2010 Rockwell Publishing Lesson 16: California Real Estate License Law Principles of California Real Estate

© 2010 Rockwell Publishing

Lesson 16: California Real Estate License Law

Principles of California Real Estate


Administration of Real Estate Law

California’s Real Estate Law is administered by Department of Real Estate (DRE).

Chief officer of DRE is Real Estate Commissioner.



Real Estate Commissioner:appointed by Governormay not engage in real estate activities

or have interest in real estate firmmust have been real estate broker

actively engaged in business in California for 5 years (or related experience)


Commissioner’s powers and duties:grants and denies licensesenforces Real Estate Law issues rules and regulations to implement lawregulates sale of subdivisions and business

opportunities investigates non-licensees performing real

estate activitiesholds disciplinary hearings on license

violations




California Attorney General provides legal advice to Commissioner regarding Real Estate Law.

Violations of Real Estate Law are prosecuted by district attorney of county in which they occur, not by state Attorney General.


When License is Required

Anyone who is acting, advertising, or appearing to act as real estate broker or salesperson must have real estate license.


When License is RequiredDefinition of a broker

Real estate broker: Person who does, or negotiates to do, certain acts on behalf of another person, for compensation or promise of compensation.

Real Estate Law describes broad range of activities brokers may perform.


Selling, buying, or exchanging real property or business opportunity.

Leasing or collecting rents from real property or business opportunity; or buying, selling, or exchanging leases on real property or business opportunity.

When License is RequiredBroker activities


Soliciting prospective sellers, buyers, or tenants, or listing real property or business opportunity for sale or lease.

Locating or filing application for the purchase or lease of state or federal lands.



Collecting advance fee to promote the sale or lease of real property or business opportunity by advertising or listing it, by obtaining financing, or in some other way.



Soliciting borrowers or lenders or negotiating loans secured by liens on real property or business opportunities, or collecting payments or performing other services in connection with such loans.

Brokers must obtain separate mortgage loan originator (MLO) endorsement before engaging in these activities in connection with residential mortgage loans.




• An MLO endorsement is obtained through the Nationwide Mortgage Licensing System and Registry, and requires its own prelicense and continuing education.• An MLO endorsement is also required for a real estate license to receive compensation from a lender or mortgage originator, even when only performing real estate brokerage activities.


Selling, buying, or exchanging real property securities, land contracts, or promissory notes secured by liens on real property or business opportunities, and performing services for holders of contracts or notes.



Engaging as principal in business of buying, selling, or exchanging 8 or more real property securities (sales contracts, promissory notes, etc.) within one year.

Note that this activity refers to broker who is acting on her own behalf.



Types of LicensesSalesperson’s license

Salesperson: Someone who’s hired by broker to do one or more real estate activities allowed under law.

Can engage in real estate activities only as broker’s representative.

Cannot represent members of the public directly.


Types of LicensesAssociate broker

Licensed broker who works for another broker rather than starting her own brokerage is sometimes called associate broker.

There is no special “associate broker’s license.”

While working as associate broker, broker has essentially same status as salesperson or “affiliated licensee.”


Types of LicensesBusiness entities

A real estate license can be issued to a corporation:

if at least one corporate officer is designated to act as broker for corporation, and

that person is licensed as a broker.


Types of LicensesPenalties for unlicensed activities

Penalty for acting without license includes:fine of up to $20,000 and/or 6 months

prison for individualsfine of up to $60,000 for corporation


When License Not Required

Law provides exceptions to licensing requirement for certain persons who are:

acting on their own behalfregulated by another agencyperforming functions that don’t require

expertise



Person buying or leasing property:for himself, oron behalf of group to which he belongs

(such as partnership or corporation).



Attorney in fact authorized by recorded power of attorney.

Attorney at law, in performance of her duties as a lawyer.



Person acting under court order, such as:executor or administrator of estatereceiver in bankruptcy

Trustee under a deed of trust.



With respect to mortgage loan activities, representatives or employees of:

financial institutions, insurance companies, pension funds, or credit unions

federally approved housing counseling service

cemetery authority licensed finance lender or residential

mortgage lender or servicer



With respect to business opportunity transactions, licensed securities broker or dealer.



