Business Finance
Agency Formation

Question Description

I need support with this Business Law question so I can learn better.

"Agency Formation" Please respond to the following: •Chapter 5 states “…without the law of agency, corporations could not function at all.” Share an example not given in the textbook that proves this statement correct. •Outline the advantages and disadvantages of the various types of agency relationships.

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Final Answer

A consensual relationship created by contract or by law where one party, the principal, grants authority for another party, the agent, to act on behalf of and under the control of the principal to deal with a third party. An agency relationship is fiduciary in nature, and the actions and words of an agent exchanged with a third party bind the principal.

An agreement creating an agency relationship may be express or implied, and both the agent and principal may be either an individual or an entity, such as a corporation or partnership.

Under the law of agency, if a person is injured in a traffic accident with a delivery truck, the truck driver's employer may be liable to the injured person even if the employer was not directly responsible for the accident. That is because the employer and the driver are in a relationship known as principal-agent, in which the driver, as the agent, is authorized to act on behalf of the employer, who is the principal.

The law of agency allows one person to employ another to do her or his work, sell her or his goods, and acquire property on her or his behalf as if the employer were present and acting in person. The principal may authorize the agent to perform a variety of tasks or may restrict the agent to specific functions, but regardless of the amount, or scope, of authority given to the agent, the agent represents the principal and is subject to the principal's control. More important, the principal is liable for the consequences of acts that the agent has been directed to perform.

Types of Agency Relationships

Choice #1 - A Sellers Agent or "Sub agent" This is what some call "traditional real estate" the way it has been practiced for decades. Unless otherwise disclosed, all agents in the United States represent the "Seller" in all real estate transactions. This is the way virtually everyone bought their homes until just a couple of years ago. The Agent is obligated to show Fairness and Honesty to the Buyer as well as to Disclose any and all known Defects or Issues which may affect the decision to buy the property.

Advantage - There is no binding relationship to any one Realtor or commitment, other than perhaps an obvious moral one, to work with any particular agent. You come and go as you please. Your agent will efficiently show you any home listed in the Multiple Listing Service.

Disadvantage - In a market like the one we now have in Central Massachusetts, the available listing inventory is extremely low. In times like these, many of the most desirable listings never even make it to the market. If I know that I have three listings coming on the market in the next week, I will commonly contact all of the buyers I'm currently representing as a Buyers Agent and give them a week or two notice prior to the home coming on the market for the general public. While we do not believe in the unethical practice of "pocketing the listing for a week," it rarely happens that someone we speak with is ready to put their home on the market today. Often, they will be tidying up for a few days, doing a little painting, perhaps just waiting for the job transfer to be "official." It is in that crucial week, that my Buyer Clients can get the jump on the rest of the people out there.

Because I have these Buyers "under contract," I have nothing to lose by giving them this information in advance. I would not typically give such information to a buyer who did not commit to working with me, because they could then take that information and pass it along to another Realtor.

Another potential disadvantage in this type of Agency Relationship is the sheer amount of time a Realtor will spend with a buyer who tells them up front that they wont commit to working with them. It's a little like asking an attorney to do all the research on your case, but not saying you'll let him or her be the one to take it to trial. They'll eventually do it, but the clients on retainer will most assuredly take priority.

Choice #2 - A Buyers Agent - Available in many states for years, Buyer Agency has truly taken hold in Massachusetts only in the past three or four years. In Buyer Agency, the Buyer will actually sign a contract with the Agent. It really simplifies into a very simple relationship predicated on a few basic concepts.

(a) The Buyer agrees to work exclusively with that Agent to find them a home.

(b) The Buyer agrees to pay the Agent a fee for their service, usually a percentage of the sales price. In Massachusetts, this fee is almost always paid by "The Seller" of the home. The Seller is already offering a fee of X% to the Agent who brings the Buyer, and the Buyer has this fee "Assigned to" their "Buyers Agent" in order to fulfill their commitment to them.

Advantages - Since a Buyers Agent represents the Buyer - not the Seller in the transaction, they can provide additional services such as Researching the property, Showing properties not in the Multiple Listing Service (FSBO, Bank Owned, Corporate, Expireds), Performing a Market Analysis on the subject home to determine its value, Negotiating with Builders and developers. These services are typically offered with no additional fee to the buyer.

Since the Buyer has committed to work with that Agent, the Agent knows that eventually the buyer will buy a home from them. There is no "pressure" on the Agent to "close the deal." Rather, by providing professional service and counseling, and sometimes even telling a buyer when to "walk away" from a deal, they can sometimes perform more functions.

Lastly, as mentioned earlier, my Buyer Clients will often have a few weeks notice in advance of the new listings hitting the general market. Since my fee is guaranteed by contract, I don't have to worry about giving out this information in advance, since they can't "go around me" anyway.

Disadvantages - Don't pick the wrong agent and get stuck with someone you're not comfortable working with. Select your agent carefully before signing any agreements. Ask the Agent to include a "Termination Clause" to get out of the relationship if you're not happy. Make sure that the agent covers all of the different communities you are interested in. If not, you may get Agents to allow multiple Buyer Agency contracts in different towns.

Choice #3 - Disclosed Dual Agency. This occurs whenever someone who I am representing as a Buyer Agent is interested in a property listed by me or my company. Essentially it means that we're representing both parties in the transaction fairly and honestly with the written permission of both parties.

Advantages - Similar to Buyer Agency

Disadvantages - As a Disclosed Dual Agent, we cannot come right out and tell you "what to offer," as though that was ever of much use anyway. We can give you, if you ask, all of the comparable sales on the street and do a market analysis. You have to then decide what price you think is fair. other than that, we're still obligated to disclose any defect or issues about the home or area that may affect your decision. This is for your protection as well as ours.

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