This article covers the due diligence obligations a broker or agent owes the buyer in a real estate transaction.

Advice and its consequences

In a real estate transaction, brokers and their agents need to be aware of the difference between a client and a customer with whom the broker is directly negotiating or who is represented by another broker.

While the seller’s broker owes their client — the seller — a special fiduciary agency duty that requires the broker or agent to diligently market the listed property for sale, the seller’s broker only owes a customer — the buyer — a general duty to deal fairly and honestly.

This limited, non-client general duty includes voluntarily providing substantive information that affects the value of the listed property, collectively called disclosures. The information disclosed by the seller’s agent only needs to place the buyer on notice of material facts which may have an adverse effect on the property’s value. However, the seller’s agent may not:

  • deliver less than the minimum level of information to put the buyer on notice of the property’s fundamentals for determining its value;
  • give unfounded opinions or deceptive responses when replying to the buyer’s inquiries; or
  • stifle buyer inquiries about the property in the pursuit of the best financial advantage obtainable for the seller (or the seller’s agent).

Related video:

General Duty to Voluntarily Disclose

The statutory duty a seller’s agent owes to prospective buyers to disclose facts about the physical condition of a one-to-four unit residential property is limited to their:

  • prior knowledge about the property; and
  • observations made while conducting their mandatory visual inspection.

To complete the disclosure process, the seller’s agent reviews all property information received from the seller for inaccuracies or untruthful statements known or suspected to exist by the seller’s agent. When necessary, the seller’s agent then enters corrections on the disclosure forms before the information is used to market the property and locate a buyer. This is called fair and honest dealing.

A good metric for the seller’s agent to determine what needs to be disclosed is to first determine what they are not obligated to provide. All other known material facts need to be brought to the attention of prospective buyers as a matter of law. [See RPI Form 304]

No duty for “dumb” agents

A seller’s agent on a one-to-four unit residential property owes no affirmative duty to a prospective buyer to gather or voluntarily provide any facts unknown to the seller’s agent about:

  • the property’s title conditions, consisting of encumbrances such as easements, CC&Rs, legal descriptions, trust deed provisions, etc.;
  • operating expenses and any tenant income the buyer will experience during ownership, such as utilities and property taxes;
  • zoning or other use restrictions which may affect the buyer’s future use of the property, except for the existence of industrial zoning which affects the property, and nearby military ordnance locations;
  • income tax aspects of the buyer’s acquisition of the property, such as limitations on interest deductions;
  • the suitability of the property to meet the buyer’s objectives in the acquisition; and
  • information on any mixed use of the property, such as acreage included in the purchase for use as subdividable lands, groves or other farming operations, or for use for tenant income or as a vacation rental.

No duty to advise prospective buyers

Further, the seller’s agent owes no duty to prospective buyers to:

  • give advice;
  • make recommendations;
  • offer suggestions;
  • comment on the extent of any adverse facts disclosed;
  • state an opinion;
  • explain the effect on the buyer of any facts about the property’s physical, natural or environmental conditions which have been provided by the listing agent; or
  • explain the consequences of the buyer’s failure to further investigate or analyze adverse facts sufficiently disclosed by the agent to put the buyer on notice of the condition.

However, when asked by the prospective buyer or buyer’s agent about any aspect, feature or condition which relates to the property or the transaction in some way, the seller’s agent is duty-bound to respond fully and fairly. The response is to include material facts known to the seller’s agent about the subject matter of the inquiry and is not to contain misleading statements.

A buyer’s agent’s due diligence

Conversely, the buyer’s broker and their agents have a duty to protect the buyer’s best interests.

Related video:

Agency Duties Owed to Buyers

The buyer’s agent, not the seller’s agent, needs to determine what due diligence efforts are necessary to ascertain whether the facts disclosed by the seller’s agent interfere with the buyer’s expected use and enjoyment of the property.

A buyer is entitled to far more assistance from their agent than the naked suggestions or recommendations contained in preprinted advisory disclosures. The duty of the buyer’s agent goes well beyond the seller’s agent’s limited disclosure obligations owed the buyer and the buyer’s agent.

Here, the buyer’s broker and their agent identify services they believe the buyer needs to best protect their interests in the proposed transaction. Thus, their advisory statement needs to consist of a checklist of activities to be considered.

More importantly, services the buyer’s agent has reason to believe the buyer needs become contingency provisions included in the purchase offer. In so doing, the buyer’s agent provides their client with the opportunity to investigate and analyze the agent’s concerns prior to closing. If the investigation discloses unacceptable conditions, the buyer may cancel and avoid the transaction.

For example, a buyer’s agent has an affirmative duty to protect their buyer by pointing out why a recommended activity needs to be undertaken when the activity may uncover a situation which, if it exists, needs to be dealt with before closing.

Just as seller enters into a formal listing agreement with their broker, the buyer uses an exclusive right-to-buy listing agreement to employ a broker and agent to locate property sought by a buyer in exchange for the buyer’s assurance a fee will be paid.

Related video:

The Exclusive Right-to-Buy Listing Agreement

This article was originally posted in July 2015, and has been updated.