Persons performing purely clerical duties and not discussing price, terms, or condition of property.

The manager of hotel, motel, or trailer park, or employee of the manager.



Resident apartment manager or employee of the manager.

Employee of property management company, supervised by licensee working for the company.


SummaryAdministration of Real Estate Law

• Department of Real Estate• Real Estate Commissioner• Broker• Salesperson• Associate broker• When license not required


License QualificationsSalesperson

To obtain salesperson’s license applicant must: be at least 18 years old be honest and truthful pass state exam and pay license fee be fingerprinted, provide social security

number, and proof of legal presence in U.S. complete 3 courses (9 semester units)


License QualificationsBroker

For broker’s license, applicant must: be at least 18 years old be honest and truthful pass state exam and pay license fee be fingerprinted, show social security

number, and proof of legal presence have at least 2 years of experience as

salesperson in last 5 years, or equivalent complete 8 courses (24 semester units)


License Application and Term Applying for a license

Applicant must apply for license within one year after date of passing exam (not the date notice was received).


License Application and TermRenewing a license

License valid for 4 years.

Licensee renews by:completing continuing education

requirementssubmitting applicationpaying renewal fee

No need to take state exam again.


License Application and TermLate renewal

License expires if licensee misses 4-year renewal deadline.

Grace period: License can be renewed within 2 years after expiration, at Commissioner’s discretion, if late penalty is paid.


License Application and TermLate renewal

After 2-year grace period ends:all license rights are lostformer licensee would have to take

state exam again and apply for new license


License Application and TermRenewals

Real estate license can’t be renewed unless licensee has fulfilled continuing education requirements.

Forms documenting attendance at courses must accompany renewal application.

Salespersons and brokers must complete at least 45 hours of continuing education (over 4 years), with certain courses specified depending on whether it is first renewal or subsequent renewal.


SummaryLicense Qualifications/Application/Term

• Salesperson’s license• Broker’s license• License application and term• Expiration and renewal• Continuing education


Other License ProvisionsFictitious names

Broker may conduct business under fictitious name if broker:

files fictitious name statement with county clerk

publishes notice in newspaper at least once a week for four weeks

submits affidavit proving publicationAffidavit: Written statement sworn before

a notary public.


Special ActivitiesReal property securities dealer

Real property securities dealer is person engaged in business of selling or reinvesting funds in real property securities.

Person engaged in these activities in California is required to have real estate broker’s license, unless licensed as securities broker-dealer.


Business Opportunities

Business opportunity: Sale or lease of a business, typically including inventory, fixtures, lease assignments, and goodwill.

Listing a business opportunity, or representing buyer, requires real estate license, even if no real property involved.

If shares of stock involved, agent may also need securities license.


Business OpportunitiesFranchise agreements

Franchise agreement: Purchaser (franchisee) buys right to sell goods under franchisor’s brand name and marketing system, in exchange for franchise fee.

Franchise may be sold by real estate licensee, securities licensee, or any person registered with Commissioner of Corporations.


Business Opportunities

In sale of business opportunity, bill of sale is typically used.

If sale involves real property and personal property, two sales agreements may be used.

Escrow is typically used in sale of business opportunity.

Two separate escrows may be used if both personal and real property sold.


Business OpportunitiesSales tax

Sales of business opportunities are subject to state sales tax, because they involve transfer of personal property.

A buyer of wholesale or retail business should obtain Certificate of Clearance from state Board of Equalization, certifying that seller’s sales taxes have been paid.

Otherwise buyer may have successor’s liability for unpaid sales taxes.


Business OpportunitiesBulk sales

Bulk sale: Sale, not in the ordinary course of business, of more than half of seller’s inventory.

Uniform Commercial Code imposes certain requirements on bulk sales.


Business OpportunitiesBulk sales

Before bulk sale occurs, buyer must:notify seller’s creditors of plans by

recording notice of intent to buy with county recorder

send notice to county tax collectorpublish notice in newspaper

If notice requirements aren’t met, buyer may become liable to seller’s creditors.


