Real Estate Brokerage

Chapter 8 – Spring 2011

Rationale for Licensing Does the public have a vested interest in seeing that real

estate salespersons and brokers have the qualifications of honesty, truthfulness, good reputation, and real estate knowledge before they are allowed to negotiate real estate transactions on behalf of others?

It was this concern that brought about real estate licensing laws as we know them today.

Until 1917, no state required real estate agents to be licensed. Anyone who wanted to be an agent could simply hang up an agent’s sign.

Licensee A person who, for compensation or promise of

compensation, lists or offers to list, sells or offers to sell, buy or offers to buy, negotiates or offers to negotiate either directly or indirectly for the purpose of bringing about a sale, purchase or option to purchase, exchange, auction, lease, or rental of real estate, or any interest in real estate

Is required to hold a valid real estate license.

More on Licensees Some states also require real estate licenses for

persons offering their services such as appraisers, property managers, mortgage bankers, apartment locators, or rent collectors.

Exemptions: property owners dealing with their own property, attorneys conducting real estate transactions as part of their duties as an attorney for a client, other trustees or executors acting on behalf of an estate, etc.

License Types Real Estate Broker

A person or legal entity licensed to act independently in conducting real estate brokerage business.

Real Estate Salesperson A person employed by a broker to list, negotiate,

sell, or lease real property for others.

Real Estate Sales Associate Either a salesperson or broker employed by a

broker. This is an employment arrangement but not a licensing category.

Qualifications for Licensing

Examination

Education

Continuing Education

Licensing Procedure Application with fee

Character references (loyalty, honest, truthfulness)

Examination date will be set by the state real estate commission. Frequency of exams varies by state.

If applicant passes the exam, pays license fee and license is mailed to applicant. Upon receipt the applicant can begin operating as a salesperson or broker.

Nonresident Licensing In general, a person must be licensed in the state in

which he negotiates. A sale can be brokered in another state as long as the negotiations are done in the state in which the salesperson/broker is licensed.

Non-resident license - a license given by some states to out-of-state brokers, particularly when the broker is located close to the state line.

License reciprocity - one state honors another state’s license (full and partial).

Nonresident Licensing Notice of consent - when a broker operates outside

of his home state, he must file notice with the secretary of state. This permits the secretary of state to receive legal summonses on behalf of the nonresident broker.

Moving to another state? Most states will give credit for the education and licensing time in another state when you go to move and start up a real estate business in a new resident state.

Licensing the Business Firm

A broker can operate as a sole proprietorship under his name or a fictitious business name. A broker can also operate in partnership with other brokers or as a corporation. If operating as a corporation, its CEO or President or some other designated officer must act as the licensed broker responsible for managing the firm.

A broker who expands by opening branch offices must have a licensed broker managing each branch location.

Minimum Service Requirements

Minimum Service Requirements

According to the Department of Justice, there are 21 states with minimum service requirements. States with non-waivable MSRs: Alabama, Illinois,

Indiana, Iowa, Missouri, District of Columbia, Kansas, Texas, Utah, Idaho, Oregon, Washington, West Virginia

States with waivable MSRs: Delaware, Florida, Nevada, New Mexico, Ohio, Pennsylvania, Tennessee, Wisconsin

Minimum Service Requirements

AL DC IA ID IL IN KS MO OR TX UT WA WVAccept delivery/present offers X X X X X X X X X X X X XAnswer questions X X X X X X XAssist communications/negotiations X X X X XProvide access to listed properties XAccept deposits X X X XPromote best interests of client X X XDisclose all adverse material facts X X X XUse reasonable skill/care/good faith X X X XProvide advice to client X X XContinuous good faith effort to find buyer unless otherwise agreed XPresent written contract with all terms and condiitons X

Minimum Service Requirements

Goodwin, Johnson, Zumpano (Journal of Real Estate Finance and Economics, 2010) looks at the effect of discount brokerage in a sample of over 11,700 properties between January 1, 2006 and July 20, 2007 in Montgomery, Alabama.

The study found that sellers using discount brokers had a trade-off between a 2% higher sales price and a 20.5% longer time on market. Using a discount broker also lowered the probability of finding a match between a buyer and seller in a given marketing period.

REALTOR® Registered trade name

Member of NAR and not synonymous with real estate agent

Agency Relationships Principal – the person who authorizes another to

work for them

Agent – the person empowered to act by and on behalf of the principal

Three Levels of Agency1. Universal Agency – the principal gives the agent legal

authority to transact matters of all types on the principal’s behalf

2. General Agency – the agent is given the power to bind the principal in a particular trade business

3. Special Agency – empowers the agent to perform a particular act or transaction

Broker’s Obligations to the Principal

1. Faithful Performance

2. Loyalty to the Principal

3. Protecting the Principal’s Interest

4. Reasonable Care

5. Accounting for Funds Received

6. Commingling

Problems of Dual Agency

Cooperating Broker – In approximately 70% of sales made through the MLS, the broker who lists the property for sale is not the same broker who locates the buyer (the cooperating broker). Who is the cooperating broker an agent of? Middleman Principle – the cooperating broker is neither

an agent to the buyer or the seller Dual Agency – when a single broker represents both the

buyer and seller, dual agency is established. In 17 states, the broker is legally prohibited from being an agent for either party.

Disclosure Statements!

Multiple Listing Service A database of local homes for sale along with details

about the property, selling price, and broker’s commission

Only member brokers can access the database

Listing Contracts Real estate Listing – a contract where a broker is

employed to find a buyer or tenant

Elements of a Listing Contract Parties involved in transaction (principal and agent) Description of property Price and terms of financing the transaction Broker’s obligations and authority Seller’s obligations Compensation for broker Terms for cooperation with other brokers Specification of the brokerage arrangement Conditions for termination

Types of Listings Exclusive Right to Sell

Exclusive Agency

Open Listing

Net Listing

Advance Fee Listing

Advance Cost Listing

Buyer’s Broker Buyers may want to hire their own broker to assist

them in their search and purchasing process.

Exclusive Authority to Purchase

Brokerage commission is typically split in half between the listing broker and the buyer’s broker

Completion of the Contract

Procuring Cause – A selling broker can expect a commission if the actions of the broker caused the seller to find a “ready, willing, and able buyer” Ready to buy at the seller’s price and terms Has the financial capacity to purchase

Terminating a contract – contracts can only be terminated prior to the ending date if by mutual agreement or if the broker is said to have abandoned the client

Bargain Brokers Flat Fee Brokers – Payment is a fixed dollar amount

rather than a percent of sales price. Usually provide a lesser menu of services than a traditional full service broker.

Discount Broker – A full service broker who works for a lower commission rate.

Variable Rate Broker – The listing broker may charge a lower rate for services but still offers a full 3% to the full service buyer broker.