PSI Virginia Real Estate Practice Exam

What defines an Agency Relationship?

1. A verbal agreement between parties

2. A contractual agreement between broker and principal

3. A non-binding partnership

4. A temporary arrangement for transactions

The correct answer is: A contractual agreement between broker and principal

An agency relationship is defined primarily as a contractual agreement between a broker and a principal. This relationship is established when one party, the principal, delegates authority to another party, the broker (or agent), to act on their behalf in transactions. This contract sets out the rights and responsibilities of both parties and ensures that the agent can legally represent the principal in dealings with third parties. By forming a contractual agreement, the principal grants the broker specific powers and duties that must be adhered to, fostering trust and clarity in the relationship. This is essential in real estate transactions where responsibilities regarding negotiation, disclosure, and fiduciary duties must be explicitly understood and outlined to protect the interests of all involved parties. In contrast, a verbal agreement could imply a less formal understanding, which might not satisfy the legal requirements for agency, leading to potential disputes or misunderstandings. A non-binding partnership does not convey the authority needed to act on behalf of another party, as it lacks the legal framework typically associated with agency relationships. Lastly, a temporary arrangement does not fully encompass the nature of an agency relationship, which often involves ongoing responsibilities and obligations beyond a single transaction.