Business OpportunitiesLiquor licenses

Sale of business opportunity may involve a liquor license.

On-sale liquor license is one that may, subject to approval, be transferred from person to person, or to different premises.

During first 5 years after issuance of liquor license, on-sale license may not be resold for more than cost of initial application.


SummarySpecial Activities/Business Opportunities

• Real property securities dealer• Business opportunity• Franchise agreement• Sales tax• Bulk sale• Liquor licenses


Disciplinary Action

Commissioner may take disciplinary action against licensee who violates Real Estate Law.

Procedures involved include:commissioner’s investigationwritten accusationadministrative hearing


Disciplinary ProceduresCommissioner’s investigation

Commissioner must investigate all verified written complaints against licensees, and may also initiate investigation on her own (without formal complaint).


Disciplinary ProceduresAccusation

If investigation warrants formal action, Commissioner:

files accusationschedules administrative hearing

Accusation: Written statement of charges.Must be filed within 3 years of alleged

violation (more time if charge involves fraud, misrepresentation, or false promise).


Disciplinary ProceduresAdministrative hearing

Hearing conducted by administrative law judge.

Judge makes proposed decision after hearing testimony.

Commissioner accepts or rejects proposed decision when making his final decision.


Disciplinary ActionSanctions

If accusation proved, Commissioner may:suspend or revoke license, orimpose fine of up to $250 for each day

license would have been suspended.Maximum fine: $10,000


Disciplinary ActionAppeal

Disciplined licensee may: petition for reconsideration from

Commissioner, and/orappeal Commissioner’s decision to

superior court


Disciplinary ActionProsecution and civil liability

Licensee disciplined by Commissioner may also face:

criminal prosecution by county prosecutor

civil suit by an injured party


Grounds for Disciplinary Action

Grounds for disciplinary action include—but are not limited to—any of following violations.



Misrepresentation: Deliberately or negligently making false statements or failing to disclose material facts to principal.

False promise: Making false promise that is likely to persuade someone to do or refrain from doing something.



False advertising or running blind ads.Blind ad: Advertisement placed by real

estate licensee that does not include licensee designation and broker’s name.



Acting as dual agent without consent of both parties. Commingling general funds with trust funds.Failing to put definite termination date in exclusive listing agreement.Failing to disclose a profit in option to purchase (secret profit).Fraud or dishonest dealing.Failing to use real property transfer disclosure statement.


Being convicted of felony or misdemeanor involving moral turpitude.Willfully using any trade name of real estate organization that you are not member of.Performing licensee activities negligently or incompetently.As broker, failing to exercise reasonable supervision over salespersons.Failing to disclose personal interest in property to buyer.



As broker, failing to notify Commissioner of discharge of any salesperson based on violation of license law.

Mobile home irregularities, including fraud in application for registration of a mobile home.

As broker, failing to notify parties of selling price.

Illegal compensation for referring customer to escrow, pest control, home warranty, or title insurance companies.



Real Estate Fund

All license fees go to state treasury, and are then credited to Real Estate Fund.

Portions of Real Estate Fund are earmarked for:

the Education and Research Accountthe Recovery Account


Real Estate FundRecovery account

The Recovery Account is used to reimburse parties injured by real estate agent’s:

fraudmisrepresentationdeceitconversion of trust funds


Recovery AccountRequirements

Injured party must:obtain civil judgment (or arbitration

award) against agent, andshow that agent has insufficient funds or

assets that can be seized to pay judgment or award.


Recovery Account will pay:up to $50,000 for any one transactionup to $250,000 for any one licensee

Agent’s license suspended until amount paid out is repaid to Recovery Account, with interest.

Recovery AccountLimitations


SummaryDisciplinary Action

• Disciplinary procedures• Grounds for disciplinary

action• Sanctions• Real Estate Fund• Recovery Account


Trust Funds

Trust funds: Money or other valuables received by broker on behalf of someone else, which are held while performing any acts requiring real estate license.

May be cash, check, promissory note, or any other item of personal property.


