What is self dealing in real estate

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Table of Contents Show

How Does Self-Dealing Work?
Examples of Self Dealings
IRS Law on Self Dealing and Non-Profits
Fiduciary Duties
Self-Dealing
Understanding a Real Estate Agent’s Fiduciary Duties – Self Dealing By: Laura Ferret, Esq.

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Self-dealing is an illegal conduct where a fiduciary takes advantage of his position and acts in his own best interest rather than that of his client or beneficiary. Self-dealing is an illegal act as it represents a conflict of interest, and can lead to penalties, termination of employment, and litigation in most cases. While self dealt can occur in different forms, the most popular occurrence is when the trustee or any other fiduciary attempts to benefit from a transaction that is placed on behalf of the beneficiary or client.

How Does Self-Dealing Work?

Fiduciaries like trustees, corporate and board members, financial advisors, and personal attorneys can involve in self-dealing as they are supposed to provide enough support to an entity in its interest. Self-dealing is easily identified by the actions carried out in transactions. When an individual seeks to enrich himself to the detriment of the entity which he has vowed to provide service to, then that individual is said to be engaging in self-dealing. There are different ways in which this can occur. A fiduciary might decide to use the personal or allotment funds of an entity to give himself a treat, or he can ignore his duty to loyalty to his employer in order to get an opportunity that favors only him. Also, financial advisors can trade company funds on stocks using insider information. However, the risk of the information being incorrect is very high and can lead to loss of capital. It is important to note, however, that most cases of self-dealing might not be directed at enriching the involved fiduciary.

Examples of Self Dealings

A perfect example of self-dealing is a case where a financial advisor suggests that a client invests in a security that is unsuitable for him just to earn a bigger commission. As we stated above, self-dealing is not wholly focused on enrichment in most cases. We have taken a look at some of the examples of self-dealing below:

When a broker sells their own stock before a clients stock after receiving a sell order from him
When a party in a business partnership pursues a venture that is meant for both parties solely by himself without informing the other.
Where a person in position refuses to award a contract to a company unless they (the company) were to provide employment to one of his family or friends.
A case where an editor-in-chief or a content strategist of a website outsources a task to their personal agency at a higher-than-normal rate without informing the management prior to his action.

IRS Law on Self Dealing and Non-Profits

The Internal Revenue Service (IRS) is permitted to impose a 5% tax on any occurrence of self-dealing by a disqualified individual with a private foundation as specified in the United States Code (26 USCA & 4941). This individual can be a trustee, a corporate officer, an attorney, or any important contributor to the foundation. This law, however, prevents the IRS from charge this amount on loans, leases, sales and exchanges, compensations, and any asset transfer to the disqualified fiduciary.

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Real estate owners routinely enter into listing agreements with real estate agents wherein the agents agree to market the properties to potential buyers, in exchange for sales commissions. The commission is negotiable, but it is usually from three to seven percent of the sales price. The relationship between the seller and the real estate agent is known in legal parlance as that of principal and agent, and the seller’s agent is sometimes called the listing agent.

Buyers also typically retain real estate agents to represent them from the purchasers’ perspective in a real estate transaction. A buyer’s real estate agent is sometimes called the selling agent. The buyer’s agent typically will split the commission with the seller’s agent. This article will focus on the duties of the listing agent to the seller, although the buyer’s agent’s duties are similar.

Fiduciary Duties

The role of the real estate agent as an agent of the seller is that of a fiduciary. Fiduciaries must always keep the best interests of their clients foremost in their minds. While the fiduciary duties of listing agents may vary slightly between states, some common duties are virtually universal:

Duty of Confidentiality – A real estate agent has the duty to keep private client information confidential permanently, unless instructed to reveal it by a judge.
Duty of Obedience – A real estate agent has the duty to follow the instructions of the client, unless asked to do something unlawful.
Duty of Accounting – A real estate agent must account for all monies and legal documents entrusted to him or her in the course of client representation.
Duty of Disclosure – A real estate agent must report all beneficial information learned by him or her to the client, especially if the information is likely to influence the client’s decision making.
Duty of Good Faith and Loyalty – A real estate agent must always act with the client’s interests first and foremost, even above the commission. The agent should avoid conflicts of interest with the client.
Duty of Care – A real estate agent must have the professional qualifications, knowledge and training to safely and diligently perform his or her duties on behalf of the client.

