What is a Principal in Real Estate and Escrow?

If you’ve looked into any sort of real estate or escrow transactions, you may have seen the term principal used a lot. But, what is a principal in real estate? 

If you are not a real estate expert, you might not be so sure as to who the principal is. But fear not, in this article you will learn exactly who the principal is and what their role in real estate and escrow are.

Let’s get started!

What is a Principal in a Real Estate Transaction?

So, what is a principal? 

In simple terms, the principals in a real estate sale transaction would be the buyer and the seller. In the case of an escrow account, the principals would be the parties who give instructions to the escrow holder.  

what is a principal in real estate

As you can see, specifically in the context of real estate and escrow, the principal can be anyone involved in a contract. This means that this could be the seller, buyer, broker, or property manager.

When Does a Principal Become a Client?

A principal becomes a client once they have agreed to hire and have signed an agreement with either an agent or brokerage firm to represent the principal in their real estate transaction.

That’s right – YOU could become the client AND the principal.

Once this happens, you will need to contact and hire an agent or brokerage firm to represent you in your real estate transaction. The main role of the principal is to find the agent or brokerage firm that will best represent you and be able to address all of your needs. 

The Agent or Brokerage Firm’s Role in Real Estate

The role of the agent or brokerage firm is simple. They serve the requests and desires of the principal and relay that direction to the Escrow Holder. The agent or brokerage firm ultimately represents the seller and their needs.

Buying or selling a home is a big deal and a stressful process, so you want to make sure you will have a good working relationship with your agent. Here are some factors to consider when seeking out an agent that is right for you: 

  • Your timeline: Who will be the best fit for the time period you’d like to spend selling or buying a property?
  • Experience Level: Be sure they have the experience you are looking for. If they are newer, do they have the leadership to help guide and support them if needed?
  • Recent Performance: You may want to ask how many transactions they have completed within the last year to determine if they are on a track that is suitable for you.
  • Their Schedule: Similarly to their recent performance, are they going to be too busy to give you the time you will need? 
  • Do they know the area?: Are they familiar with the area, and are you comfortable with their knowledge of it? 
  • Do you like them?: You want an agent that you can talk to, ask questions, share thoughts, and have a good relationship with. Make sure they are friendly and helpful and will be able to deliver what you need. 

Since you (the principal) and the agent will be working closely together, it is essential to make sure the agent is a good fit for you! Keep reading to learn more about the principal-agent relationship in your real estate transaction. 

In the Know: Principal-Agent Relationship 

When a principal and agent (or brokerage firm) are both involved in the sale of a real estate property, they have a close working relationship. They work together to ultimately get a property sold and complete a transaction. This should be a mutually beneficial relationship that works in favor of both parties.

But, unfortunately, that doesn’t always happen. With the informational advantage of brokers, it’s possible for an agent to act in their own interest as opposed to the best interest of the principal. 

So, how do we ensure that the client is protected? Answer: A fiduciary relationship.

Build a Fiduciary Relationship

So, what is a fiduciary relationship? Let us explain.

A fiduciary relationship is a legal and confidential relationship between two parties. 

Once a principal hires an agent or brokerage firm, the agent or brokerage firm now has a fiduciary duty to represent the principal, who has now become the client. They must act honestly, fairly, and have the client’s best interests in mind. If fiduciary duties are neglected, the agent or brokerage firm will be held accountable.

Duties of an Agent

The National Association of Realtors defines a set of fiduciary duties so that an agent maintains the principal’s best interests. The duties of an agent are as follows: 

  1. Loyalty 
  2. Confidentiality 
  3. Disclosure 
  4. Obedience 
  5. Reasonable Care and Diligence 
  6. Accounting 

These fiduciary duties can be in addition to any other obligations created in a contract of employment to ensure the principal is not to be taken advantage of and is formally protected. 

Learn More Real Estate Tips through New Venture Escrow

Through this article, you learned about the unique role of a principal in a real estate transaction.

Have more questions about principals, agents, or escrow? Here at New Venture Escrow, our experts are ready to help you in every step of your real estate journey. Contact us and we will answer all of your questions and guide you through the escrow process.

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