Regulations have changed in our industry so much in the past 15-20 years. The obligations for us as agents to disclose everything that we know about or should know about to all parties involved in a real estate transaction have become so unbelievably all-important. Along with this, the agency disclosures on who we represent in each of our transactions must be very clearly spelled out to our buyers and sellers.

As real estate agents, we are held to a much higher degree of disclosure than most other industries are. We are held to be experts at what we do, having fiduciary relationships with the people we represent, and as such we must not do anything that would cause us to gain an economic advantage for ourselves while simultaneously causing detriment to our clients.

When it comes to us investing in real estate this also creates some touchy arenas for us to deal with. As we are often considered to be experts at what we do we can also be held to have taken economic advantage of sellers if we purchase properties from them at what is later considered to be below market prices. This can be true even if we did not utilize our real estate license in the transaction and did not collect a real estate commission from the seller. In other situations, if we are purchasing properties as investments and are utilizing our real estate licenses to collect commissions in the process, we could truly be sealing our own fate.

Real estate laws in the USA vary on a state-by-state basis, but there is a common underlying theme that applies to many of the individual state laws. Because of this, if you utilize your real estate license to collect a commission on a transaction in which you are the buyer, you are most probably held to an obligation of full disclosure of anything that could affect the seller's desire to sell the property to you. So, if you are purchasing a property that is not listed on the market and you are buying it at a below market price, you can easily be held to have breached your obligation to the seller to disclose all material facts involved in the transaction. In summary, you don't want to put yourself in this position. I'd like to tell you a story that may illustrate this in far greater detail for you:

There's a truly outstanding real estate agent that I know by the name of Michael who sells real estate in California. Several years ago Michael purchased an investment property for $650,000.00, and it's possible that the property may have actually been worth $700,000.00 at the time he purchased it. Over the next 2-3 years this property appreciated in a very hot real estate market and Michael then sold the property to another investor for $850,000.00. That's when Michael's troubles began.

The original owner that Michael had purchased the property from had heard about the recent sale and was angered by the profit that Michael was making only two-three years after the original sale was completed. He decided to sue Michael claiming that while Michael utilized his real estate license and collected a commission on the original transaction, Michael had also breached his obligation of full disclosure as a real estate agent in the transaction and had taken advantage of him. He claimed that Michael had purchased the property unfairly from him at a below market price.

Michael was in a tough situation. He realized that the cost of going the distance in court through litigation would be about $50,000.00 in legal fees, a lot of mental and emotional aggravation, and the possibility of losing his real estate license. So to make matters really simple and begin moving on with his life, Michael decided to give the previous owner of the property exactly what he was looking for...100 percent of the profit Michael was expecting to receive on the sale of the property after deducting the original $650,000.00 purchase price from the proceeds.

Now keep in mind that the original owner of the property had taken the $650,000.00 that he received from Michael two-three years earlier and reinvested it in another property at that time. And that property had also appreciated incredibly over the same 2-3 year period. So the original seller was definitely coming out way ahead of the game here on both properties.

Which leads me to my point in telling you this story:

Talk to a qualified real estate attorney in your state and get very clear on what your obligations are both as an agent representing your clients, and as a licensed real estate agent who wants to invest in real estate. A little homework in advance on your part with an attorney who is truly an expert in this arena can go a long way towards helping you to avoid any situations like the one that Michael experienced.

Published: April 9, 2004

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Jim Gillespie, Ph.D., is America's Premier Real Estate Coach℠. He has over 20 years of experience in real estate sales and is a past president of three different real estate companies. His FREE real estate E-newsletter with tips and creative ideas to help agents make more money is now read by over 35,000 agents nationwide. You can subscribe to his FREE E-newsletter by visiting RealEstateSalesCoach.com or contact him at Jim@RealEstateSalesCoach.com.