Self-Dealing

A common breach of a real estate broker’s fiduciary duties of loyalty and disclosure is self-dealing. A typical example of self-dealing by a real estate agent is when he or she buys the client’s property personally and sells it to another buyer for a secret profit. A real estate agent is not supposed to purchase property he or she is listing on behalf of a client unless all relevant facts are fully disclosed to the client and the client consents. Before consenting, the seller should consult a skilled real estate lawyer and have an independent appraisal.

Remedies

Depending upon which fiduciary duties are breached, the extent of the harm to the client and the law of the particular state, the client may be able to get the transaction rescinded or the commission refunded. Additionally, the agent may be liable to the principal for money damages. These legal remedies may be available just because of the real estate agent’s breach of fiduciary duty, even if no particular harm to the client or benefit to the offending agent can be shown. The agent may also lose his or her license.

Conclusion

It is a good idea for a seller of real estate to consult an experienced real estate attorney even when represented by an agent. The lawyer can give advice about the real estate agent’s fiduciary duties, and can draft or review real estate agent retainers and documents of sale.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.

When a real estate agent buys the principal's property (or sells it to a relative, friend, etc., or to a business the agent has an interest), without disclosing that fact to the principal, then sells it for a profit.

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Today, we continue our series on a real estate professionals fiduciary duties. Attorney, Laura Ferret, examines the duty of loyalty and through the prohibition of self-dealing. Most self-dealing involves some sort of secret profit that is taken. While it sounds nefarious, it is easy find oneself on the wrong side of the self-dealing equation. Something as simple as forgetting to disclose a commission rate could have implications. Take caution and make sure to disclose.

As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing managing shareholder Keith Dunnagan at .

Also, remember that we do legal presentations for business and community organizations. If your group would like to schedule a presentation, please contact me to setup a date and time.

Understanding a Real Estate Agent’s Fiduciary Duties – Self Dealing By: Laura Ferret, Esq.

In part two of this series we examined the fiduciary duties of dual agents. Today, we will look at the agent’s duty to avoid self-dealing. The prohibition of self-dealing falls under the umbrella of the agent’s fiduciary duty of loyalty. As the agent has a duty of undivided loyalty to their principal (client), the client must be the only one who profits from the transaction the agent enters on their behalf. In other words, the agent must avoid conflicts of interest with their clients.

Under California law, a conflict of interest exists when an agent stands to profit personally from a transaction. As with any other conflict, full and timely disclosure of the facts and the client’s informed consent are required to avoid a breach of fiduciary duty. Cal. Business & Property Code § § 10176(g) and 10177(o).

The principal of a real estate transaction owns all profits from that transaction unless they knowingly consent to the agent’s retention of a profit. An agent engages in self-dealing if they stand to make any profit from the transaction which is not disclosed to the client. This can be true even where the undisclosed profit is merely a sales commission, referral fee, or assignment fee. Agents should obtain a client’s informed consent in order to retain fees by disclosing the amount of the fee concurrently with the residential purchase agreement, and before escrow closes. If an agent fails to inform the client of profits, they will be subject to a court’s disgorgement of the profits and other liabilities.

One common violation of the agent’s fiduciary duty against self-dealing is the “dummy” sale. A dummy sale is where the agent arranges for a third party (such as a relative or employee) to purchase the property on the agent’s behalf. When the property is then resold at a higher price, the agent stands to profit from the difference between the selling prices.

A similar situation occurs when the broker has a purchase option on a property and waits for an offer on the property that is higher than the option price. If the agent exercises their lower option price without informing the principal of the higher offer, and then resells the property at the higher price, the agent is self-dealing.

Agents should be careful to avoid breaching their fiduciary duty of loyalty by engaging in self-dealing and realizing secret profits from real estate transactions. In such cases, the principal can recover the amount of the secret profits from the broker, rescind the transaction, and recover other damages against the agent. Furthermore, a real estate agent who violates the prohibition against secret profits may have his or her license suspended or revoked. (Business and Professions Code Sec. 10176(g) and (h)). The risk of exposure to liability and the penalties or discipline that flow from self-dealing are not worth it. Make sure that you disclose your interests, if any, including your commission fee so that you don’t needlessly expose yourself to liability.

Stay tuned — in our next installment on fiduciary duties, we will examine the duty to investigate and disclose.

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The attorneys of BPE Law Group, PC. have been advising our clients on real estate, business and estate planning issues for over 20 years and have assisted numerous clients in business and real estate matters and have represented and advised brokers on their professional obligations as well as consumers on their rights. If you have questions concerning legal matters, give us a call at (916) 966-2260 or e-mail Keith at . Our flat fee consult for new clients may get you the answers you need for the questions you have.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.