Trust Funds

Funds that real estate brokers hold in trust for clients:

good faith depositstenant security depositscollected rentsadvance fees

Advance fees: Fees seller pays in advance for expenses associated with a listing.


Trust AccountsSeparate from general account

Broker must maintain one or more trust accounts to keep trust funds separate from broker’s own money.

Trust accounts should be:opened in broker’s name as licensedspecially designated as trust accounts


Handling Trust Funds

Funds should be deposited in trust account no later than third business day after they’re received.

Broker may pass check directly from principal to escrow or another principal without putting it in trust account first.

Check should still be recorded in broker’s trust fund records.


Handling Trust Funds

If principal gives check directly to third party, such as title company, without it ever passing through broker’s hands, broker does not need to enter it into trust fund records.


Handling Trust FundsReceipt by salesperson

When trust funds are given to salesperson, salesperson should immediately:

deliver funds to her broker, oras directed by broker, deliver funds to

broker’s trust account, neutral escrow account, or to principal.


Handling Trust FundsGood faith deposits

Exception to rule: Good faith deposit check can be held uncashed until buyer’s offer is accepted, so long as:

check is not negotiable by licensee or buyer has given written instructions not to deposit or cash check until acceptance, and

seller is informed that check is being held.


Before seller accepts offer:good faith deposit belongs to buyermust be returned to buyer if he

demands it



After offer accepted:broker may hold check only with seller’s

written authorizationno part of deposit can be refunded

without seller’s written permission



If transaction fails to close, and parties dispute who is entitled to deposit:

Broker (or escrow agent) files interpleader action and turns funds over to court.

Court decides which party gets deposit.



Handling Trust FundsCommingling

Commingling: Illegally mixing trust funds with personal funds.

Broker must never put trust funds into her general account, or her funds into trust account, even if careful records kept.

Conversion: Appropriating client funds for broker’s own purposes.

Conversion is basis for theft charges.


Funds in trust account should always equal broker’s trust fund liability.

Shortage or overage are both violation of Real Estate Law.

Exception: Broker may keep up to $200 of her own funds in trust account to pay bank’s service charges.

Handling Trust FundsCommingling


If broker is owed commission from trust funds, she may withdraw it directly from trust account.

Broker cannot make any other withdrawals from trust account for either personal or business reasons.

Trust AccountsCommingling


Rule against commingling makes it difficult for broker to dip into trust funds for her own benefit.

It also protects trust funds from any legal action that may be taken against broker.

If trust funds were in broker’s general account, creditor with judgment against broker might seize the trust funds.

Trust AccountsCommingling


Trust AccountsReconciliation

Reconciliation: process of comparing trust fund balance to sum of individual transactions.

When reconciled, trust account balance must equal total of balances due to individual beneficiaries (clients and customers).


Trust AccountsWithdrawals

Broker may not deduct her commission from trust fund until after transaction closes.

Once earned commission is transferred to broker’s general account, money may be used to pay obligations, such as salesperson’s commission.


Trust Fund Records

Broker’s records must include:all trust fund receipts and disbursementsbalance of each trust accountall receipts and disbursements affecting

each client or customer’s accountbalance owed to each client or customer

Receipts and disbursements must be in chronological order.


Trust fund records must be kept for at least 3 years after date of closing (or listing date, if transaction didn’t close).

Records are subject to inspection by Commissioner.

Trust Fund Records


Trust Fund RecordsAdvance fees

Advance fees must be handled in compliance with trust fund rules.

Can’t be commingled with broker’s funds.Must be deposited into broker’s trust

account within three days after receipt.Salesperson/broker must obtain prior

approval from DRE for:advertising, andadvance fee agreement.


Documentation Requirements

Broker must also keep real estate transaction documents for at least 3 years after closing date (or listing date, if sale doesn’t close), and have them available for inspection by Commissioner.



