California Real Estate Practice Exam

A broker had signed an agreement to locate property for his principal. Having found a property which suited his principal, which could be purchased for less than he was willing to pay, the broker bought the property himself. Later the broker sold the property to his principal at the higher price, keeping the difference for himself. This is considered:

1. commingling

2. conversion

3. divided agency

4. secret profit

The correct answer is: commingling

The scenario described illustrates a situation where a broker acts in a manner that is not aligned with their ethical and fiduciary responsibilities to their principal. By purchasing the property themselves and then selling it to their principal at a higher price, the broker is effectively making a secret profit from the transaction, which is a clear conflict of interest and violates their duty to act in the best interests of their client. This practice is referred to as a secret profit. It indicates that the broker profited from information gained through their role, without fully disclosing this information to their principal, thus withholding crucial details that could have affected the principal's decision-making process. In real estate, transparency and trust are essential elements of the broker-client relationship; therefore, engaging in secret profits undermines these fundamental principles. The options presented relate to different ethical violations in real estate, but the key aspect of this scenario is the broker's undisclosed gain from the transaction - hence, secret profit is the most applicable term. The other choices, such as commingling (mixing client funds with personal funds) or conversion (wrongful use of another's property), do not accurately capture the situation's specifics. Divided agency refers to representing both parties in a transaction, which does not apply here