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A principal refers to a person or entity that holds a position of authority or ownership in a transaction, investment, or business. In this article, we’ll define the term “principal” and explore its relation to real estate.

Key Takeaways

  • Principal can have different meanings depending on context
  • In real estate, principal usually refers to a person or entity who hired a real estate agent to represent them in a transaction, either a buyer or a seller
  • The relationship between a principal and agent is governed by a contract called a listing agreement 
  • The principal’s role is significant as they are the party who is ultimately responsible for the property or funds involved in a real estate transaction 
  • The agent has a fiduciary duty to act in the best interests of the principal

What Is A Principal?

The term principal can have several different meanings depending on context.

In real estate, a principal refers to the person who hires an agent to act on their behalf in a transaction. The principal is typically the buyer or seller, and they delegate authority to the agent to act on their behalf.

In finance, a principal can refer to the amount of money borrowed or invested, upon which interest or returns are calculated.

In commercial real estate, a principal can refer to a partner or owner of a firm that is involved in a transaction.

In the context of real estate licensing, a principal is the real estate broker who supervises the activities of a licensed salesperson.

Principal in Real Estate

In real estate, the term "principal" most often refers to the person or entity who hires a real estate agent or broker to represent them in a transaction. The principal can be either a buyer or a seller, and they delegate authority to the agent to act on their behalf in the negotiation, marketing, and closing of the deal.

The relationship between the principal and the agent is typically governed by a contract known as a "listing agreement" in which the agent agrees to provide certain services, such as finding a buyer or identifying suitable properties, and the principal agrees to pay a commission or fee upon the successful completion of the transaction. The listing agreement also outlines the terms of the agent's authority, such as the price range, location, and type of property the agent is authorized to search for, and the terms of any offers that the agent is authorized to make or accept.

The principal's role in a real estate transaction can be quite significant. As the party who is ultimately responsible for the property or funds involved, the principal must make important decisions based on the advice and guidance of the agent. For example, if the principal is a seller, they may rely on the agent's expertise to determine the best listing price, marketing strategy, and negotiation tactics. Conversely, if the principal is a buyer, they may rely on the agent to help them identify properties that meet their needs and negotiate favorable terms on their behalf.

One important aspect of the principal-agent relationship in real estate is the concept of fiduciary duty. Fiduciary duty refers to the legal and ethical obligation of the agent to act in the best interests of the principal, even if it means sacrificing their own interests or potential profits. This duty requires the agent to provide honest and transparent advice, avoid conflicts of interest, and keep the principal informed of all material facts and developments throughout the transaction.

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