalty (and a fiduciary duty) applies when a licensee transacts business with his own client. Inherent in these duties are an obligation to place the client’s interests over those of the licensee and a duty to provide the client with all known facts and information that would be important to the principal making an informed decision.
In my opinion, a licensee should never buy property from his/her own client without the assistance of an attorney to draft all necessary disclosure and consent forms. Even then, extreme caution must be used to ensure that the licensee’s client understands the nature of the relationship. In addition, a licensee must use extreme caution to demonstrate that she is not capitalizing on superior knowledge to the client’s disadvantage.
Cases involving licensees buying property from clients and shortly thereafter “flipping” the property for a profit don’t tend to bode well before judges or juries. The temptation to profiteer when buying a property from a client should be resisted by licensees.
SELF-DEALING WITH THIRD PARTIES
A licensed real estate professional must also disclose his or her interest in a property when dealing with non-clients. The professional has a legal/statutory duty to disclose the fact that the agent owns an interest in the entity that is the purchaser or seller, irrespective of whether a client is involved:
TREC Rule 535.144 provides as follows:
When Acquiring or Disposing of Own Property or Property of Spouse, Parent or Child
(a) For purposes of §1101.652(a-1)(1) of the Act “license holder” includes a license holder acting on behalf of:
(1) the license holder’s spouse, parent or child;
(2) a business entity in which the license holder is more than a 10% owner; or
(3) a trust for which the license holder acts as trustee or of which the license holder or the license holder’s spouse, parent or child is a beneficiary.(b) A license holder engaging in a real estate transaction on his or her own behalf or in a capacity described by subsection (a), is obligated to disclose in writing that he or she is a licensed real estate broker or sales agent acting on his or her own behalf or in a capacity described by subsection (a) in any contract of sale or rental agreement or in any other writing given before entering into any contract of sale or rental agreement.
(c) A license holder acting on his or her own behalf or in a capacity described by subsection (a) shall not use the license holder’s expertise to the disadvantage of a person with whom the license holder deals.
Similarly, Texas Occupations Code §1101.652(a-1)(1) [a portion of the Texas Real Estate License Act] creates serious penalties for breaches of these duties:
(a-1) The commission may suspend or revoke a license issued under this chapter or take other disciplinary action authorized by this chapter if the license holder:
(1) engages in misrepresentation, dishonesty, or fraud when selling, buying, trading, or leasing real property in the name of:
(A) the license holder;
(B) the license holder’s spouse; or
(C) a person related to the license holder within the first degree by consanguinity.
If you are concerned with the ethical concerns about the dealings between a real estate professional and a non-licensee, you should consult with an experienced real estate attorney who understands the TRELA and applicable standards.
