What is a Principal in Real Estate? Real Estate Terms Explained

If you are interested in buying, selling, or investing in real estate, you may encounter the term principal.

But what does it mean and who is it?

In this article, we will explain the definition and role of a principal in real estate transactions.

Principal as a Party to a Contract

One of the meanings of principal is a party to a contract.

In real estate, a contract is an agreement between two or more parties to exchange something of value, such as property, money, or services.

A principal is someone who has the authority and responsibility to enter into and perform the contract.

For example, if you want to buy a house, you are the principal buyer.

You have the authority and responsibility to make an offer, negotiate the terms, pay the price, and take possession of the property.

Similarly, if you want to sell your house, you are the principal seller.

You have the authority and responsibility to accept or reject offers, disclose any defects, transfer the title, and receive the payment.

A principal can also be a legal entity, such as a corporation, partnership, trust, or LLC. For example, if you own a rental property through an LLC, the LLC is the principal owner.

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The Principal-Agent Relationship .
The Principal-Agent Relationship | Study.com

It has the authority and responsibility to manage the property, collect rent, pay expenses, and sell or transfer the property.

Principal as an Agency Owner or Manager

Another meaning of principal is an agency owner or manager.

In real estate, an agency is a business that provides services related to real estate transactions, such as brokerage, appraisal, management, or consulting.

A principal is someone who owns or manages an agency.

For example, if you are a licensed real estate broker who owns your own brokerage firm, you are the principal broker.

AN image of development manager
Principal real estate [PHOTO COURTESY OF POSTREDI]
You have the authority and responsibility to operate your business, supervise your agents, handle your clients’ funds, and comply with the laws and regulations. Similarly, if you are a licensed real estate agent who works for a brokerage firm as a manager, you are the principal agent.

You have the authority and responsibility to oversee your team, train your staff, monitor your transactions, and report to your broker.

A principal can also be someone who acts on behalf of an agency owner or manager.

For example, if you are a licensed real estate agent who works for a brokerage firm as an associate broker, you are the principal’s agent.

You have the authority and responsibility to represent your broker in real estate transactions, follow your broker’s instructions, act in your broker’s best interest, and disclose any conflicts of interest.

Difference between an agent and a principal

The difference between an agent and a principal depends on the context and the relationship between them.

Generally speaking, an agent is someone who acts on behalf of another person or entity, while a principal is someone who authorizes or directs the agent to act for them.

For example, in real estate, an agent is a licensed professional who helps buyers and sellers with their real estate transactions.

A principal is a buyer or seller who hires an agent to represent their interests and negotiate on their behalf.

The agent has a fiduciary duty to act in the best interest of the principal and follow their instructions.

Another example is in business, where an agent is an employee or a contractor who performs tasks or services for a company or an organization.

A principal is a company or an organization that hires or contracts the agent to work for them.

The agent has a contractual obligation to perform the tasks or services according to the terms and conditions agreed upon with the principal.

In both examples, the agent and the principal have a mutual agreement that defines their roles and responsibilities.

The agent and the principal may also have rights and liabilities arising from their relationship.

For instance, the agent may be entitled to a commission or a fee for their services, while the principal may be liable for the actions or omissions of the agent.

Conclusion

A principal in real estate can have different meanings depending on the context.

It can be a party to a contract who has the authority and responsibility to enter into and perform the contract.

It can also be an agency owner or manager who has the authority and responsibility to operate and supervise their business.

A principal can be an individual or a legal entity.

A principal can also have agents who act on their behalf in real estate transactions.

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