The license disclosure myth

This article dispels the myth that a real estate licensee who acts solely as a principal in a real estate sales transaction must disclose the existence of their license in order to comply with California real estate law.

Principal or agent: a crucial distinction

A real estate licensee who acts solely as a principal when buying or selling property need not disclose the existence of his real estate license. The disclosure of a sales agent’s or broker’s license is only required when the individual holds himself out as an agent in a transaction with the expectation of a fee.

California real estate law does not explicitly state a Department of Real Estate (DRE) licensee need not disclose their license status when acting as a principal in a real estate sales transaction. Likewise, there is no specific mandate that a DRE licensee must disclose their license status when acting solely as a principal in a real estate sales transaction.

This ostensible lapse in real estate law is due to the fact that the law focuses strictly on the definition of agency duties and the rights and limitations pertaining to the use of a real estate license. The law does not address the comportment of principals in real estate transactions. Thus, real estate law governing the use of a DRE license only controls when one acts in the capacity of an agent. Individuals acting as principals in real estate transactions are not subject to the rules governing licensees, regardless of their status as a real estate sales agent or broker.

No conflict of interest

Confusion amongst licensees regarding the appropriate time to disclose one’s status as a licensee originates from the various disclosures that must be made when the license is put to work to earn a fee as a representative acting on behalf of another (i.e. agency). These misunderstandings typically stem from the required conflict of interest disclosures, such as acting as a principal and an agent in a transaction, as well as situations where a relative, employee or any person with whom you may have a bias is a principal or provider in the transaction. [For more information on conflict of interest disclosures, see the April 2011 first tuesday Form of the month.]

Consider a licensed real estate broker who sells his own property and adds a broker’s fee to the purchase agreement in order to collect additional compensation on the sale. When a broker-seller receives a brokerage fee on the sale of his own property or on the purchase of property for his own account, he subjects himself to real estate agency requirements. Once a licensee holds himself out as an agent and collects a fee, the licensee becomes responsible to fulfill general agency duties to the buyer and must disclose the existence of his license. [Prichard v. Reitz (1986) 178 CA3rd 465]

Another common conflict of interest situation arises when a licensee acting in an agency capacity has a bias towards a party who holds an interest in the transaction. A broker employed to act on behalf of a principal must disclose the nature and extent of any direct or indirect interest he or his agents hold in a property of interest to a buyer. [Robinson v.Murphy (1979) 96 CA3d 763]

The distinction exists in the capacity the licensee is acting in: acting solely as a principal but not an agent, which is not a conflict of interest and thus requires no license disclosures; or acting as an agent and at the same time holding a personal interest in the property or having a bias toward someone participating in the transaction, which is a conflict of interest requiring a license disclosure. [For more information regarding conflicts of interest, see the February 2009 first tuesday article, Managing ongoing agency conflicts.]

Codes of (mis)conduct

Although some confusion over the necessity to disclose one’s status as a licensee when acting as a principal stems from nuances in statutory conflict of interest disclosures, the most likely cause of this misconception arises from the rhetoric espoused by the California Association of Realtors (CAR) trade union and its members. [For more information on the myths pervading the California real estate brokerage community, see first tuesday’s Real estate myths.]

The CAR trade union code of ethics outlines several restrictions requiring union members to disclose their status as “real estate professionals,” “licensees” and “REALTORS” when acting as a principal in a real estate transaction. According to common CAR trade union lore, it is a showing of good faith to disclose one’s status as a real estate professional in order to inform the opposing parties in a real estate transaction of one’s expertise or above average knowledge of real estate sales transactions.

This logic quickly degenerates into pure absurdity on one level and in fact instigates additional risk on another. Should medical doctors disclose their licensing status at every checkup? Must every CPA disclose they are an expert in tax accounting if they have another CPA prepare their tax return? And what of those individuals who let their license lapse? Should a broker who dropped his license 20 years ago confess to a potential buyer of his home that he knows a great deal about real estate?

Aside from the absurdity of this requirement, the compulsory disclosure of one’s real estate license when acting solely as a principal substantially increases one’s risk for liability. Statutory restrictions on licensee conduct may be considered to be activated by one’s disclosure of their status as a licensee. Thus, by virtue of the disclosure, one’s status may be perceived to change from that of a mere principal to one who is holding himself out as an agent.

When an agent holds himself out to be specially qualified and informed in certain subject matter expressed in his opinion regarding a real estate transaction, his opinion becomes a positive statement of truth on which a buyer or seller of lesser knowledge can rely. Thus, it should be considered ill-advised for a licensee acting solely as a principal to disclose the existence of their license. [Cohen v. S & S Construction Co. (1983) 151 CA3d 941] [For more information regarding the pitfalls of real estate trade union customs, see the November 2011 first tuesday article, Holmes v. Summer: dilatory disclosures and the damage done.]

If a member of the CAR trade union should choose to blindly follow its code of ethics, they must be aware that to do so could potentially expose them to greater risk when they are not acting in an agency capacity. Codes of ethics are fine, but they do not function as law. All California real estate agents and brokers, regardless of their affiliation with a trade union, must be aware that being a real estate licensee does not create a second class citizenship.

The bottom line: if you are not using your license, you need not disclose it.

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