The client wants to waive an appraisal contingency? What should the realtor do?

Real Estate agents often know better than the clients what to do and what not to do in a transaction. What is the duty of a real estate agent when the client insists on an action that is not recommended?

The scenario today comes to us from Google’s Question Hub. One of Google’s users asked the question “What should a real estate licensee do if her client insists on waiving appraisal contingency?”

The answer to this question is found in agency law. It is also found in the California Association of Realtors Code of Ethics. Below, we will review each to answer the question.

My name is Jared Clemence, and I am a real estate agent in Bakersfield, CA. I am a third-year law student at Kern County College of Law, and the information that follows is hear for your use, but it is not legal advice. If you have a particular problem or need, talk first to your broker. If you are the broker or if the broker does not know, then consult a lawyer. California Association of Realtors provides access to lawyers to members for just this purpose.

Answer According to Agency Law – Should the agent follow the client’s orders?

Real Estate licensees in California act as agents for the Broker. The Broker acts as an agent for the client.

Under California Law, the distinction between an agent and an independent contractor is whether the client controls the activity or the outcome.1Kim v. Sumitomo Bank (1993) 17 Cal.App.4th 974, 983 [21 Cal.Rptr.2d 834]. The case of Kim v. Sumitomo Bank, supra, 17 Cal.App.4th 974, 983, the court writes the following:

An agency is proved by evidence that the person for whom the work was performed had the right to control the activities of the alleged agent. (Malloy v. Fong (1951) 37 Cal.2d 356, 370 [232 P.2d 241].) When the principal only controls the results of the work and not the means by which it is accomplished, an independent contractor relationship is established. (White v. Uniroyal, Inc. (1984) 155 Cal.App.3d 1, 25 [202 Cal.Rptr. 141].)

Thus, if the agent were allowed to chose the terms that are included in the offer, and the client only cared or had a choice in which house to purchase, then an independent contractor relationship would exist. But this is not the nature of our relationship with our clients at all, is it?

A review of the Agency Disclosure form that California licensees are required to present to their clients uses the word “agent” very purposefully. If the contractual relationship between the client and the Realtor is an “agency,” then under California law, the client has the right to control the agent’s actions, which would include the terms that the agent submits on the offer.

The client pulls strings controlling what the Realtor types into the laptop.

Under California law, the client pulls the agent’s strings and has full control.

Thus, under California law, where the Realtor is an agent of the client, if the client demands that the agent waive appraisal contingencies, then the agent is required to issue a document that waives the appraisal contingencies. This is true regardless of whether waiving the appraisal contingency exposes the client to undue risk or a potential loss of his or her earnest money deposit.

It is interesting to note that under agency law that the client controls only the actions of the agent. If the outcome is adverse to the client, then it is because of the client’s improper control of the agent and not because of the agent’s actions.

Answer According to the California Association of Realtors Code of Ethics – Should the agent follow the client’s orders?

The California Association of Realtors has adopted the National Association of Realtors Code of Ethics. All references that follow regard the 2021 NAR Code of Ethics. Article 1 of the section regarding duties to the client is most on-point.

Article 1

In Article 1, the Realtor pledges “to protect and promote the interests of their client.” The Code says that this obligation is “primary.” As we read through the Standards of Practice in Article 1, we learn that the method that NAR proposes to protect client interests is full disclosure and complete honesty.

The Standards of Practice

Realtors “shall not deliberately mislead” any person in attempting to obtain a buyer or seller agreement. They must protect clients by submitting offers “as quickly as possible,” even if the transaction is already in escrow! (See Standards of Practice 1-6 and 1-7).

Although the Standards of Practice do not specifically address what to do when the client has a different opinion of what next step to make, none of the Article 1 practices suggests that an agent should take an action contrary to the client’s wishes, even when the client’s wish may be self-damaging. The way to protect the client is to inform them of the consequences of their action so that they are led to choose a better path. The client still decides what path or action to take.

Document the advice

Protect yourself against claims that you have failed your Article 1 duties by having the buyer sign a document where you advise them against the action. We see this in the buyer’s inspection waiver form where it states that if the buyer decides to waive the home inspection, he or she does so against the advice of the broker. This is an excellent example where a buyer acts against the agent recommendation and it is properly documented.