What is due diligence?

Every exclusive listing agreement entered into by an agent on behalf of their broker documents an employment which establishes a client relationship. The employment imposes special agency and fiduciary duties on the broker and the agent to use due diligence.

Due diligence is a continuous effort by the broker and their agents to meet the objective of the employment with the client.

The promise to use due diligence is the consideration a broker and their agents owe their client  when rendering services in exchange for their employment as the exclusive representative of the client. If the promise to use diligence in the employment is not stated in the exclusive listing agreement, it is nonetheless  implied as existing in the relationship.

The broker with authority to be the exclusive representative of a client takes reasonable steps to promptly gather all material facts about the property in question which are readily available to the broker and the broker’s agent.

After gathering factual information about the integrity of the property, the broker’s agent proceeds to do every reasonable and ethical thing to pursue, with utmost care, the purpose of the employment.

In contrast to the exclusive listing, a broker and their agents entering into an open listing are not committed to render any services at all. The broker and agents only have a best effort obligation to act on the employment.

However, when an agent under an open listing enters into preliminary negotiations, such as an exchange of property data on inquiry by a third party, a due diligence obligation arises. The due diligence obligation triggered by inquiry requires the client’s broker to provide the utmost care and protection of the client’s best interests in managing that inquiry.  Having acted on the open listing, the agent now inspects the property and gathers all readily available information on the property under consideration.

Once the agent actually begins to perform services under an open listing entered into by a buyer or seller, the agent has acted on the employment. Thus, the due diligence standards of duty owed to the client apply to the agent’s future conduct.

Maintaining the client file

Typically, the agent who produces a listing (and thus their broker’s right to a fee) becomes the agent in the broker’s office who is responsible to the broker for the care and maintenance of the client’s file.

On entering into a listing employment, a physical file is set up to house information and document all the activity which arises within the broker’s office due to the existence of the employment.

For example, the file on a property listing for sale is to contain:

  • the original listing agreement;
  • any addenda to the listing;
  • all the property disclosure documents the seller and seller’s agent provide to prospective buyers in the process of marketing the property; and
  • an activity sheet for entry of information on all manner of file activity.

Everything that occurs as a result of the client employment is to be retained in the file.

The file belongs to the broker, not the seller’s agent, although it will likely remain with the listing agent until the close of a sale on the listed property or the listing expires un-renewed. The agent hands the broker the entire file on close of escrow, usually a condition precedent ot payment of the agent’s share of the fee received by the broker.

Guidelines used to build a file’s content are available in many forms including:

  • checklists prepared by the broker or their listing coordinator;
  • a transaction coordinator’s (TC’s) closing checklist;
  • escrow worksheets;
  • work authorization forms;
  • advance fee and advance cost checklists; or
  • income property analysis forms. [See RPI Form 403]

Checklists belong in the file to be reviewed periodically by the agent, office manager, TC or employment broker for oversight and work to be done in the future to better service the listing and earn a fee.

Guidelines and checklists

Following are some – but not all – steps a broker and their agent undertake to fulfill their employment responsibilities owed to the client. They include:

  1. A property profile of the seller’s title from a title company in order to identify all owners needed to list, sell and convey the property.
  2. A Transfer Disclosure Statement (TDS), also known as a condition of property disclosure sheet, filled out and signed by the seller. [See RPI Form 304]
  3. A home inspection report (prepared by a home inspector) paid for by the seller and attached to the TDS before the seller’s agent signs the TDS. [See RPI Form 130]
  4. A natural hazard disclosure (NHD) on the property from a local agency or a vendor of NHD reports, paid for by the seller, and reviewed and signed by the seller and the seller’s agent. [See RPI Form 314]
  5. An annual property operating data sheet (APOD) covering the expenses of ownership and any income produced by the property, filled out and signed by the seller, together with a rent roll and copies of lease forms which the owner uses, to be included in the marketing (listing) package after reviewing the seller’s data. [See RPI Forms 352 and 562]
  6. Copies of all the Covenants, Conditions and Restrictions (CC&Rs), disclosures and assessment data from any homeowner’s association involved with the property. [See RPI Form 15011.9]
  7. A termite report and clearance paid for by the seller.
  8. Any replacement or repair of defects noted in the home inspection report or on the TDS, as authorized and paid for by the seller.
  9. An occupancy transfer certificate (including permits or the completion of retrofitting required by local ordinances), paid for by the seller.

Similarly, when acting as the buyer’s agent regarding the acquisition of a property, due diligence includes:

  • gathering readily available data on the property under review;
  • assisting in the analysis and consequences of the property data gathered; and
  • advising the buyer regarding the property and any proposed transaction in a conscientious effort to act honestly, and to care for and protect the buyer’s best interests.

Duty to DRE to keep records 

All records of an agent’s activities on behalf of a client during the listing period are retained by the agent’s broker for three years. [Bus & P C §10148]

The three-year period for retaining the buyer’s or seller’s activity file for DRE review begins to run on the closing date of a sale or from the date of the listing if a sale does not occur.

The records will be made available for inspection by the Commissioner of Real Estate or their representative or for an audit the Commissioner may order.