Three-year requirement applies to:listing and buyer representation agreementsdeposit receiptsrent collection receiptsbank deposit slipscanceled checks and supporting papersagency disclosure statementstransfer disclosure statementsproperty management agreements



Records that must be kept for 4 years:disclosure statements given to non-

institutional lenders or trust deed purchasers

real property security statements


Documentation RequirementsBroker-salesperson agreement

Broker-salesperson agreement must be:in writingkept on file at broker’s officeretained for at least three years after

relationship is terminated


Advertising Regulations

False advertising and other violations of advertising laws are:

grounds for disciplinary action under Real Estate Law

misdemeanors (under California law)


Advertising RegulationsLicensee designation

An advertisement published by real estate agent must include licensee designation:

some indication in ad that advertiser is licensee

Ads without this designation are illegal, unless licensee is advertising his own property.


Advertising RegulationsFirst contact solicitation materials

Licensee must include license ID number in any solicitation materials intended to be first point of contact with consumers (potential clients or customers).

Includes:business cards and stationeryadvertising fliers


Broker who advertises on the Internet must establish procedures to make sure that a real estate licensee responds to all inquiries from prospective clients resulting from ad.

Advertising RegulationsOnline advertising


Advertising RegulationsLoans and notes

Ads for loan products must be approved by DRE before publication.


Ads for loan may not:use phrase like “guaranteed” without

describing how loan is secureduse misleading termsimply that the loan:

can be approved over the telephoneis endorsed by a government agencyhas better terms than are actually available




Ads for promissory note:can’t promise yield or return different

from rate specified on note, unless it also reveals note rate and discount at which note is being sold.

Discount: Difference between outstanding note balance and sales price of note.


Advertising RegulationsInducements

If attendance at sales presentation or compliance with other conditions is required in order to receive gift or prize, those terms must be disclosed.

If inducement is given to one party in a transaction, this must be disclosed to all parties.

Note: Inducements are always forbidden as part of loan transactions.


Other Brokerage TopicsDesk cost

Desk cost is brokerage’s operating cost per salesperson.

It is calculated by dividing firm’s operating expenses by the number of salespersons.

In 100% brokerage, salesperson keeps all of his commissions but must pay desk fee to pay for firm’s operating costs.


Other Brokerage TopicsCompany dollar

The company dollar is money left over for brokerage firm to pay its operating expenses after all commissions have been paid.

Brokerage may need to pay business license tax based on its gross receipts.


SummaryTrust Funds/Documentation/Advertising

• Trust account• Good faith deposit check• Commingling• Documentation requirements• Advertising regulations• Prohibited practices


Antitrust Laws

Federal and state antitrust laws limit anticompetitive behavior in marketplace.

Primary federal antitrust law: Sherman Act, passed in 1890.

California’s main antitrust law: Cartwright Act, passed in 1907.


Antitrust Laws

Antitrust laws prohibit any agreement or activity that creates unreasonable restraint of trade.

Restraint of trade: Any act that prevents individual or company from doing business in certain area or with certain group of people.

Conspiracy: When two or more entities act together to restrain trade.


Real estate agent who violates antitrust laws may be subject to civil and criminal actions.

Penalties for Sherman Act violations:Individual: fine of up to $1M, and/or 10

years of imprisonment.Corporation: fine of up to $100M.

Antitrust LawsPenalties


Antitrust laws prohibit these business practices and activities:

price fixinggroup boycottstie-in arrangementsmarket allocation

Antitrust LawsProhibited practices


Price fixing: Cooperative setting of prices or price ranges by two or more competitors.

No pre-printed commission rate.Never tell client rate is non-negotiable.Don’t discuss rate with competitors.

Broker can discuss rate with own salespersons.



Group boycott: Agreement between two or more competitors to exclude other competitors from fair participation in marketplace.



Tie-in arrangement: Agreement to sell one product only on condition that buyer also purchases different (or tied) product from seller.



Market allocation: Agreement between competitors to divide up market, in terms of products, customers or service areas.

Illegal between competitors.Okay for broker to do for salespersons.



SummaryAntitrust Laws

• Sherman Act• Prohibited practices• Price fixing• Group boycotts• Tie-in arrangements• Market allocation

Documents

2010 Rockwell Publishing Lesson 16: California Real Estate License Law Principles of California Real Estate